Sinking fund management overview
A sinking fund is the name given to a long term savings account that leaseholders contribute to through service charges - typically every month - and is used to meet the future cost of major works that their building may require, such as a new roof, replacement windows or lift, exterior painting, etc. The way in which sinking funds are managed by housing organisations can vary greatly, with the simplest model having just one fund per cost centre (also referred to as a scheme), right up to multiple sinking funds per cost centre, one for each major work's element. Even where a sinking fund relates to only one item, there could still be multiple costs associated with it that need to be included in the budget e.g. a refurbishment to the lift after 10 years and then a total replacement after 20 years. To manage the required payments, a separate account could be created for, say, a lift replacement, and then the attributed sinking fund amount calculated by taking the replacement cost of the item and dividing it by it's notional life. To ascertain individual contributions towards this sinking fund, the amount is then apportioned equally across the number of dwellings in the block of flats where the lift is located, with the resulting charge only levied to leaseholders and shared owners i.e. rented tenants do not contribute towards a sinking fund. Indeed, as the owner of the rented assets, a landlord has the responsibility for building repairs, and may themselves contribute to a sinking fund, or just pay the lump sum of their share when the works are carried out. If the landlord has not contributed to the account, they will pay their share of the costs before taking the remainder out of the sinking fund. Once the amount to be covered by the sinking fund is known, this will be deducted from the balance. In circumstances where there are insufficient funds in the account to cover the work, the deficit will be billed to those assets that contribute to the sinking fund.
If a leaseholder contributes to a sinking fund but then subsequently sells their property, they are not entitled to their money back, as this is seen as their contribution to the repair costs for the time they were in residence. In this way, sinking funds are considered to be fair, as everyone pays a share of the costs each year; hence people who use the lifts for ten years and then move out have made a valid contribution to their replacement. This approach also prevents leaseholders from suddenly selling up to avoid an imminent charge. Conversely, people who move in just before the planned work is done aren't penalised.
When creating a sinking fund in Civica Cx Housing, the management rules dictate that it must be linked to a single cost centre but then any number of cost elements within that cost centre - the individual breakdown of fees that combine to give the overall service charge - can be linked to it. Each fund is also assigned a charging frequency, whether that be yearly, annually or monthly, to determine the period over which sinking fund charges are calculated. So, for example, if a yearly charging cycle is assigned to a sinking fund, the period over which charges are calculated will be across the full year. The next charging period will then commence on the first anniversary, and every year thereafter. Any number of expected costs can be raised against the sinking fund and these combine to determine the overall contribution commitment, taking account of their likely due dates. As each leaseholder makes separate contributions to the sinking fund, Civica Cx Housing supports the ability to analyse how the fund is performing, not just at scheme level but also at sub-account level (the individual leaseholder transactions). As repairs are made to the major work's element covered by the sinking fund, all incurred charges can be raised and matched against the expected cost entries, which feed into the transactional analysis and statement reporting opportunities. As sinking funds also accrue interest, the current percentage rate applicable to the account can be maintained and will be automatically applied to the operating fund balance, period by period.
Separate help articles have been created for each key aspect of sinking fund management, including: