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AoC South West FDs, 12 th May 2014

AoC 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, AoC Julian_Gravatt@aoc.co.uk. Pension policy. The pensions landscape. Colleges. Individuals.

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AoC South West FDs, 12 th May 2014

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  1. 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

  2. Pension policy

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

  4. LGPS 2014 Plan to pool investments Employers Support staff Eligible members Staff employed by colleges ..and subsidiaries Contribs 15-20% Contribs 5.5-12.5% LGPS 2014 Career average pension 1/49th 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 89 LGPS funds

  5. Teachers Pension Scheme 2015 16.48% Colleges Teachers TPS 2015 Career average pension Accrual 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 link Pre-2015 benefits fixed Vary with final salary Public sector club remains 7.4% - 11.7% Teachers Pension Scheme Eligible members Teachers employed by Colleges

  6. Pension income and pension tax Tax limit on saving Annual (AA) £40k Lifetime (LTA) £1.25mil 16* salary in DB scheme Protections (IP, FP) Individuals 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? Defined benefit scheme Pension savings & income

  7. 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

  8. 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)

  9. 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?

  10. Capital funding

  11. 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

  12. Revenue funding 2014-15

  13. 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

  14. 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 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

  15. Funding in 2016-17

  16. Funding in 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

  17. EFA / SFA scenario 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

  18. Advanced level and higher education 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

  19. 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 AoC’s ETF-funded governance support programme Continue to pick up good ideas from others

  20. 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 AoC annual conference, 18 / 20 November 2014 General election, 7 May 2015

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