Eton and Endowments

Simple analytics of optimal endowment policy.

Trevor Chow

There has been much furore regarding the role of private schools within the UK - at the centre of that has been the Labour Party’s “Abolish Eton” campaign. In particular, concerns have been raised over the charitable status and vast endowments available to certain private schools. Given its prominence, let us look at Eton College. Is it right and proper that the school has such a sizable endowment? Is it doing its charitable duty using these assets? I will set out a simplified model of what it could earn from its endowment, calibrate it against existing values and see what that means for bursaries. (Disclaimer: I am an Etonian who attended the school between 2015 and 2020.)

A Plan of Action

Suppose Eton College took its endowment and invested it into an index fund, selling off a proportion every year such that the total value of the endowment never rose. In August 2019, Eton College had £365 million in its investment portfolio and £110 million in its property portfolio. Historically, the FTSE All-Share Index and the S&P 500 have both risen by around 10% a year on average. If we assume that inflation and transaction costs involved in liquidation cut into this, we can approximate a 6% return. This would suggest that across the last 10 years, the value of the investment portfolio would have increased by 79%. In fact, it has grown by 125%, though some of that is likely from the generosity of donors. The 6% figure would suggest that there would be an increase in value of £21.9 million every year, while the school’s 2017/2018 annual report recorded an investment gain of £24.7 million. As such, the approximation of 6% that we have chosen seems an eminently reasonable assumption.

Since the school fee at Eton College is £42,500 a year, our estimate of £21.9 million would mean that the school could theoretically fund the full school fees of 515 students. That represents around 40% of its student population. By comparison, it provided around £7 million in scholarships and bursaries in the 2018/2019 cycle, which is equivalent to around 165 students or 13% of the school. Ostensibly, this is a large gap in between what the school could provide and what it does. How can this be accounted for?

Possible Objections

Let me offer a rejoinders. To wit, the school currently runs at a loss - its net income excluding investment gains in the year ending 31 August 2018 was -£4.9 million. This loss would only increase if it took more students who were not paying full fees or fees at all. The net gain right now if we included our theoretical gains from investment would be £17 million. Every fully subsidised spot at the school cuts this by £85,000. As such, the school would be able to break even based on these estimates by providing an extra 200 spots, adding up to 365 free places (or equivalent since not everyone gets a full bursary).

Of course, this would result in the endowment not growing independent of donors, which would leave the amount given out in bursaries limited at that forever. A helpful framework may be to instead consider at what point an endowment is large enough that it can sustain a needs-blind bursary program and the school’s costs via gains from investment alone. Needs-blind means many things - it seems unlikely the school will ever pay 100% of school fees. Harvard College, which is touted as needs-blind, provides aid to 55% of its students and has 20% of its students paying nothing. As such, it would seem reasonable to model a needs-blind Eton College as having 25% of students paying nothing, 50% paying a third of the school fee and 25% paying the full fees. This is equivalent to 760 full bursaries. Ceteris paribus, this results in an endowment that would need to have returns of around £30.2 million a year - in other words, a £503 million endowment. Given the estimated rate of growth of the endowment, this is very possible within the next decade - after which point you could have a growing endowment while still ensuring a needs-blind process.

Normative Implications

There are those who believe it makes more sense to let the endowment grow until it can sustain a needs-blind admissions policy, even if it comes at the expense of expanding bursaries right now to people who may benefit. However, as one of my favourite television shows would say, “the future is a sucker’s bet, a maybe, a contingency, a ‘what if?’. The only thing that is real is the present.” I am not here to make a normative prescription on which side of this debate schools should follow, nor am I here to disparage schools that are not using all of their investment gains for bursaries right now. There is a multitude of reasons for that - perhaps they are spending that money on other charitable efforts such as partner schools, or perhaps the hurdle right now isn’t funding for admitted students, but getting people from less privileged backgrounds to apply in the first place.

Instead, what I am suggesting is that given our specific set of assumptions, we can produce a stylised model of how educational endowments might work. Clearly, these assets are not nearly as liquid as I have suggested, nor is it necessarily prudent to invest all of it into an index fund, which itself isn’t guaranteed to provide returns averaging 6%. However, it does seem apparent to me that there is a huge amount of good that these endowments can do, and recognising that can help improve educational opportunities and equality.