AoC South West FDs, 12

th

May 2014

Long-term issues for colleges

• Pensions • Financial health issues • Capital funding • Revenue funding • Final thoughts Julian Gravatt, Assistant Chief Executive, AoC [email protected]

Pension policy

Aim

How Ensure incomes in retirements are sufficient given collapse of private sector DB schemes Turner report 2006 Pension Act 2009 Change the design of public sector pensions State pension to offer a minimum income for all UK citiizens Make pensions more attractive given low interest rates Limit use of pension tax relief to maintain government’s tax base Hutton report 2011 Public service pension act 2013 Single state pension 2013 Pension bill 2014 Pension bill planned in 2014-15 Successive Finance Acts

Impact on Colleges

Auto enrolment in 2013-4 New LGPS 2014 TPS 2015 End of contracting out in 2016 Higher NI payments DC pensions become like ISAs AA now £40,000/year LTA now £1.25 million

The pensions landscape

Treasury

LGPS

LGPS 2014

Eligible members

Staff employed by colleges ..and subsidiaries Contribs 15-20%

89 LGPS funds

Plan to pool investments Contribs 5.5-12.5%

LGPS 2014

Career average pension 1/49 th pensionable earnings accrued Benefits revalued at CPI Options for cheaper pension (50%) Extras unchanged (ill-health, lump sum etc)

Transition

10 year protection and Final salary link

Teachers Pension Scheme 2015

16.48%

Eligible members

Teachers employed by Colleges 7.4% - 11.7%

TPS 2015

Career average pension Accrual at 1/57 th Option to buy faster 1/45 th Revaluation CPI+1.6% “10 year protection” No change to extras (eg lump sums, illhealth)

Final salary link

Pre-2015 benefits fixed Vary with final salary Public sector club remains

Pension income and pension tax

Tax limit on saving

Annual (AA) £40k Lifetime (LTA) £1.25mil

16* salary in DB scheme Protections (IP, FP)

Defined benefit scheme

State pension

SPA harmonises (2018) SPA 66 (2020) 67 (2028) SSP (£144/wk) after 2016 End of pension credit No contracting out Higher NI for colleges +3.4% ER, +1.4% EEs

Private pensions

March 2014 budget Annuities not compulsory New transfer restrictions Future impact on tax relief?

Pension issues

Employment

Implementation of changes (compliance) Communication with staff Options (TPS faster accrual, LGPS 50/50) Impact of contributions on take-home pay Whether to offer a third (DC) option for staff?

Finance

LGPS (2014) or TPS (2015) + NI (2016) = 5% rise in on-costs Impact of pension costs on competitiveness Impact of LGPS liabilities on banking relationships

Financial health

College finances

Deficits in 2012-13 (48% of colleges) Staff costs 60-65% of income Public spending cuts -> 4% fall in EFA+SFA in 2014 Rising costs and falling income Ofsted-related spending + capital projects = short-term worsening UK in “Year 4 of a 9-year austerity plan” (IFS)

If colleges get into trouble

No formal lender of last resort but SFA & EFA may act FE commissioner (or SFC commissioner)

Financial management

Addressing problems

Necessary to face up to difficulties promptly Plan B needs to address the worst-case scenario Understanding impact of competition & demography on 16-18 plans Curriculum & finance need to be closely connected Finance/analysis skills in senior teams Governors need several channels of communication Tackling low class sizes & duplication with other colleges All parts of the budget need to be managed Is this list right? Are there other issues?

Capital funding

DFE Schools DFE 16-18 SFA BIS (outside SFA) 2010 to 2015 Capital budget cut by 50% in 2010 £5,000 bil in total for new places Some money routed via councils £1,500 mil for new free schools c£65 mil/year SFC buildings £30 mil/year 16-18 growth Some new 16-19 free schools £600 mil spent on pre-2010 projects £750 mil via ERG, CCIF, CCF etc £1,000+ mil for Research Student loans capitalised

2015 to 2020

£21,000 mil budget for 6 years £2,000 mil for new school places £2,000 mil for school rebuilding Nothing yet earmarked May yet have a role £330 mil/year for 2 years via LEPs £80 mil in 2015-16 for national projects

Capital projects

Colleges need to make their own decisions on projects Investment can increase income, rationalise space, reduce costs & meet employer needs. Why else do a project?

