Ao C South West FDs 12 th May

Ao. C 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, Ao. C Julian_Gravatt@aoc. co. uk

Pension policy Aim How Impact on Colleges Ensure incomes in retirements are sufficient given collapse of private sector DB schemes Turner report 2006 Pension Act 2009 Auto enrolment in 2013 -4 Change the design of public sector pensions Hutton report 2011 Public service pension act 2013 New LGPS 2014 TPS 2015 State pension to offer a minimum income for all UK citiizens Single state pension 2013 Pension bill 2014 End of contracting out in 2016 Higher NI payments Make pensions more attractive given low interest rates Pension bill planned in 2014 -15 DC pensions become like ISAs Limit use of pension tax relief to maintain government’s tax base Successive Finance Acts AA now £ 40, 000/year LTA now £ 1. 25 million

The pensions landscape Colleges Individuals Treasury LGPS Teachers Pension Scheme Pension savings & income

LGPS 2014 Employers Contribs 15 -20% 89 LGPS funds Plan to pool investments Support staff Eligible members Staff employed by colleges. . and subsidiaries 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 Colleges 16. 48% Eligible members Teachers employed by Colleges Teachers 7. 4% - 11. 7% Teachers Pension Scheme 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) £ 40 k Lifetime (LTA) £ 1. 25 mil 16* salary in DB scheme Protections (IP, FP) Defined benefit scheme Individuals Pension savings & income 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 2010 to 2015 to 2020 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 £ 21, 000 mil budget for 6 years DFE 16 -18 c£ 65 mil/year SFC buildings £ 30 mil/year 16 -18 growth Some new 16 -19 free schools Nothing yet earmarked SFA £ 600 mil spent on pre-2010 projects £ 750 mil via ERG, CCIF, CCF etc May yet have a role BIS (outside SFA) £ 1, 000+ mil for Research £ 330 mil/year for 2 years via LEPs £ 80 mil in 2015 -16 for national projects DFE Schools Student loans capitalised £ 2, 000 mil for new school places £ 2, 000 mil for school rebuilding

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 Outcomes Things to note EFA 16 -18 -0. 8% cash. +1. 2% students FPG helps some colleges 18 yr old mitigation helps others Colleges advance funding FT students New Maths/English condition Tighter sub-contracting rules Apprenticeships Recruitment down on 16 -18 apps Colleges say 19+ apps on target SFA maintaining funding New apprenticeship trailblazers Adult skills 17% ASB cut means a 23% skills cut Colleges say ASB on target No tolerance, no transitional protection Traineeships continue to be a priority Loans Colleges using c 66% of facility SFA has increased facilities by 27% 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 u 24 s or Level 2 s 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+L 3+) Loans HE Fees & Grants Fees Contracts Other Total 0 1000 2000 3000 4000 5000 6000 7000 Pay Supplies Services Depreciation Interest Total expenditure Surplus 4000 5000 6000 7000

Funding in 2015 -16 130 125 120 115 110 FE Colleges 105 Universities 100 95 90 85 80 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 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 16 -18 education £ 1, 500 Adult skills £ 1, 000 £ 500 £ 0 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 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 -24 s 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 Ao. C’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 Ao. C annual conference, 18 / 20 November 2014 General election, 7 May 2015