Financial review

High inflation resulting from global supply disruptions, the war in Ukraine and Brexit are having a profound impact on the National Trust, its staff, volunteers and supporters. Careful financial management during the pandemic years has placed the Trust in a strong position and has allowed it to maintain planned investment in conservation work.

One of our priorities has been to support our staff and volunteers during these difficult times. An additional cost of living payment was made to those on the most junior grades, to support them through the winter months. We have reached an agreed pay settlement for the year to come and continue to invest in resources to help our staff and volunteers.

As the effects of the pandemic started to wane, the Trust faced new economic challenges. In the summer months fuel costs increased significantly. Those inflationary pressures then fed through into the cost of goods and services as the months went on.

The impact has been felt in all aspects of our operations, from conservation costs to the frequency with which visitors can afford to travel to our places.

The Trust started the year well, with strong opening reserves and a member base that had increased to 5.7 million members. This meant that we were able to keep delivering our planned conservation work in the face of these pressures. Plans for outer years have been phased over a longer period so as to accommodate higher prices, but no work has had to stop.

The high prices also impacted our staff and volunteers. The Trust made a one-off £300 cost-of-living payment to staff on our most junior grades. The payment was made in December 2022 to help with high energy and food prices. We launched a cost-of-living information hub, with materials to help our staff during these difficult times. We also supported our volunteers through a significant increase in mileage re-imbursements rates.

Support for our cause remains high as we saw increased donations, and we maintained our member numbers at 5.7 million. In turn we worked hard to help members and supporters. We trialled a ‘Kids Eat Free’ offer over the summer and have rolled that out across many of our places. We continue to offer free access to our places through initiatives such as Heritage Open days or targeted free entry offers. Recent acquisitions and initiatives have increased free access to nature, beauty and history. One such example is the Sky Park in Manchester.

Highlights from 2022–23:

member numbers have remained stable at 5.7 million (2022: 5.7 million)
our project expenditure reached record levels
the Trust’s reserves remain above their required threshold
fundraising income increased by £11.5 million.

We are immensely grateful for the support of our members, donors, volunteers and staff during 2022–23.

Our year on year financial

performance comparison

As set out here, the Trust’s primary measure of financial performance is the operating margin, which shows the contribution of our normal operating activities to the funding of our conservation projects and acquisitions. The operating margin fell year on year, from £177.5 million in 2021–22, to £108.2 million in 2022–23. The reduction in the operating margin of £69.3 million represented income growth of £24.8 million (the biggest component being income from our property trading activities) offset by operating cost growth of £94.1 million – this is explained in more detail below.

Found here in the financial statements shows the trend in the operating margin over five years and reconciles the margin to the net incoming resources set out in the Consolidated Statement of Financial Activities on page here.

The operating margin excludes legacy receipts and project-related grants and expenditure on projects and acquisitions; we use it as it helps us target income growth and cost efficiency from our visitor, membership, commercial and let estate businesses to optimise the funding available for our core conservation projects. The following table sets out how the operating margin and our project activity comes together within our overall financial statements.

Our income on the above basis has grown by £31 million on the prior year. Most of this increase has arisen from our operating activities – the income we earn from opening our properties to visitors, from our tenants, gifts and donations to appeals and of course our members. Income from legacies and grants has also increased and this has been boosted by what has been a record year for legacy income.

Our costs have grown by £142 million on the prior year, due to a combination of welcoming more visitors (and the associated costs), investing at a record level in conservation, and inflationary pressures.

We budgeted to utilise some of our reserves in order to continue our ambitious conservation programme in 2022–23. These financial flows resulted in net expenditure before investment and actuarial movements of £51.4 million (2021–22: net income of £59.6 million).

*Total income includes amounts distributed under our total return investment policy (2023: £28.4m, 2022: £28.4m) and exceptional items (2023: £nil, 2022: £8.2m). Our hotel operations are recorded on a contribution basis within operating income (2023: £7.4m, 2022: £6.2m).

6 The ability to access a portion of stored up capital growth on our investments, as well as the income yield the investments generate. The operating margin includes investment income on this basis. As the table shows, the effect of accessing this value in 2022–-23 was £33.8m (2021–22: £33.8m).

