AoC South West FDs, 12th May 2014

Long-term issues for colleges

• Pensions

• Financial health issues

• Capital funding

• Revenue funding

• Final thoughts

Julian Gravatt, Assistant Chief Executive, AoC

Julian_Gravatt@aoc.co.uk

Pension policy

Aim How Impact on Colleges

Ensure incomes in retirementsare sufficient given collapse of private sector DB schemes

Turner report 2006Pension Act 2009

Auto enrolment in 2013-4

Change the design of public sector pensions

Hutton report 2011Public service pension act 2013

New LGPS 2014TPS 2015

State pension to offer a minimum income for all UK citiizens

Single state pension 2013Pension bill 2014

End of contracting out in 2016Higher NI payments

Make pensions more attractivegiven 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/yearLTA now £1.25 million

The pensions landscape

LGPS LGPS

Treasury

Treasury

Plan to pool investments

LGPS 2014

89 LGPSfunds

89 LGPSfunds

LGPS 2014Career average pension1/49th pensionable earnings accrued Benefits revalued at CPIOptions for cheaper pension (50%)Extras unchanged (ill-health, lump sum etc)

Transition10 year protection and Final salary link

Contribs15-20%

Contribs5.5-12.5%

Eligible membersStaff employed by colleges..and subsidiaries

16.48%

Teachers Pension Scheme 2015

7.4% - 11.7%

TPS 2015Career average pensionAccrual at 1/57th

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

Final salary linkPre-2015 benefits fixedVary with final salaryPublic sector club remains

Eligible membersTeachers employedby Colleges

Pension income and pension tax

Tax limit on savingAnnual (AA) £40kLifetime (LTA) £1.25mil16* salary in DB schemeProtections (IP, FP)

State pensionSPA harmonises (2018)SPA 66 (2020) 67 (2028) SSP (£144/wk) after 2016End of pension creditNo contracting out Higher NI for colleges+3.4% ER, +1.4% EEs

Private pensionsMarch 2014 budgetAnnuities not compulsoryNew transfer restrictionsFuture impact on tax relief?

Defined benefit scheme

Defined benefit scheme

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 2015 to 2020

DFE Schools Capital budget cut by 50% in 2010£5,000 bil in total for new placesSome money routed via councils£1,500 mil for new free schools

£21,000 mil budget for 6 years

£2,000 mil for new school places£2,000 mil for school rebuilding

DFE 16-18 c£65 mil/year SFC buildings£30 mil/year 16-18 growthSome 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

Student loans capitalised

£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

Outcomes Things to note

EFA 16-18 -0.8% cash. +1.2% studentsFPG helps some colleges18 yr old mitigation helps others

Colleges advance funding FT studentsNew Maths/English conditionTighter sub-contracting rules

Apprenticeships Recruitment down on 16-18 appsColleges say 19+ apps on targetSFA maintaining funding

New apprenticeship trailblazers

Adult skills 17% ASB cut means a 23% skills cutColleges say ASB on target

No tolerance, no transitional protectionTraineeships continue to be a priority

Loans Colleges using c66% of facilitySFA has increased facilities by 27%

SFA developing a loan growth planLoans 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

16-18In 2016-7, new A-levels in place, Maths/English condition applies and Formula Protection Grant ends. DFE facing rising 5-16 pupil numbers

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

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

Funding in 2016-17

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

Funding in 2015-16

EFA / SFA scenario

EFA and SFA assumptions prepared in FebruaryAssumed 4% annual reduction in EFA, 15% annual reduction in SFAIn 2014-15, EFA allocations better, SFA worse than this

Advanced level and higher education

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

HEStudent number controls in 2014-15 cover private HE and FE collegesFlexibility range up to 6% in 2014-15Promise that SNCs will be removed in 2015-1630,000 (8%) extra places in 2014 ; 60,000 extra places longer-termNo controls on PT HE but a substantial decline in recent yearsSome political interest in developing higher vocational education

Some thoughts

CollegesPessimism can be contagious. College fortunes vary significantlyPublic 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 professionalsFinance and business disciplines more important than everCashflow management, risk management, financial analysis etcGoverning bodies responsible for solvency & viability of collegeUse AoC’s ETF-funded governance support programmeContinue to pick up good ideas from others

Some dates

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

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