Technical and Further Education Bill

Baroness Cohen of Pimlico Excerpts

Committee: 3rd sitting (Hansard): House of Lords
Wednesday 1st March 2017 Grand Committee

[Baroness Garden of Frognal (LD)]

My Lords, I support these amendments. It probably is important that any education administrator should be familiar with further education because it is a very distinct type of education. I have a question that I would like the Minister to clarify. Clause 22(4), which it is now proposed to delete, indicates that the administrator must,

“carry out his or her functions in a way that achieves the best result for … the company’s creditors as a whole”,

yet Clause 14 says that the primary,

“objective of an education administration is to … avoid or minimise disruption to the studies of the … students”.

There seems to be a slight contradiction here regarding whether the education administrator is going to put students or creditors first. I accept what the noble Lord, Lord Stevenson, said, that perhaps the problem is with creditors: if they feel they are going to be last in line to get paid back, that might make more problems for colleges in getting funding. Can the Minister perhaps clarify the apparent contradiction between those two clauses?

[Baroness Cohen of Pimlico (Lab)]

I generally support the amendments. I started from a very particular consideration: I wondered whether I would be prepared to be an education administration person, because I think I am qualified to be so. The first thing I would want to know is where my financial backing was. The first thing I would ask for would be a guarantee that I would not end up personally liable, as under normal insolvency law I would be. I would need a back-up. The problem here, as with all public sector bodies—I have been through this before when we were thinking about what to do about a failing nationalised industry—is that if the Government are the guarantor or provider of last resort, the creditors will be perfectly happy but I am not quite certain how the education administrator gets out of it. I do not think I would be prepared to be an education administrator without an underwriting behind me. Mere appointment by a court would not do it for me. Have the Government thought about this bit?

[Baroness Buscombe (Con)]

My Lords, I am grateful to the noble Lords who have put their names to this group of amendments. I shall begin with Amendments 40 and 44. I realise that the noble Lord, Lord Stevenson, also referenced Amendment 46A, regarding creditors. I will get to that but if he and other noble Lords could bear with me, it would be rather easier if I could do this sequentially.

On Amendments 40 and 44, then, as is the case with other special administration regimes, Clause 15 provides that the person to be appointed as the education administrator must be someone who is qualified to act as an insolvency practitioner in relation to the FE body. This is the only criterion that must be satisfied for appointment as an education administrator.

Amendment 40, however, would require the person appointed as the education administrator to have relevant experience and knowledge of the further education sector, as noble Lords have said, in addition to being qualified to act as an insolvency practitioner. Saving the blushes of the noble Lord, Lord Stevenson, he is a very good example of accountants who have a breadth of perspective—indeed, I should declare an interest as I am married to an accountant who has a fantastic breadth of perspective—so we should not underestimate their ability to address different sectors with the same amount of expertise.

While such experience may be desirable, it is certainly not essential. Noble Lords familiar with the company insolvency regime will know that insolvency practitioners are often appointed to administer companies in sectors where they have little or no experience. That does not prevent them carrying out their duties successfully; it is their ability to understand and apply the different options available to them in the insolvency toolkit that is of most importance, not a detailed knowledge of the sector or the company. It is no different in an education administration.

In his evidence to the Committee in another place Mr Stephen Harris, an experienced insolvency practitioner with Ernst & Young, said that:

“From an insolvency practitioner’s perspective, it is worth standing back and recognising that insolvency practitioners are not train drivers, or people who spend their life in the railway or the London Underground, when it comes to a special administration regime, nor are they specialist property developers. They come to each situation afresh. One comforting thing that insolvency practitioners bring is recognising when they need to keep in place the existing management structure in a corporate sense, or the workforce in a pastoral sense, recognising that those people have skills and qualifications that they as an office holder do not necessarily have, and also”—


this is key—in bringing,

“outside specialist help to continuing the duties of education administrator should the need arise. That is … part and parcel of any trading insolvency regime”.—[Official Report, Commons, Technical and Further Education Bill Committee, 22/11/16; col. 46.]

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[Baroness Buscombe]

I did actually reference this while the noble Baroness was talking to a colleague. There is no contradiction. As I said about five minutes ago, the creditors’ objective is secondary and subject to the special objective of protecting students’ studies. Only when it is consistent with the special objective does the education administrator have regard to creditors’ needs. This reflects normal insolvency procedure. It is right that the education administrator has regard to creditors’ needs. I hope this is helpful.

