th
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

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

Treasury
LGPS

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

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

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?

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

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)

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?

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

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

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

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

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

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

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

£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

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

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

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