Investing body corporate reserve funds
Regulations and best practices when investing body corporate reserve funds15th Mar 2020
It’s old news that sectional title schemes need to establish and maintain a reserve fund that is separate from the administrative fund. Most bodies corporate have done so, and have built the fund up to meet the requirements.
And some are now sitting on large sums of cash, and may even have a surplus of reserve funds. So investing this surplus makes good financial sense, but it must be done cautiously and with the preservation of funds as a priority.
Basic requirements of a reserve fund
The purpose of the reserve fund is to cover unexpected costs of repairs and maintenance, and The Sectional Title Schemes Act states that the reserve fund should be ‘reasonably sufficient to cover the cost of future maintenance and repairs of the common property (for the coming financial year)’. There is no prescribed minimum balance required for the reserve fund, but there are rules to calculate the contributions required for the financial year.
At the end of the financial year, the balance of the reserve fund is compared to the total of contributions made to the administrative fund for the financial year.
- If the balance of the reserve fund is equal to, or more than 100% of the total contributions made to the administrative fund for the year, then the reserve fund is deemed sufficient and there is no need to top it up. The body corporate may, however, decide to still collect contributions as an additional safety net.
- If the balance in the reserve fund is more than 25%, but less than 100%, of the total contributions to the administrative fund for that year, the contribution to the reserve fund must at least equal the amount from the administrative fund that the body corporate budgets to spend on repairs and maintenance in the coming year.
- And finally, if the balance of the reserve fund is less than 25% of the total contributions made to the administrative fund, then the reserve fund will need to be topped up by at least 15% of the contributions made to the administrative fund. This allows for the gradual growth of the reserve fund for new bodies corporate, or for cases in which the reserve fund is depleted.
It should go without saying that all money received by the body corporate is to be deposited into an account in the name of the body corporate, and that sound accounting practices are followed.
Investing the reserve fund
The body corporate may, on the authority of a written trustee resolution, invest any moneys in the reserve fund in a secure investment with any institution referred to in the definition of ‘financial institution’. This includes collective investment schemes, authorised financial services providers and banks.
The body corporate’s role is to collect and manage funds needed to effectively maintain buildings and common property. The focus in this regard should not be on making a profit, but rather on preserving the funds to ensure that they are available when needed. This then is why the legislation requires a conservative approach to investing.
Should it make sense, however, to invest in higher-risk investments, the body corporate may adopt a management rule by unanimous resolution allowing this. Note, however, that the trustees’ fiduciary duty to the body corporate includes the duty to not subject the body corporate’s funds to unnecessary risks. The trustees could be held personally liable if the body corporate suffered any loss from the investment.
Insurance against losses
Prescribed management rule (PMR) 23 (7) states that the body corporate must take out insurance ‘for an amount determined by members in a general meeting to cover the risk of loss of funds belonging to the body corporate or for which it is responsible, sustained as a result of any act of fraud or dishonesty committed by a trustee, managing agent, employee or other agent of the body corporate’. This is also mentioned in Regulation 15(1) in the Community Schemes Ombud Service Act (CSOSA), which states that ‘every community scheme must insure against the risk of loss of money belonging to the community scheme or for which it is responsible, sustained as a result of any act of fraud or dishonesty committed by any insurable person.’
In terms of CSOSA, the minimum amount of insurance cover must be the total value of the scheme’s investments and reserves as at the end of the previous financial year, plus 25% of the scheme’s operational (administrative) budget for the current financial year.
A sound investment strategy
The body corporate should at all times focus on the future preservation of funds by seeking conservative and secure investments that will keep up with (and hopefully beat) inflation without placing the funds at risk. It’s also important to consider that money may need to be accessed quickly should an emergency arise, and it would be unwise to tie all money into an investment to which access may take days or weeks.
Managing and investing the finances of a body corporate should be based on sound financial principles and good governance, and it is recommended to involve an experienced financial advisor in this regard.