Government must get a grip on further education sector, with nearly half of all colleges in financial special measures, Say MPs

The financial health of the college sector has been a cause for concern for many years. The financial health of the sector remains fragile – in 2018/19, one in three colleges reported an operating deficit. Financial pressures are having a detrimental impact on what colleges can offer students, including in cuts to mental health and other support services.

The COVID-19 pandemic will put further strain on the financial health of the sector, even as its importance grows in addressing labour market skills gaps and retraining workers in response to the economic impact of COVID-19. But in evidence to the Committee, the Department for Education (DfE) and the Education and Skills Funding Agency (ESFA) painted a picture at odds with “the much less positive situation on the ground”.

Colleges’ autonomy can hamper the Department’s ability to protect learners and safeguard taxpayers’ money – for example, colleges are free to borrow sums that they may struggle to repay, and to run with financial deficits year after year.

But the Committee says it is “clearly iniquitous that sixth-form colleges have to pay VAT while post-16 academies and schools with sixth forms do not”, and notes that “successful implementation of the new T level qualifications risks being delayed by a lack of work placements” beyond colleges’ control.

The result is a situation where, in February 2020, government was intervening in nearly half of colleges for financial health reasons, and in recent years the Department has provided over £250 million in emergency funding, alongside other support, to ensure the continued functioning of colleges.

Meg Hillier MP, Chair of the Public Accounts Committee, said: “The Covid pandemic has thrown our young people’s education and career qualifications into chaos, and the Department for Education’s handling of the crisis so far has been late and confusing, and it has left already struggling colleges squeezed when people need new skills more than ever.

“As focus turns to rebuilding and reskilling for the ‘new economy’ that will emerge, this is a chance for DfE finally to take a hold and develop the proper, integrated vision for the college sector that it has lacked for so long. The young people training and qualifying in these times are the people who will rebuild our economy and society. The Department cannot keep putting sticking plasters over this gaping wound.”

1 For too long, the Department has lacked a proper integrated vision for the college sector. The Department oversaw a programme of area reviews from late 2015 to early 2017, in an attempt to ensure that post-16 education and training provision met the needs of employers and students in local areas, while also creating a more financially robust college sector. The area reviews were successful to a degree, but significant strategic challenges remain. The Department considers that it has pursued elements of long-term strategy for some time – for example, giving employers more of a voice and reviewing the number of qualifications on offer. It acknowledges, however, that the impact of COVID-19, together with concerns about productivity, mean there is an increased need for a strategy for further education and skills development. The Department is developing a strategy to address fundamental weaknesses in the sector and expects the resulting White Paper to be published before the end of March 2021.

Recommendation: The Department should make clear when it expects to set out funding commitments to support reforms proposed in the forthcoming White Paper.

1. Rising pension costs are putting significant pressure on college finances. Staff costs, including pension contributions, typically account for around two-thirds of colleges’ running costs, and have been rising in recent years. Employer contributions to the Teachers’ Pension Scheme rose by over 40% in 2019. The government provided colleges with extra funding to cover this increase in 2019/20 and 2020/21, but colleges are worried about the affordability of contributions in future years. In addition, the Local Government Pension Scheme, which college support staff may belong to, has had a deficit in recent years and colleges have had to make payments to help cover the deficit, on top of their standard contributions.

Recommendation: The Department should write to us within three months, setting out what it has done to assess pension cost pressures on colleges, and how it has taken account of these in its funding decisions.

1. It is clearly iniquitous that sixth-form colleges have to pay VAT while post-16 academies and schools with sixth forms do not.As part of the area reviews of post-16 education and training provision, sixth-form colleges were given the option of becoming academies and, by 2018/19, 24 sixth-form colleges had converted. There is a financial incentive for colleges to convert because colleges have to pay VAT while academies (and other schools) do not. The Sixth Form Colleges Association estimates that the requirement to pay VAT means the average sixth-form college diverts around 4% of its funding away from frontline provision. This would equate to around £20 million per year across the remaining sixth-form colleges. The Department believes that, despite regular discussions between the two departments, the issue of inconsistent VAT treatment is not a priority for HM Treasury.