[Baroness Cohen of Pimlico]

May I have another go at this point? In the days when I was a civil servant, a bust company would arrive on the doorstep of the Minister. Since it was in the Industry Act that we had the power, and indeed a duty, to preserve jobs, the administrator would usually ask us, “How far do you want to go? I can keep this company going for another five weeks, while we look for a buyer, but I want an underwrite. My client, the bank, is not interested. It is going to close this company”. There is the same problem here. Who authorises the administrator to go on putting the students’ interests first and to what end? The legislation is clear: the administrator puts the students’ interests first and tries to get a satisfactory answer. After two months, it becomes clear that nobody wants these students, nor this institution. I would not start out as the administrator without having a pretty clear view of what I had to do, when I was asked to stop and to whom I should go back and say, “This one is not going to work. May I now go back and satisfy the creditors?”. The process is worrying me. The words are all right, but I do not understand the process. I am sure we would all prefer not to have the process tested in practice, as it were, and have it come unglued there.

[Baroness Buscombe]

I am clutching a response to the noble Baroness’s earlier question which is on point. Clauses 26 and 28 allow the Secretary of State to provide the education administrator with indemnities or guarantees where that is necessary or appropriate. The education administrator will be able to apply to be discharged from office when they believe that they have achieved the special objective.

It may also help if I move on to Amendment 46A which specifically references creditors. Although we share common ground in our commitment to ensuring that if a further education body were to become insolvent, students would be placed at the heart of the subsequent administration process through the special objective, we do not share common ground here.

Clause 5 applies existing company insolvency law to further education colleges. The long-standing insolvency regime ensures that the interests of creditors are protected when a company becomes insolvent. Without such protection, lenders would rightly change their lending behaviours, such as by imposing higher interest rates and lending lower amounts. Other businesses would also become more cautious in trading with companies they perceived to be at risk of failing. This would ultimately paralyse growth. The same is true of the further education sector. So, while we are all agreed that there is a need to protect students’ studies—and that is the purpose of the special administration regime—there is also a need to have regard to the interests of creditors.

Through the special administration regime, we are rightly placing the protection of students’ studies ahead of the interests of creditors. However, as I said, this does not mean that the interests of creditors can, or should, be ignored. That would undoubtedly damage the further education sector, and I am sure that colleges themselves would be opposed to such action.

Subsections (4) and (5) make clear, therefore, that where the education administrator has a choice between courses of action that equally meet the special objective and protect students, they must follow the approach which achieves the best result for creditors and, where the college is run by a company, the company’s members. This delivers both protection for student studies and the reassurance that creditors, particularly lenders, need to ensure that the further education sector continues to be able to grow and improve to meet the needs of young people.

I want to respond to questions about the banks. Gareth Jones of Santander said:

“Overall, from our perspective, we are still very supportive of the sector—still looking to grow our exposure to the sector and grow our lending book. On the Bill and the proposed insolvency regime, we are actually supportive of the clarity that they provide”—[Official Report, Commons, Technical and Further Education Bill Committee, 22/11/16; col. 38.]


I was asked whether we are afraid that commercial debt will dry up for colleges as banks reassess their risk profiles, which is a critical point. The answer is no. Banks make lending decisions based on many considerations, and of course we expect them to reassess the risk profile of the sector now that exceptional financial support will no longer be available, but we expect them to continue to lend, particularly in light of the good work being done through the area review to build financially stable and resilient colleges. If this means a careful assessment of an individual college, its business plan and management, that is a good thing.

I hope that I have been able to answer all noble Lords’ questions on this group of amendments. If not, I will be happy to write to noble Lords but, on the basis of what I have been able to say this afternoon, I hope that the noble Lord will feel able to withdraw his amendment.

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[Lord Storey]

In that case, there is merit in considering the amendment.

[Baroness Cohen of Pimlico]

I support what I think the amendment is about. There is a worrying set of complications, in my mind. Someone has provided the money to keep the FE college going while the special administrator decides that actually it cannot be kept going. Where does the person who provided the money rank among the creditors? We are talking about selling assets at the end of this. For a start, the bank might have a charge on those assets, in which case I guess that is the answer, but somebody has put money in to keep the business going. I have done this on behalf of the Department of Industry—we took back the money that we had put in to keep it going. What is the order of batting in relation to the local authority, or whoever it is, who put the money in to keep the institution going, and the rest of the creditors?

[Lord Nash]

My Lords, I start by saying that I recognise that the amendment is driven by noble Lords’ good intentions. They are concerned that assets that have been paid for largely by money from the taxpayer should not then find their way into the private sector at an undervalue, when they can then be sold and used to make a profit at the taxpayer’s expense. I recognise and share those concerns. FE colleges are statutory corporations with significant freedoms to deal with their own assets, but the key check on those freedoms is that any such dealing must be in the interests of the colleges’ charitable education—as the noble Lord, Lord Stevenson, said, the basis on which they have their charitable status.