Total income

Total income increased by £31 million in 2022–23. We are pleased to report growth in both our operating income and in the vital fundraising income for our projects (from legacies and project grants).

Legacy income and project grants increased year on year by £8.7 million, providing critical funding for priority conservation work. We are immensely grateful to all our donors and supporters for making so many important conservation projects possible.

Other income from sources like insurance proceeds and lease sales fell slightly.

The following charts the increase in income from our operating activities.

The following charts the increase in income from our operating activities:

Secondary spend in our food and beverage and retail outlets saw increases of £15.2 million and £6.3 million respectively as visitor numbers increased to over 24 million in the year. Admissions income from paying visitors rose by £4.6 million and generous gifts and responses to our appeals resulted in income increasing by £3.7 million in this area too.

In the prior year, we were grateful to be able to receive retail and hospitality support grants amounting to £8 million while we were unable to open many of our outlets at our places during the ongoing period of government-imposed social-distancing restrictions. This income naturally fell away in 2022–23.

We are incredibly grateful to our members who have been able to support us throughout the years. Trust membership renewals continued to be strong, and retention levels have been maintained at around 85%. Although membership income fell by £3.6 million in the year, this reflects the fact that income in the prior year was boosted by £10 million due to a lower VAT rate applying. Underlying membership income grew by £6.4 million year on year.

Total expenditure

Total expenditure increased by £142 million year on year. The following chart shows the key movements:

The largest area of cost growth was in property operating costs (up £94.1 million) as 2022–23 saw the first full year of trading activity for our properties following the end of social-distancing restrictions.

Operating costs grew as we were able to trade more freely (costs of trading grew by £8.7 million) and as full activity levels were restored, the operating costs of our properties grew by £59.6 million (of which energy price increases were £6 million alone). We also spent an additional £9.2 million servicing our membership base and investing in improved systems for our members and supporters. Other operating cost growth related mainly to central support costs, the costs we incur to support work at properties through specialist conservation activity and other functions (where costs grew by a combined £16.6 million).

As explained above, Trust’s property operating costs have been adversely affected by soaring energy costs which more than doubled to over £11 million. The Trust is committed to maximising the energy it can produce from its own estate (more than half the energy it requires) is ever more important, as is our procurement of energy from wholly renewable sources. The Trust is making use of fixed energy tariffs wherever possible in order to increase the level of operating cost certainty.

Property projects and acquisitions expenditure grew by £50.9 million. This relates to direct investment in conserving existing places and protecting new ones, and we are delighted that we were able to spend record amounts on conservation, including over £80 million on core maintenance work. Total spend on property projects and acquisitions was £237.7 million⁷ (2021–22: £154.3 million).

7 Adjusting for amounts capitalised as fixed assets, total expenditure was £279m.

Within this total, over £26 million was spent on the acquisition of heritage assets in the year (up from just £10.9 million in 2021–22). Our acquisitions are listed in detail from page 120 of this report and include a number of nationally important places and collections that are now within care of the National Trust.

8 This represents the effect of the growth of scheme assets and changes in inflation and interest rate assumptions used to measure the obligation the Trust has to pay pensions in the future.

Net movement in funds

The net expenditure set out above of £51.4 million, coupled with the slight reduction in the value of our investments (see the investments section of this report here) and the actuarial losses on our net pension deficit⁸ have decreased our total funds by £98.3 million as follows:

The Trust’s funds and reserves have been sustained over the pandemic period – much of this has been the result of planned cost savings and project postponement while we recovered after a phase of property closure and an inability to recruit new supporters at our places. Our financial plans for 2022–23 were designed to increase conservation project investment – drawing down on some of the funds the Trust had built up.

Actuarial losses represent changes in assumptions relating to our defined benefit pension scheme. The scheme closed to new entrants in 2003 and to future accrual of benefits in 2016. Since then, the Trust has made significant contributions to bring the scheme to a near fully funded basis. The scheme has a deficit of £9.3 million as at the end of the 2022–23 financial year. This accounting basis differs from the valuation methodologies used in the Scheme’s triennial valuation (next due to be updated in 2023–24).

