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Debt pensions insolvency

This article explores the financial challenges faced by colleges, including rising staff costs, a poorly controlled pension system, and the impact of debt and insolvency. It discusses the implications of the college credit crunch, flat cash funding, and funding reform on these challenges.

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Debt pensions insolvency

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  1. Julian Gravatt, AoC assistant chief executive Debt pensions insolvency

  2. A cocktail of financial challenges Rising staff costs College credit crunch Competition for students Flat cash funding Poorly controlled pension system Funding reform and uncertainty

  3. Debt, pensions and insolvency Banks

  4. A college credit crunch How we got to where we are • Long established capital funding model for colleges • Bank lending reached peak of £1.6 bil in 2015 • Irish banks exit in 2008 • Barclays & Lloyds have 45% of loan book each • Regulatory & shareholder pressure on banks • Limited options (Santander, RBS, councils, others?)

  5. Bank debt issues An every more complicated picture • Revenue funding position for colleges turned in 2013 • Covenant breaches prompting bank-ordered reviews • Some problem cases • General bank response is to ask for security • BIS decided exceptional support advances were loans in 2015 • Requirement for intercreditor agreements • Area reviews and mergers bring 2 or more banks into play

  6. Bank loan options General trend is towards lower bank debt • Longer term loans agreed before 2013 or even 2008 • Some with fixed interest rates at high levels and break clauses • Banks fairly averse to increasing loan levels • Where there are mergers, total bank debt may fall • DFE Transaction Unit restructuring loans (not grants) on offer • Private negotiation of terms using complex financial model

  7. Debt, pensions and insolvency Pensions

  8. A poorly controlled pension system Teachers Support staff College TPS 91 LGPS funds LGPS Employer Range 10-25% Average 15.8% Rising in 2017 TPS Employer 16.48% Could rise in 2019 Support staff Income-related Contributions 5.5-12.5% Income-related Contributions 5.5-12.5%

  9. Teachers’ pension scheme (TPS) Pensionable employment within Teachers’ Pension Scheme (TPS) covers: “A teacher employed by a governing body of an institution that is within the further education sector” (as defined by section 90 of Further and Higher Education Act 1992) TPS Regs 2010, no 990, Schedule 2, Part 1, section 6 (page 95) http://www.legon.gov.uk/uksi/2010/990/pdfs/uksi_20100990_en.pdf

  10. Local government pension scheme (LGPS) Employment in Local Government Pension Scheme (LGPS) “A person is eligible to be an active member of the scheme if employed by a body listed in Schedule 2, Part 1” ..unless they are eligible to be a member of another public sector pension scheme” LGPS Regs 2013, no 2356, sections 3 and 4 plus Schedule 2, Part 1, http://www.legislation.gov.uk/uksi/2013/2356/pdfs/uksi_20132356_en.pdf

  11. Pension regulations and colleges Colleges Eligibility Teachers employed in a college eligible for TPS All other college staff eligible for LGPS Subsidiary companies Staff not eligible for TPS (unless seconded in) Staff eligible for LGPS if company is admitted Support staff Teachers

  12. Pension – do colleges have an alternative? TPS • Teachers in schools, colleges, post-1992 unis get TPS • High on-costs (16.48%) but no liability on institution • Subsidiary company staff cannot access TPS • Offer to designate subsidiaries under s.28 of the 1992 Act to secure TPS access in HE/FE mergers LGPS • High and rising costs and liabilities. Exit very expensive • Subsidiary companies can be inside or outside of LGPS • Colleges able to offer an alternative scheme; must NOT give advice • LGPS contributions may rise if there are fewer active members

  13. LGPS 2014 Support staff Plan for 8 investment funds Colleges Income-related Contributions 5.5-12.5% Contributions Range 10-25% Average 15.8% LGPS 2014 Career average pension 1/49th pensionable earnings accrued (fast) Benefits revalued at CPI (slow) Options for cheaper pension (50%) 10 year protection and Final salary link 91 LGPS funds

  14. The 2016 LGPS valuation LGPS wide issues • Low interest rates (impact on NPV, future returns) • Longevity slightly reduced (offsets other issues) • Widespread desire to tackle deficits • Growing concern on non-tax raising members • More funds (about 1/3rd) graded employer financial strength • Option to pledge assets or make cash payments College specific issues • Recent funding cutbacks = fewer active members colleges • College insolvency consultation has made the sector look riskier • Colleges under pressure to pay back deficits faster

  15. TPS 2015 TPS 2015 Career average pension Accrual at 1/57th (slower) Option to buy faster 1/45th Revalued CPI+1.6% “10 year protection” Pre-2015 benefits fixed More expensive than LGPS Reward long serving teachers Union influence on DFE Govt picks up costs Fixed contribution 16.48% Colleges Teachers Income related Contribution 7.4% to 11.7% Teachers’ Pension Scheme

  16. Future TPS costs What we know • Current employer contribution (16.48%) is 4 points above the plan • Current valuation reported a 92% funding level as at 2012 • Next valuation will assess scheme as at March 2016 • New contribution rates expected to take effect in 2019 • Results should be available by March 2018 • Teachers majority in the scheme (college staff 8% of members) • Discount rate cut from 3% to 2.75% • Treasury has already forecast higher contributions in its budgets • A cost control mechanism provides some weak protection

  17. Future pensions What we know • Colleges have been tied into TPS and LGPS for decades • Pensions can & have derailed mergers & complex structures • College (ER) contributions average 16% and are rising • There are ways in which colleges can manage costs at the margin. Decisions on pay & staff have longer term pension implications • It will require changes to the law – and political will to do this – for matters to change in a substantial way • LGA’s review of Tier 3 employers will collect evidence

  18. The college insolvency regime

  19. The college insolvency plan Background • Treasury insisted on this in return for restructuring funding • Government now reluctant to bail out colleges • Risk of disorderly insolvency because law is unclear • Special administration regimes exist in post, housing, energy etc • Consultation during 2016 • Technical and Further Education Act became law in April 2017 • Consultation on regulations due later in 2017 • Expected to be put into effect in second half of 2018 • Not certain it will ever be used

  20. The college insolvency plan The Technical and Further Education Act • Extends commercial insolvency law to colleges • Creditors can ask courts to appoint a normal administrator • Power for DfE to appoint a special administrator within 2 weeks • Special Administrator has extra duty to protect students • Extra duty puts unsecured creditors (staff, LGPS) at greater risk • Powers to Sec of State to bar governors in certain cases

  21. Insolvency issues Some issues and questions about the DfE plan • Upsets a balance struck over 22 years • Has scared banks and some LGPS pension funds • Risky to introduce special admin regime without pension reform • Overlap between statutory FE regime and HE student protection • Enough time to review respective role of Ofsted, FE commissioner, SFA/EFA, Transaction Unit etc • Colleges are being pushed to become financially cautious

  22. A new regulator? Special Administrator (2018) FE Commissioner EFA or SFA Office for Students (2018) Ofsted College LGPS Fund External auditor The College’s bank

  23. Final thoughts

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