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[Lord Storey]

My Lords, I support this important amendment. As we said at the beginning and keep underlining, the insolvency regime is highly unlikely to happen, but that does not mean that we cannot give comfort to staff working in further education, particularly at a time when all the changes, area reviews and, indeed, the Bill have created uncertainty when they need certainty. As we have heard, often through no fault of their own, they could be in a poorer financial place. When we have just heard that BHS staff are to get their full pension entitlements, would it not be nice if the Minister would agree the amendment?

[Baroness Cohen of Pimlico]

I raise another worry that has come to me, which is the reverse. If a public or private company is in danger of takeover, one very good way to prevent that is to introduce a poison pill. The quick way to do it is usually through a very generous pension scheme, or a pay-off scheme for your senior staff. If I were a threatened institution, I might be tempted to consider either of those. It is a hard life, but do we have any means of dealing with threatened institutions which introduce financial measures which will make it much more difficult if they need to be closed or otherwise dealt with?

[Baroness Buscombe]

I thank all noble Lords who have taken part in this important debate and will do my very best to reply and, I hope, reassure—notwithstanding that I think that noble Lords accept that some of the important issues raised go beyond the scope of the amendment.

I recognise the well-intentioned purpose of the amendment, which is to ensure that those staff employed by a further education body in education administration continue to accrue their pension entitlements. I hope to reassure the Committee that pension rights will be protected in the unlikely event that the further education body becomes insolvent and is placed in education administration.

In developing the special administration regime, the Committee will see that we have sought to mirror many of the provisions that exist in the ordinary administration regime that applies in the event of a company insolvency. As noble Lords will know, in an ordinary company administration, the administrator has 14 days to decide whether to adopt staff contracts. Those who continue to be employed by the company will continue to be paid in accordance with the contract, including payment by the company of any pension contributions that fall due. These payments are an expense of the administration and continue until the staff are transferred to a new employer, if the business is sold to a new owner, as is often the case, or until their contract is terminated. We propose to adopt similar provisions for an education administration.

We have been clear that, for the education administration to be successful—for the special objective to be achieved—it will be necessary for the Government to provide funding to achieve the special objective: for example, to allow the college to continue to operate while the education administrator prepares his proposals for the college’s future. The Bill provides at Clause 25 powers for the Secretary of State or Welsh Ministers to provide that funding, where necessary, whether through loans or grants. In addition, the Secretary of State or Welsh Ministers may choose, where they consider it appropriate, to give indemnities under Clause 26, or guarantees under Clause 28, during the education administration.

Any funding provided under Clause 25 can be used to meet the cost of the education administration, including ongoing staff salaries and associated contributions, such as employer pension contributions. For as long as pension contributions are being made in accordance with staff contracts, pension entitlements will continue to accrue. The education administration changes nothing in this regard. However, once contributions cease, so too will the accrual of benefits. This would happen where staff were made redundant during the education administration. As with any employer pension scheme, once an individual’s employment ends they can no longer continue to pay into that scheme, but that does not mean that the benefits individuals have accrued in the scheme at that point are lost. Although they can no longer be added to, the benefits accrued will remain in the scheme and increase, as provided for by the terms of the scheme. Individuals will be able to access these benefits as and when the terms permit.

I believe that the way in which the regime will operate in practice means that the amendment is unnecessary. The Secretary of State may not provide a guarantee during an education administration, whereas it is almost inevitable that the Secretary of State or Welsh Ministers will provide funding through a loan or grant during an education administration. This funding will enable the continued operation of the further education body, and this in turn will mean that pension contributions continue to be made for all staff, whether teachers, caretakers, cleaners or support staff. I hope that that gives some reassurance.

I turn to some of the wider issues raised by the noble Lord, Lord Watson, and the noble Baroness, Lady Cohen. Further education colleges report that they are seeing a marked increase in the risks attached to their LGPS pension deficits. The question is: what are we going to do to counteract that? Further education bodies underwent the triennial revaluation of their LGPS pension deficit positions last year, and are still in the process of receiving and reviewing their results. We are aware of the outcome of a few, but not the majority, of the positions of colleges across England. The picture we have is mixed, with some coming out with results better than anticipated, and a minority even seeing their deficit repayment cost reduced for the forthcoming period. Others are seeing their costs increased. In some cases, that may be because they did not increase substantially in the previous revaluation period. There is residual adjustment being made in this period.

The assessment of repayment obligations is a function of many factors, including fund performance, the size of the deficit and fund managers’ overall analysis of the financial position of the relevant college. Reports from colleges received so far suggest that in only a few cases has a pension fund’s assessment of the risk of further education insolvency specifically contributed to revaluations with significantly increased repayment costs. Further education bodies have freedoms and flexibilities in law to be financially and operationally independent of government and are therefore classified by the ONS as private sector. Pension revaluations are a matter for negotiation between individual FE colleges and their pension fund, and final revaluations are normally based on a variety of factors as assessed by actuaries.