The triennial valuation uses more prudent discount rates to arrive at the agreed cash contribution levels that the Trust will make to ensure that the scheme is adequately funded in the long term.

Liquidity

Over time, strong net income and funding is vital to the long-term financial health of the Trust. In addition to this, it is essential that there is sufficient access to liquid funds to manage the Trust’s cash flows over the course of each year as there are phases where the Trust will plan to deliver additional conservation work by deploying some of its reserves and funds, as has been the case in 2022–23.

The Trust’s underlying trading cash flows are seasonal and related to the timing of visitor flows and conservation project requirements.

In the short term we use a revolving credit facility with a maximum draw down level of £100 million, to assist us in providing short-term working capital to manage these cash flows well. The facility (see Note 24 to the financial statements) is provided jointly by Barclays and NatWest. In total, £37.4 million of the overall facility’s capacity was drawn down as at 28 February 2023.

Longer term liquidity needs are provided through the Trust’s investment portfolio (see below) and long-term commercial investment requirements are financed through a long-term loan facility of £100 million (see Note 31 to the financial statements).

Funds and reserves

The funds shown in our consolidated balance sheet here (and analysed further in Note 17) are as follows. They have reduced year on year by £98 million.

Why we hold funds and what they represent

The Trust has a unique obligation to conserve places of historic interest or natural beauty in perpetuity for the benefit of the nation. It requires considerable financial resources and extensive long-term planning to protect such a significant part of the nation’s heritage for everyone, for ever. Reliance simply on in-year income to fund our work would be an unacceptable, high-risk strategy. Therefore, the Trust holds what might appear to be high levels of unrestricted reserves and restricted funds to enable us to finance our work securely and sustainably.

The Trust has three principal categories of funds:

Endowment funds, which are capital sums permanently set aside to generate income to fund our work at specified properties. These funds can arise either through the terms of donations to the Trust, or through the Trust’s own decisions to allocate funds in perpetuity.
Restricted funds are income funds that can only be spent in ways specified by donors. These legal restrictions are scrupulously adhered to by the Trust and they often mean the Trust needs to hold the funds in the long run until a suitable project comes forward.
Unrestricted funds represent the Trust’s ‘safety net’ against income fluctuations whilst also providing flexibility to fund other projects and support infrastructure. These are the only funds over which the Trust has complete discretion to spend as it wishes on its core purpose.

Strong financial performance that reinforces our reserves position plays a key role in helping the Trust to respond to the need to increase investment in our core conservation purpose and respond to unforeseen events.

Endowment and restricted funds comprise a very large proportion of our funding (at £1,111.5 million of total funds of £1,581.4 million). We cannot spend the capital element of endowment funds and are committed to spending restricted funds on purposes as defined by donors. Therefore, to maintain as much flexibility as possible, we endeavour to use restricted funds before unrestricted funds when funding projects and acquisitions.

Our policy for unrestricted reserves

Given the importance of unrestricted funds to the financial health of the charity, the Trust sets a reserves policy to govern the appropriate minimum level of these funds.

The Trust defines its total unrestricted reserves under this policy as the general fund plus other designated funds, i.e. excluding the fixed asset reserve and the pension fund deficit. These reserves represent the resources that the Trust can use for any of its charitable purposes.

We aim to hold total unrestricted funds of at least £214 million, a threshold that increases annually by inflation. This threshold was set by the Board after considering the following needs and was reviewed in the context of the pandemic to ensure its continued sufficiency and relevance:

Short-term smoothing of fluctuations in annual revenues or capital receipts, such as legacies.

Provision of long-term strategic financial support to properties, or funding for development work and central infrastructure.
Funding for unplanned projects and acquisitions when opportunities arise.
In extremis funding if unforeseen circumstances affect the charity’s ability to operate.
Protecting the Trust’s conservation expenditure in the event of investment market volatility.
Retaining the ability to make strategic investments.

Total unrestricted reserves, comprising the General Fund and other designated reserves, stand at £366 million (2022: £413.7 million), £152 million more than our policy threshold (2022: £218.7 million above the threshold). Excluding designations set aside for specific purposes, the value of reserves was £274m (2022: £272.2m) or £60m above our minimum threshold.

