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Where should the axe fall? The apprenticeship funding crisis revisited

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Apprenticeship policy is a victim of its success, say government ministers, as the options for funding have once again become a subject for controversy. Richard Alberg, CEO of MWS Technology, looks at the options in response to the apprenticeship funding crisis.

It’s July 2019, and we are yet again debating the funding crisis of apprenticeships. In December last year, FE Week revealed that there was an overspend in the Levy. This announcement came as something of a shock to providers and employers who had been consistently told the Levy was underspent. According to the Institute for Apprenticeships and Technical Education, there would be a shortfall of £0.5 billion in 2018/19 and a predicted £1.5 billion in 2021/2.

A National Audit Office report, published in March 2019, confirmed the figures and warned that the programme was not financially sustainable.  The reason? Employers were choosing to spend their Levy on funding higher level apprenticeships, which cost more – something the government did not, seemingly, anticipate.

Tightening the purse strings?

The government has responded with a series of inconclusive suggestions aimed at curbing demand. One of these is a starting salary cap for apprenticeships, which would have the impact of limiting demand for higher-level apprenticeships. Other suggestions include age limits or targeting key sectors for funding. However, Anne Milton, Minister for Skills and Apprenticeships, speaking to the Financial Times in April, did not rule out increasing the Levy.

In other words, apprenticeships have been something of a success, which inevitably means more money is involved. Funding apprenticeships through the Levy has also meant that employers demand some say in how they spend the money, and they have voted with their feet by enhancing the skills base of their employees with higher-level apprenticeships. And higher-level apprenticeships do cost more.

But are we taking seriously enough the idea that funding should be increased? As Mark Dawe points out in his recent FE Week article:

“Of course, a new skills minister might be thinking that this government’s apprenticeship policy is an amazing success and we could get even more productivity, social justice and support from business if we found more money to support more apprentices at all levels.”

And as he rightly argues, the proposed options for limiting funding are likely to be unpalatable for a range of reasons.

So what’s the answer?

Skills and productivity

We know that the UK needs to improve its skills base. However, the Audit Office report insisted that the Department for Education had still not done enough to prove the capacity of the apprenticeship programme to deliver higher productivity. Clearly, better evidence is needed. Yet there is much to draw on. Research on employer experiences by the Open University, published this month, reveals that 63% of UK organisations say they have a skills shortage. Most lacking were management, leadership and IT skills.

A report by the OECD said that the UK had an over-supply of low-skilled jobs and supply outstripped demand in higher-skilled employment – 40% of workers are either over-skilled or under-skilled for the jobs they do. A report by the Chartered Institute of Personnel and Development puts the skills mismatch figure at 49%. Among the OECD’s recommendations are better training and better jobs/skills matching at all levels.

And what about the impact of improved skills on economic performance? The Leitch Review in 2006 analysed the relationships between skills and GDP. It concluded that the improvement of the UK’s qualifications level in the ten years preceding publication had raised achieved GDP by £30 and £50 billion. A report published by the UK Commission for Employment and Skills in 2010 argued that while productivity growth in the UK outstripped other advanced nations, average productivity (average output per worker or hour worked) fell behind the US, France and Germany. They outline the impact of skills on the capacity for innovation, which ultimately impacts productivity levels.

There is not just a causal relationship between skills, innovation and productivity. The OU’s research found that insufficient skills among company workforces made them less agile in response to changing circumstances, offering another insight into how productivity lags occur.

I’ve presented only some of the evidence pointing to the fact that advanced post-industrial nations, on the brink of the Fourth Industrial Revolution, need to improve their skills base. The economy gains, as does the individual who can take advantage of higher wages and better working conditions (and, in turn, has more spending power).

In the context of all this evidence, debating where the axe should fall seems spurious. It is perhaps the number one lesson of business that you invest to succeed – and, mostly, that means people. While we do need to train people on the lower level standards, it is evident that there is a skills gap at the most advanced standards, including levels 7 and 8.

Expanding the Levy pot

Instead of cutting funding, I’d argue we should be looking at how to increase the funding pot – which may mean increasing public spending contributions or reforming the Levy to maximise employer contributions. In other words, I’d argue there are some easier wins than trying to pull back on apprenticeship success.

Levy payers don’t pay 0.5% on the first £3m of payroll and instead have a starting credit of £15,000 in their Levy account. Removing this benefit is entirely in line with employers contributing to the costs of training their staff. For smaller organisations the change is fair, and for larger organisations a modest difference. This change would result in approximately a further £300m being raised.

Employers that don’t pay the Levy and those that have used up their Levy now pay a 5% contribution to the training costs. I think this is a mistake, especially for Levy payers. Any Levy payer that has used its Levy and wants more training in its organisation has recognised the benefits of high-quality apprenticeships. After all, if employers saw apprenticeships as a waste of staff time, it would be better to regard the Levy as a tax and forgo usage. Restoring the contribution to 10% would, in my view, represent value to employers and the Exchequer.

Finally, I have concerns about the ability of organisations to donate some of their Levy. The sums involved aren’t large as they mainly save the (current) 5% employer contribution. It seems to be an unnecessary use of available funds.

Final thoughts

Given the value of apprenticeships individuals, employers and society, the worst option is to ration availability or, through cuts to the funding per standard, drive down quality. If there is still insufficient money, then the least worst option is increasing the percentage payment from 0.5%. My only caveat in taking this approach is that it is a blunt tool that disproportionately affects sectors such as care, retail and hospitality – sectors that are in real financial pain. An increase to the Levy could result in the entire apprenticeship funding system being called into question or exceptions being made – a policy slippage that should, in my opinion, be avoided.

In reality, there may be little alternative in simply recognising the value of apprenticeships to productivity and growth and invest appropriately from the public purse. 

Because education and training isn’t a luxury – our economy depends on it.

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