At their December meeting, the Board of Governors (BoG) approved an increase in the spending rate of UBC endowments from 3.5 per cent to 4 per cent. This change, which will affect all of the university’s endowments — a fund of approximately $1.8 billion — will be implemented on April 1.
Overall, the change means that the university will be able to spend more of its asset money each year at a slightly increased financial risk.
According to the report submitted to the Board on the spending rate review, the endowment spending rate is reviewed every three years in accordance with Endowment Management Policy 113.
“There are endowments across the university and each one’s spending rate will go from 3.5 to 4 per cent,” said Peter Smailes, UBC’s treasurer. “Many endowments have specific deeds ... and so the money will be spent in accordance with those deeds precisely on what the gift the original donation intended it to be.”
The endowment’s spending rate is the total percentage of it that is spent every year. Among other things, Smailes noted that student financial aid will benefit greatly from the newest change, letting the university spend about $1.4 million more each year.
The endowment spending rate review submitted to the Board also noted that in the case of a severe market crisis such as the 2008 financial crash, the asset mix of what the endowment is invested in is estimated to lose about $25 million more than it otherwise would have.
“We’re speculating here, [but] if we had a market crash and you took the spend rate back from 4 per cent down to 3.5 because the Board felt that that was the prudent thing to do, we would be spending just under $1.4 million less a year on student aid,” said Smailes. “Even if the spend rate was not changed, what really happens is that the market value of the endowments goes down, and so it’s four per cent of a lower number.”
Smailes said that after the 2008 crash, the Board reduced the spend rate and that “virtually all” of the endowments were at their pre-crash value by 2015.
There are several changes that will be made to the asset mix, which the report to the BoG on the endowment spending rate review says will allow them to increase that rate, giving more funds to the university to use while not significantly changing the amount of risk. For example, five per cent of the current investment in Canadian equities will instead be invested in global small cap equities, and 7 per cent of the current 13 per cent investment in bonds will be specifically put towards “UBC debenture,” which is the investment from the endowment that was made in Orchard Commons.
“[The endowment] invested $100 million in Orchard Commons and that pays a return to the endowment,” said Smailes. “We would not have been able to build Orchard Commons at the time without that UBC debenture financing because we’re prohibited from borrowing by the province.”