One of the quieter changes to come out of the Charities Amendment Act 2023 has turned out to be one of the most consequential for boards. Charities Services now asks charities with annual operating expenditure above $140,000 to explain, in their annual return, the reasons they hold accumulated funds — the cash, investments, and other resources carried forward rather than spent on charitable activity in the year they were received.
The policy intent behind the change was transparency. Successive reviews of the sector had raised questions about organisations sitting on substantial reserves while public funding and donor generosity continued to flow in, and the Government response was to require an explanation rather than a cap. No charity is being told how much it may hold. It is simply being asked to say why.
In practice, that question has pushed reserves policy onto board agendas at organisations that had never formally written one. And it has surfaced an uncomfortable overlap between two things boards tend to treat separately: the reserves they hold against future shocks, and the insurance they hold against the same shocks.
Why Reserves and Insurance Are the Same Conversation
Most reserves policies, when they exist at all, justify the balance in broadly similar terms. The organisation holds funds to cover a period of operating costs if income stops. It holds funds against a major building repair. It holds funds against a legal dispute, a contract loss, or an unforeseen liability. Those are risk justifications, and every one of them describes a risk that could also be transferred to an insurer.
That does not mean insurance replaces reserves. It means the two need to be planned together. A charity that holds $400,000 in reserves partly to cover the possibility of a serious liability claim, while also carrying a $10 million public liability policy, is holding capital against a risk it has already transferred. Conversely, a charity that has trimmed its reserves to fund frontline delivery while carrying no trustee liability cover has neither the transfer nor the buffer.
When a board is asked to explain accumulated funds in an annual return, the most defensible answer is one that shows the reasoning has been done. Reserves are held for identified purposes; risks that can be economically transferred have been transferred; and the balance reflects what remains after that analysis. That is a stronger position than a generic statement about prudence.
What Charities Services Is Actually Asking For
The annual return question is not an audit. It asks the organisation to describe the reasons for the funds it holds, and boards can answer in their own words. Typical justifications that stand up well include committed but unspent grant funding, an approved capital project with a defined timeline, a stated operating reserve expressed as a number of months of expenditure, an endowment or bequest with donor-imposed restrictions, and provisions against known contingent liabilities.
Answers that read as weaker are those that describe no purpose at all, or that simply record the balance without explaining it. The risk is not a penalty — it is that a charity that cannot explain its reserves to the regulator will find it equally hard to explain them to a major funder, a philanthropic trust, or a journalist. Funders increasingly read the Charities Register before they read an application.
The October 2026 Governance Review Sits Alongside This
Charities also have a statutory duty to review their governance procedures before 5 October 2026, and at least every three years thereafter. The review means formally assessing whether the organisation’s governance documents remain fit for purpose and changing them if they do not.
For most boards, that review is already scheduled or under way. It is the natural place to deal with the reserves question too. A governance review that covers the rules or trust deed, delegations, conflict of interest processes, and financial controls can reasonably extend to a reserves policy and an insurance schedule, because all of them describe how the organisation manages risk to its charitable purpose.
Boards that treat the two exercises separately tend to do the governance review as a compliance task and the insurance renewal as a procurement task, and the connection between them never gets made. Boards that combine them come out with a document that explains, in one place, what the organisation is exposed to and how each exposure is managed — through controls, through reserves, or through insurance.
Where Cover Reduces the Reserves You Need to Hold
Several covers commonly carried by community organisations map directly onto the reasons charities give for holding funds.
Trustee liability, sometimes written as Directors and Officers or Trustees and Officers cover, responds to claims against individual board members arising from governance decisions, and typically funds legal defence costs from the point a claim or investigation is notified. Boards that have set aside reserves against the possibility of a governance dispute are, in effect, self-insuring a risk the market prices in the low thousands of dollars a year.
Material damage and business interruption cover addresses the building repair scenario. A charity holding reserves against the cost of repairing its premises after a fire or a storm should first confirm that its sum insured reflects current replacement cost, including compliance upgrades and demolition. Where cover is adequate, the reserve required against that scenario is the excess, not the repair bill.
Crime or fidelity cover addresses internal theft, which Charities Services has identified as a real and recurring problem in the sector. Employers liability and statutory liability address employment and regulatory exposures respectively. Cyber cover addresses breach response and notification costs under the Privacy Act 2020.
None of these removes the case for reserves entirely. Insurance has excesses, sub-limits, and exclusions, and there are always uninsurable risks — the loss of a major contract being the most obvious. But a reserves figure that has been set with an accurate picture of what is already insured is both smaller and easier to defend.
A Practical Sequence for Boards
The work is not complicated, but it does need to happen in order. Start by listing the risks the organisation would genuinely struggle to absorb, with a rough figure attached to each. Then map the current insurance programme against that list and mark which exposures are transferred, which are partly transferred, and which sit entirely with the organisation. Set the reserves target against what remains, and write down the reasoning.
That document does three jobs at once. It answers the accumulated funds question in the annual return. It forms part of the governance review required before October 2026. And it gives your broker a far better brief than a request to renew last year’s policy, because it tells them which exposures the board actually cares about.
If your board is working through its governance review this year and wants the insurance side of that picture properly assessed, get a quote from one of our specialist charity insurance brokers.
About the Author
Sarah Connell — the CharityInsurance crew are your friendly insurance geeks on a mission to make specialist cover simple and accessible for every NZ charity, sports club, and community organisation.