Movements in unrestricted reserves

The Trust’s unrestricted income is driven in large part by our membership income and the strength of our visitor-based activity, both of which grew in 2022–23 (unrestricted income was £559.3 million, up by £35.3 million year on year). Year on year our expenditure from unrestricted sources increased significantly by £121.7 million to £461 million. 2022–23 was the first full financial year that has not been affected by the restrictions that the pandemic placed on our operational and project activity, and the Trust was able to return to delivering its planned conservation work. Record investment in our conservation cause was achieved in 2022–23.

Structure of unrestricted reserves

The structure of our unrestricted reserves of £366 million (2022: £413.7 million) was as follows:

The General Fund: £164.5 million (2022: £272.2 million)

The General Fund is the Trust’s central unrestricted reserve. Its purposes are to provide finance for central infrastructure, to provide funding for large projects to properties with insufficient local reserves, and occasionally to fund unforeseen projects and acquisitions if restricted funds are not available. The fund also provides financial protection against income volatility (e.g. from investment markets).

The net incoming resources of the General Fund were £49.9 million. The Fund reduced in value year on year, largely as a consequence of transferring funding back to property reserves in order to recommence the property finance model that had been paused during the coronavirus pandemic (see below).

Designated Funds £201.5 million (2022: £141.5 million)

The remainder of the Trust’s unrestricted reserves are usually held at properties or in funds designated specifically to fund conservation and repair work at properties. Property reserves represent retained operating surpluses after meeting the costs of conservation repair and improvement work, commercial development and the purchase of plant and equipment.

While the Trust recovered from the effects of the pandemic, property reserves had been released back to the General Fund. The finance model governing the use of the property unrestricted reserves re-launched in March 2022 and funding was transferred back from the General Fund for this purpose (see Note 17 to the financial statements). As at 28 February 2023, £109.5 million of designated funds were held for properties.

In addition to the designation of property reserves, the Board reviewed the forecast year-end reserves and agreed on targeted designations to ensure adequate funds are set aside for the Trust’s essential work on its mansions, estate and acquisitions. A total of £92 million of designations is being held in designated funds for these purposes.

Investments

Policies and powers
The National Trust’s investment assets play a key role in the long-term financial sustainability of the organisation and also in the furtherance of its climate strategy.

The Trustees of the National Trust are responsible for the financial policies under which the investment portfolio is managed. The main policies are set out here. Full details are provided in the financial statements.

We invest the overwhelming majority of our funds in our “General Pool”. (This is a “Common Investment Fund”, a scheme facilitated by a Charities Commission order which enables the pooling of trusts). This is run on a “total return” basis, i.e., targeting both capital gain and investment income yield. Any permanent endowments included in the General Pool can only distribute part of their capital gain if they are covered by a “total return order” (see also Note 21 to the financial statements).

Investment Policy Statement

During 2021 the Investment Committee proposed, and the Board approved, a new Investment Policy Statement by which they should abide, the cornerstone of which is the following agreed set of investment beliefs:

Core purpose: The core purpose of the Trust is to look after special places for everyone, for ever. Accordingly, its investment portfolio should adopt a multi-decade time horizon aiming to deliver returns in a truly sustainable way, for the benefit of generations to come.
Risk: Investment risks include anything that threatens the Trust’s long-term return goal or would see permanent impairment in the portfolio’s return-generating capacity.

As a long-term investor, the Trust should both provide patient risk capital and tolerate short-term volatility.

The portfolio should also have sufficient resilience in the short term to support distributions to the organisation even when market circumstances are unfavourable.

Diversification: Return sources should be broadly diversified, but not to the extent that it compromises long-run return or alignment with the Trust’s values and mission.
Mission: Investment should be done on a responsible and sustainable basis to enhance long-term portfolio performance and be aligned with the mission and values of the Trust.

Companies with high or improving standards of ESG (Environmental, Social and Governance) performance are most likely to generate the sustainable returns which meet the Trust’s long-term investment criteria. Effectively incorporating ESG factors into decision-making can enhance long-term portfolio performance and therefore represents an alignment with the Committee’s fiduciary duty.

The reputational risk of not investing, or not appearing to invest, responsibly will impact the Trust’s charitable mission.

Responsible Ownership: The Trust should act as an engaged and responsible long-term owner of businesses. The Trust should use its influence to encourage responsible stewardship behaviour in the investment industry and advance thought leadership on matters such as ESG integration and low-carbon approaches in all asset classes.
Climate Change: The condition of the environment impacts the Trust’s ability to deliver on its conservation mission, and climate change therefore poses the single biggest threat to the places it looks after. It will also be a material investment factor in coming decades. The Trust should aim to align the portfolio with the transition to a low-carbon economy, broadly consistent with the Paris objectives, and work towards being net zero by 2030.

Investment Approach: The primary goal is the long-term achievement of an inflation plus 3.5% return, rather than performance in line with a standard index benchmark. The Trust should appoint active managers who align to the Trust’s objectives and values and offer good value for money. Where it is not possible to find active managers for a particular mandate who live up to the Trust’s high standards for quality, mission alignment and stewardship capabilities, index-tracking mandates with positive ESG elements and a low-carbon trajectory should be used.

Sustainability and Climate Strategy

Investment Policy

Included within the Investment Policy Statement is a policy on Sustainability and Climate Strategy. This is designed, without compromising our financial returns or increasing our financial risks, to align our investment strategy closely with the ambitious environmental strategies being adopted by the Trust as a whole. It has four pillars:

Disinvestment from fossil fuels over the three years to September 2022: The Trust made rapid progress in this objective, swiftly reducing exposure down to two small holdings in private equity fund investments that pre-dated the disinvestment decision. As at 28 February 2023 these holdings had a valuation of less than 0.2% of the total value of the portfolio. During the year the Board discussed whether these holdings should be liquidated but analysis showed that the cost of doing so before maturity would be likely to be steep, potentially even greater than the entire value of the holding, and there was also an acknowledgement that disinvesting at this stage would have no real-world impact. Given this, and given maturity is likely in the next few years, this was not considered a worthwhile use of charitable funds at this time.

Decarbonisation as part of the Trust’s net zero by 2030 target: The carbon footprint of our portfolio is assessed and quantified on a regular basis. In recent years gross emissions have been reduced significantly, largely because of several fund manager changes, and now stand at less than half the level of an MSCI ACWI* equivalent.

* The MSCI All Country World Index (ACWI) is a global equity index that measures equity performance in both the developed and emerging markets

In the future gross emissions are likely to fluctuate in line with portfolio size but it is hoped that they will fall as a result of global decarbonisation. It is possible though that portfolio emissions could rise in the shorter term as the Investment Committee is keen to investigate potential investment in environmental solutions managers. These are managers supporting the climate transition but which in themselves can often have relatively high starting emissions.

Importantly, however, during 2022 the Trust invested in two forestry funds: BTG Pactual’s The Reforestation Fund and Gresham House’s Forest Growth and Sustainability Fund. These funds target significant forestry expansion, subject to exacting environmental standards, and an attractive return within a diversified portfolio. They will also though enable the Trust to remove the gross emissions of the rest of its portfolio, thereby achieving carbon neutrality for the portfolio by 2030.

Collaborate and Engage: Our ambition is to collaborate with others to demonstrate the leadership behaviours the financial system needs to address the climate crisis. We engage with our investment partners, and the companies in which they invest, to encourage the low-carbon transition of economic sectors in line with science and under consideration of associated social impacts.

Activity in this area is managed by a Stewardship and Engagement Working Group of the full Investment Committee.

This working group meets regularly with all the Trust’s fund managers to assess alignment with the Trust’s ESG goals, with a particular focus on the attitude to climate change, and to encourage improved performance by those funds, or support dis-investment by the Trust if appropriate. To support this activity, a Climate Voting Policy has been formally agreed setting out our expectations of our fund managers and the principles we will use to assess their overall approach to climate-related proxy voting.

Under the auspices of this working group, the Trust is also an active member in the Institutional Investors Group on Climate Change (IIGCC) and ClimateAction 100+, and has signed and committed itself to the Net Zero Asset Owner Commitment of the IIGCC.

