7 Questions Every Body Corporate Trustee Should Ask About Reserve Cash

Intro

A healthy reserve fund is one of the foundations of a well-run sectional-title scheme.

It helps ensure that when major maintenance, repairs or replacement projects arise, the body corporate has money available rather than having to rely entirely on unexpected special levies.

But building the reserve is only part of the job.

There is another question trustees should be asking:

Is the money in our reserve fund working as effectively as it could be while we wait to use it?

Under the Sectional Titles Schemes Management Act, bodies corporate are required to establish and maintain a reserve fund to cover future maintenance and repairs to common property. The prescribed management rules also provide for reserve-fund money to be invested, on the authority of a written trustee resolution, in a secure investment with an appropriate financial institution.

That makes the management of reserve cash an important trustee responsibility.

Here are seven questions worth putting on the agenda at your next trustee meeting.

Question 1: How much is currently held in the reserve fund?

Start with the basics.

Trustees should have a clear picture of the total reserve balance, how it has changed over time and how this compares with the scheme’s expected future maintenance requirements.

The important point is not simply knowing that a reserve exists.

You need to know how much cash you are responsible for managing.

For a large sectional-title scheme, that could be millions of rand.

And the larger the reserve, the greater the potential impact of how that money is managed.

Question 2: What interest rate or return is it currently earning?

Once you know the balance, ask the next obvious question:

What is the money earning?

Reserve cash is sometimes left in the same account or investment simply because that is where it has always been.

That doesn’t necessarily mean it remains the most appropriate option.

Trustees should understand:

• Where the money is invested
• What return it is currently earning
• Whether there are fees involved
• How quickly the money can be accessed
• Whether the return is competitive relative to other suitable options

Knowing the balance without knowing the return only gives you half the picture.

Question 3: When was that return last benchmarked?

Interest rates and investment returns change.

An account or investment that was competitive when it was opened may not remain competitive indefinitely.

That is why reserve cash should be reviewed periodically rather than treated as a set-and-forget decision.

Ask:

When did we last compare our current return against other available options?

If the answer is “we’re not sure”, it may be time for a review.

Even a relatively small difference in return can become meaningful when applied to a large reserve balance.

Consider a simple example.

If a body corporate has R5 million in reserve, an additional 1% per annum represents approximately R50,000 in additional annual return, before considering fees, taxes and changes in rates.

On R10 million, the same 1% difference represents approximately R100,000.

Those are meaningful numbers for a scheme.

Question 4: How much cash actually needs immediate access?

Not every rand in a reserve fund necessarily has the same time horizon.

Your maintenance, repair and replacement plan should give trustees visibility over when significant expenditure is likely to occur.

Some money may be needed relatively soon. Other amounts may only be required several months or years into the future.

Understanding these cash requirements helps trustees consider the balance between:

access, risk and return.

The objective should not be to chase the highest possible return.

It should be to make an informed decision about where reserve cash is held while ensuring that money remains available when the body corporate needs it.

Question 5: What expenditure is coming under the maintenance plan?

A reserve fund exists for a reason.

Painting. Roofing. Waterproofing. Lifts. Security infrastructure. Paving. Electrical work. Plumbing. Major repairs and replacement projects.

Before making any decision about reserve cash, trustees should understand what is coming.

Ask:

• What major projects are planned?
• When will they take place?
• What are the estimated costs?
• How much cash needs to remain readily available?
• What portion of the reserve is unlikely to be needed in the immediate future?

The investment decision should support the maintenance plan, not operate independently of it.

Question 6: Have we compared more than one financial institution or fund?

Many bodies corporate have long-standing banking relationships.

There is nothing inherently wrong with that.

But familiarity shouldn’t replace comparison.

Trustees are responsible for managing the scheme’s money in the interests of its owners. It therefore makes sense to periodically understand what alternatives are available.

That could include comparing suitable money market funds from established South African asset managers.

TreasuryONE’s Money Market Fund platform, for example, allows investors to compare multiple money market and income funds from leading South African asset managers in one place.

Instead of approaching fund managers individually, investors can compare available funds, yields and managers through a single platform.

Question 7: How much additional interest could the reserve generate without sacrificing required liquidity?

This is perhaps the most valuable question.

Because the objective isn’t simply:

“How do we get the highest return?”

The better question is:

“Could we improve the return on our reserve cash while retaining the liquidity and risk profile the scheme requires?”

Money market funds are designed with liquidity and capital preservation in mind, although, like all investments, returns are not guaranteed.

Through TreasuryONE’s platform, qualifying money market fund withdrawals submitted before 11:00 can be paid by 17:00 on the same business day.

There are no fixed investment terms, allowing trustees to maintain flexibility while potentially earning a competitive, market-linked return.

A small percentage can make a significant difference

When trustees discuss expenditure, a difference of 1% can sound insignificant.

When applied to a substantial reserve fund, it isn’t.

Reserve Fund	0.5% Difference	1% Difference	2% Difference
R1 million	R5,000	R10,000	R20,000
R2.5 million	R12,500	R25,000	R50,000
R5 million	R25,000	R50,000	R100,000
R10 million	R50,000	R100,000	R200,000

Illustrative annual amounts only, before fees and tax where applicable. Actual investment returns vary and are not guaranteed.

Every additional rand earned by the reserve fund is another rand available to support the financial needs of the scheme.

Put this question on your next trustee agenda

At your next meeting, ask:

What is our reserve fund currently earning, and when did we last compare it with other suitable options? If the answer isn’t immediately clear, TreasuryONE can help. We’ll answer question 7 for you.

Put your reserve cash to work while keeping access to the money your scheme needs.

Investment returns are not guaranteed and may change. Money market and income funds carry investment risk. Trustees should ensure that any investment is appropriate for the body corporate and complies with the scheme’s legal and governance requirements.