Government has been a good funder in the past but is now unreliable and runs one-year budgets LEPs now hold the ring and may be allies in making projects happen Worth having bid-ready projects and a property strategy

Revenue funding 2014-15

EFA 16-18 Apprenticeships Adult skills Loans Outcomes -0.8% cash. +1.2% students FPG helps some colleges 18 yr old mitigation helps others Recruitment down on 16-18 apps Colleges say 19+ apps on target SFA maintaining funding 17% ASB cut means a 23% skills cut Colleges say ASB on target Colleges using c66% of facility SFA has increased facilities by 27%

Things to note

Colleges advance funding FT students New Maths/English condition Tighter sub-contracting rules New apprenticeship trailblazers No tolerance, no transitional protection Traineeships continue to be a priority SFA developing a loan growth plan Loans may replace ASB in 2016-17

Funding in 2015-16

EFA faces a cash crunch in 2015-16 Obvious options are to cut rates (perhaps on targeted basis), to declare some students ineligible or to take back money in-year SFA also faces a continuing sharp but unclear reduction in budget EFA & SFA will be confirming allocations in spring 2015 Following the May 2015 election, there will be a June budget and a 2015 spending review to set budgets for several years

Funding in 2016-17

16-18

In 2016-7, new A-levels in place, Maths/English condition applies and Formula Protection Grant ends. DFE facing rising 5-16 pupil numbers

Adults

Apprenticeship credits due to start (but possibly won’t) Any political decision on HE fees will have an impact in 2016-17 New SLC IT system means FE loans may extend to u24s or Level 2s

Public spending

Treasury has already pencilled in £10 bil spending cut for 2016-17 Extra £5 bil tax income from higher NI in 2016-17 already counted

Funding in 2016-17

Education (16-18) High needs Apprentices (16-18) Apprentices (19+) Adult Skills (19+) Fees (24+L3+) Loans HE Fees & Grants Fees Contracts Other Total 0 Pay Supplies Services Depreciation Interest Total expenditure Surplus 0 1000 2000 3000 4000 5000 6000 7000 1000 2000 3000 4000 5000 6000 7000

Funding in 2015-16

130 125 120 115 110 105 100 95 90 85 80 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 FE Colleges Universities Figures from published accounts & forecasts indexed to 2009-10 Universities – science ringfence, higher tuition fees, overseas & residential Colleges – government funded students, relatively low fee income

EFA / SFA scenario

£3 500 £3 000 £2 500 £2 000 £1 500 £1 000 £500 £0 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 16-18 education Adult skills EFA and SFA assumptions prepared in February Assumed 4% annual reduction in EFA, 15% annual reduction in SFA In 2014-15, EFA allocations better, SFA worse than this

Advanced level and higher education

FE Loans

Option for BIS to extend FE loans in 2016-17 Loans could be offered for 19-24s at Level 3 or 19+ at Level 2 Not automatic that loans must cover 100% of fees Vince Cable suggested maintenance loans should be available in FE

HE

Student number controls in 2014-15 cover private HE and FE colleges Flexibility range up to 6% in 2014-15 Promise that SNCs will be removed in 2015-16 30,000 (8%) extra places in 2014 ; 60,000 extra places longer-term No controls on PT HE but a substantial decline in recent years Some political interest in developing higher vocational education

Some thoughts

Colleges

Pessimism can be contagious. College fortunes vary significantly Public spending cuts make colleges smaller but also more efficient.

Productivity improvements from IT only partly realised in education.

Some government budgets continue to rise (eg FE and HE loans).

Opportunities in higher skills, maths/english, 16-18, localism

Finance professionals

Finance and business disciplines more important than ever Cashflow management, risk management, financial analysis etc Governing bodies responsible for solvency & viability of college Use AoC’s ETF-funded governance support programme Continue to pick up good ideas from others

Some dates

Financial reporting

Financial plan (2013-14, 2014-15, 2015-16), July 2014 Accounts & finance record (2013-14), December 2014

Events

College Finance conference, 3 / 4 June 2014, Birmingham World cup first round 14 / 24 June 2014 Scotland referendum, 18 September 2014 Autumn SW FDs meeting, 16 October 2014 AoC annual conference, 18 / 20 November 2014 General election, 7 May 2015