The noble Lord, Lord Watson, mentioned Sandwell, and I shall reference that and West Midlands. Only two of the 91 LGPS pension funds expressed in response to our consultation that the special objective in the insolvency regime was inappropriately formulated, one—which was actually West Midlands—suggesting that creditor protection should be placed on a par with learner protection and the other suggesting that creditor protection should be prioritised over learners. The others that responded to the consultation supported the premise of learner protection or were silent on the point.

As was set out in our response to the consultation, it is right that learner protection is prioritised and that approach is widely supported, even by other creditors. That is the point of the special objective. A few pension funds also questioned not limiting the length of the time for a SAR. We are clear that this is so as to not constrain the education administrator. In reality, an education administration may well last a similar length of time to an ordinary administration. Ordinary company administrations often last at least 12 months and then are often extended for a further 12 months or so, so an education administration lasting this length of time would not be unusual for insolvency proceedings. Several pension funds, as well as other creditors, sought greater certainty on how a SAR would be funded, and the Government responded by providing additional flexibility in the funding power set out in the Bill, removing the requirement that loans from government be made on a basis of priority to other creditors. So the Government can choose, in each individual case, to pay for the costs of the SAR up front by a loan and to not require that loan to be repaid unless any funds remained after other creditors had been paid out, meaning that the assets normally available to creditors remain available to creditors in the usual priority. This will be a matter to be decided case by case, but it does not appear that all pension funds have taken this change from the stricter position in normal insolvency into account in their assessment of the risk.

With regard to the wider issues, which go beyond the scope of the amendment, I hope that I have been able to reassure noble Lords. If there are issues outstanding, I shall write to noble Lords and place a copy in the Library for the benefit of all. On that basis, I hope that the noble Lord withdraws his amendment.

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[Lord Storey]

My Lords, I support the amendment. The noble Lord, Lord Hunt, has spoken wise words. In local government, the quality of officers advising elected members is hugely important—the independence of those officers and their ability to challenge and scrutinise with neither fear nor favour. In further education, we are talking about multimillion pound budgets. You have only to flick through the pages of the further education press to see some of the horrendous accounts of what has gone on in the past. I do not want to go into those lurid details; I shall leave it to people to have a look at them if they so desire.

What that suggests to me is that the governing body of those institutes has to be of the best possible calibre; it cannot be a friend of a friend, not wanting to offend the principal. It is often difficult to attract calibre governors, so the role of the clerk cannot be some sort of part-time lesser role; they have to be people who are confident in themselves. Those three words—“scrutiny, challenge, transparency”—are really important. This is the tail-end of Committee, but to get the Bill right is important. The points that the noble Lord, Lord Hunt, has made are also important. I hope that between now and Report we can look at this in a little more detail, because it is crucial.

[Baroness Cohen of Pimlico]

I support the amendment. I am new to the business of voluntary governorship in state-funded institutions. I have been fortunate for most of my working life to have been in organisations that had admirable company secretaries, who had the equally difficult task of standing up to chairmen and chief executives—but these were well-trained, qualified and well-paid people. The problem in all education is, of course, that anything that is not a teacher reads like an unmerited overhead.

I am not quite certain what I should propose as a remedy, but this point is key. Many of the messes that schools and further education institutions get into have to do with governance, and that has to do with a clerk who is not actually qualified and probably not properly paid.

[Lord Stevenson of Balmacara]

I hesitate to speak because I can see that a Division is pending and it would be nice for us to be able to finish at just the right point, but I realised when my noble friend was speaking that I was that clerk. In an earlier career, I was the clerk of an FE college. The spectre of the buccaneering principals who were around in FE at that time came crowding back, and I felt I ought to share that with the Committee. The problem was that these institutions were very often the creatures of the local authority that owned and fronted them, and there were pressures at play. The principal wanted to be the person who was the main conduit to the local authority and would not brook any interference. Absent the principal, the company secretary, who was indeed a demon of great skill and ability to maintain her position in the structure, took over and ran the place very adequately. But with the growth of corporate structures and, now, the whole question of how that must be used to mature and operate organisations of some scale and scope, I would have thought there must be a way of ensuring that, when corporate structures such as companies are established, there has to be a company secretary, and that company secretary must fulfil at least the minimum standards required of those who operate in the private sector. So there may be a way forward.

I agree entirely with what my noble friend said: the pressure to keep those who are academics—and who should be academics—away from trying to do things that they are patently unable to do, just because they happen to occupy the position of principal or vice-principal, has been an enduring theme with those who have worked in the education sector at FE and HE level. It is only recently that appropriately qualified and suitably remunerated members of that profession have been operating in the way that they should. I support the amendment.