Invest for positive impact: The Trust seeks to invest selectively in new companies that aim to have positive environmental impacts to speed up the transition to a low-carbon economy. A critical aspect to this is the ‘impact’ element of our private equity portfolio and also our private diversifiers allocation.

Asset allocation strategy

Our asset allocation strategy for the General Pool was developed with our investment advisers Cambridge Associates and is set out below. It targets a return well ahead of inflation, to thereby support the Trust’s long-term conservation needs, coupled with a high level of diversification to manage the consequent risk.

Asset Class

Definition

Liquidity Reserves

Intended to provide liquidity to meet spending and other cash requirements during periods of economic and market stress.

Carbon Removers

Forestry fund investments meeting exacting sustainability and environmental criteria and designed to remove the carbon emissions of the rest of the portfolio.

Liquid Diversifiers

Investments across multiple asset classes. Designed to be less volatile than equity albeit with commensurately lower returns.

Private Diversifiers

As with Private Equity comprises equity and/or debt of private companies but here will be designed to produce a stream of returns uncorrelated to the equities and, for the Trust, this allocation will be heavily skewed to strategies with environmental overlays or supporting climate solutions.

Private Equity

Equity and/or debt of privately owned companies. Can be at any stage in company life cycles.

Emerging Market Equity

Equity in public
companies in emerging economies.

Developed Equity

Equity in public companies in developed economies.

Our private asset mandate with Cambridge Associates will take time to build. As detailed above, we have a long-term target of 15% of the General Pool for private equity/venture capital and 10% for private diversifiers. At 28 February 2023 there was a total of 63 investments with a value of £185.2 million, and a total commitment of £145.5 million (at the year-end dollar/sterling exchange rate) in a range of US, European and Asian domiciled funds across a broad spread of private asset classes.

Within the 15% private equity/venture capital allocation we have allocated a portion for impact investing. Investments within this allocation must also target one of eight specific environmental outcomes: reduce CO2 emissions; reduce energy consumption; reduce water use; improve water quality; reduce landfill; increase recycling; reduce single-use plastics; and a new one added during the year of supporting biodiversity improvement.

By year end we had made investments into five funds within this portion of the portfolio. These invest in a very diverse range of companies in environmentally beneficial and cutting-edge technologies.

Our private diversifiers allocation was only created during 2020–21 but already has eight commitments with a particular emphasis so far on renewable energy generation and decarbonisation technologies.

Investment performance

In the year to 28 February 2023, the total value of all non-pension investments decreased from £1,614 million to £1,565 million. As noted above, the General Pool comprises the majority of our investments, and its funds under management decreased from £1,486 million to £1,439 million at the end of the financial year.

We are a long-term investor given our commitment to the care of the nation’s heritage in perpetuity – as such we monitor investment performance over the very long term.

The year just ended though was very challenging given high and rising inflation, which triggered rising interest rates and a general fall in the value of investment assets. Despite this, we do still believe that the portfolio has the ability to deliver real returns over the long term.

The performance of the General Pool overtime is shown here:

Data as at 28 February 2023. Portfolio returns are net of fees.

Real Return Target consists of UK RPI+4% from inception to 28 February 2021, UK RPI +3.83% for 1 March 2021 to 28 February 2022 and then UK RPI + 3.66% from 1 March 2022 onwards.

Our assets are currently managed by a broad range of investment managers.

In terms of the position as at 28 February 2023, the following was the individual investment manager performance:

Final Private Equity and Private Diversifier returns for 2022 not yet available.
N/A: Stewart investment incepted part way through February 2022. Carbon removal incepted part way through December 2022.

The selection of our investment managers is determined by the Investment Committee who regularly review performance and also the rate of income distribution from the portfolio.

Investment management fees were £5.6 million (2021–22: £5.5 million). The fee level the Trust paid in 2022–23 represents 0.4% of the value of the investment portfolio (2021–22: 0.4%).

We consider the fee level appropriate in the context of this long-term strategy, reflecting both the higher return expectations of illiquid asset classes and the active management needed to deliver our objectives.