Recommendation: The Department should work with HM Treasury to assess the merits of making the rules on VAT consistent for schools and colleges.

1. Successful implementation of the new T level qualifications risks being delayed by a lack of work placements. In May 2018, the then Permanent Secretary at the Department requested and was given a ministerial direction, as he had concerns about the feasibility of delivering the new T level technical qualifications in 2020. The first three qualifications were launched in September 2020, but we remain concerned about the practicability of implementing the programme. A crucial element of each T level is the 20% of time spent on a work placement at a relevant employer, but colleges tell us of difficulties in securing those placements. COVID-19 has forced many employers to work virtually, and this is likely to reduce the opportunities for work placements even further. The ESFA acknowledges that some people still do not know what T levels are, but says it is working to engage with employers about the programme.

Recommendation: The Department should write to the Committee before the start of the next academic year setting out what up-to-date assurance it has that there will be enough work placements for T levels. This should cover what impact the COVID-19 pandemic has had on the availability of placements, and plans to incorporate virtual placements.

1. The Department’s funding decisions are based on previous years’ student numbers, which risks holding back colleges that are growing. Funding for students aged 16 to 19, which makes up around half of college income, is based on the previous year’s learner numbers; other factors, such as retention rates, are based on data which are two years old. This means that colleges with increasing numbers of learners or improving retention rates are not funded for their full level of provision. This may become a growing problem, as learner numbers are expected to increase over the next few years as the population of young people rises. The ESFA reports that it is reviewing various aspects of the FE funding system – which, it acknowledges, is very complex – including how it uses lagged data.

Recommendation: The Department should consider a change to the formula for funding colleges which takes account of real time or more recent information about student numbers. It should report back to us by the summer about how funding could be delivered that better reflects colleges’ real time position.

1. The Department’s, the ESFA’s and the Further Education Commissioner’s approach to intervention takes too long, costs too much and is not effective in making colleges more sustainable. At February 2020, government was intervening in nearly half of colleges for financial health reasons. Some colleges remain in intervention for a long time – for example, seven have been in formal intervention for five years or more – and 75 colleges have been in and out of early intervention more than once. The Department has spent substantial sums of public money on supporting colleges in intervention, including £253 million on emergency funding for 36 colleges with cashflow problems. This emergency funding was originally intended to take the form of repayable loans, but much of the money is now not expected to be repaid. Two colleges in Kent have been in the insolvency regime since mid-2019 and the ESFA expects these cases will end up costing it over £60 million. Payments to the education administrators amount to £6 million (10% of the total) so far, and could increase further. The ESFA acknowledges that intervention often does not feel supportive to colleges and reports that it is taking action in response to Dame Mary Ney’s 2019 report on college financial oversight arrangements, which recommended the ESFA develop a more nurturing relationship with colleges.

Recommendation: The Department should set out within three months what actions it plans to take to improve its intervention arrangements, and how it will assess the success of these actions.

1. Students are losing out as colleges cut mental health and other support services in response to financial pressures. The Department’s funding for colleges fell by 20% in real terms over the six years from 2013/14 to 2018/19, and the ESFA rated the financial health of 35% of colleges as ‘inadequate’ or ‘requires improvement’ in 2018/19. The ESFA emphasises that the sector’s financial position did not decline as much as had been feared in 2015, but we consider this detracts from the continuing financial fragility. More colleges will face financial difficulties as a result of the COVID-19 pandemic and, when we took evidence, the ESFA had concerns about the cash position of 64 colleges. Many colleges have responded to their increasingly tight financial position by cutting back on enrichment activities designed to improve students’ wider learning experience, and on welfare services such as mental health support. The Department believes that colleges are good at prioritising their activities in response to financial pressures, but accepts that this is an area it needs to monitor.

Recommendation: The Department should undertake research into the extent to which college support services are meeting students’ needs, including canvassing the views of students themselves. In its Treasury Minute response, we expect the Department to give a firm commitment to taking this action, and details of the timetable for the research./ENDS