Technical and Further Education Bill

Lord Watson of Invergowrie Excerpts

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

Moved by

[Lord Watson of Invergowrie]

56: Clause 28, page 13, line 2, at end insert—
“( ) Sums guaranteed under subsection (1) shall include statutory pension obligations payable to staff employed by a further education body subject to an education administration order.”

[Lord Watson of Invergowrie (Lab)]

My Lords, Amendment 56 would ensure that staff employed by an FE college continued to accrue statutory teachers’ pension scheme and local government pension scheme pension obligations during an education administration. The first of those is self-explanatory, and FE colleges are legally obliged to offer either that or LGPS membership to their staff. The latter is the scheme for the large number of so-called support staff, from learning support assistants, caretakers and catering staff to administrators, cleaners and IT technicians. It would be completely unacceptable if, as a result of an insolvency, staff pension rights or their potential pension rights were to be adversely affected.

When this amendment was considered on Report in another place, the Minister, Mr Halfon, said:

“As with any administration, once the administrator has adopted the employment contracts of the staff they decide to keep on, they are personally liable for the costs of those ?individuals, such as their salary and their pension contributions. They would take on the appointment only if they were confident that sufficient funds were available to meet the costs. Some pension contributions will continue to be made and benefits accrue”.—[Official Report, Commons, 9/1/17; col. 115.]


Although that sounds like a firm commitment, it has not assuaged those with staff directly involved in colleges—namely, the Association of Colleges and the University and College Union. If that is what the Government understand the position to be, I suggest they can have no objection to placing it in the Bill. The Minister in the other place did not provide a reason why that could not be undertaken, and I hope the Minister today will state the case one way or the other.

There are wider issues regarding pensions relating to the Bill. There is concern within the FE sector that the insolvency regime outlined in the Bill is already discouraging partnership and investment by making banks hesitant to lend to colleges. Some colleges are facing issues with proposed mergers arising from area reviews because of difficulties with bank lending linked to local government pension scheme liabilities, which now have to be shown on colleges’ balance sheets.

The area reviews under way are aimed at rationalising the FE sector. That process has been more problematic than it might have been, but at least no colleges have been closed thus far. A number have been merged and often that has worked well, with both partners approaching the future with greater confidence. However, that has not always been the case. For various reasons some projected mergers have not been completed, and one such example is currently the subject of some controversy. Other than to say that they are based in the same city, I will not identify the colleges because that might serve to exacerbate an already difficult situation, but the major stumbling block in that case is the pension scheme, more so at one college than the other. The local LGPS has changed the colleges’ deficit repayment terms from a 22-year plan with no interest to a 10-year plan with an interest rate of 4.3%. As a result, banks are refusing to advance the necessary funds to allow the mergers to go ahead. Essentially the increasing potential for colleges to become insolvent and the proposals within the Bill mean that colleges are now being viewed as high-risk employers, making both pension schemes and banks look on them less favourably and undermining area review outcomes where these have otherwise been agreed.

I have already mentioned the two schemes that apply. When incorporation began some 25 years ago and colleges were removed from local authority control, part of the deal was that by regulation they were obliged to offer one of the schemes as appropriate to existing staff. For new staff, colleges have often held contracts of employment with a wholly owned subsidiary company that may or may not be part of either the teachers’ pay pension scheme or the local government pension scheme—more often, for obvious reasons, it has been “may not”. So, provided that a college keeps paying for current staff, pension costs in respect of new staff will slowly be reduced as they are put on significantly worse pension schemes.

The college area review process has caused problems because often the local fund of the local government pension scheme requires the scheme’s debts to be met by the new entity. This becomes more complicated where mergers cross local authority borders, involving different strands of the LGPS. Differing LGPS regions have significantly different policies on past service deficits, and impose differing contribution rates. They might even insist upon any deficits being paid off in full.

An example of this has been brought to my attention by Sandwell College in West Bromwich. The West Midlands local government pension fund has notified all colleges in its region that, because of its interpretation of the Bill, it intends to increase the risk banding of all colleges. Sandwell College has been rated financially outstanding by both the DfE and the SFA and, in the area review, the further education commissioner decided that it should remain a viable independent institution. Despite all that, the West Midlands pension fund still believes that, because of the insolvency regime that forms the bulk of the Bill, Sandwell College is now at high risk, when it is palpably is not.

--- Later in debate ---

[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.

[Lord Watson of Invergowrie]

I thank the noble Baroness for that comprehensive response. On the first part of the response relating to the amendment, to a significant extent she repeated the words of Mr Halfon in another place but, equally, she repeated his failure to give a reason why this should not be in the Bill. She said that the Government propose to adopt similar provisions—

[Baroness Buscombe]

I may not be able to reassure the noble Lord, but we simply do not feel that it is necessary to have this in the Bill.

[Lord Watson of Invergowrie]

Yes, but that is not giving a reason. The proposal is very important, and it fits in with the provisions in Clauses 25 to 28. No harm can be done in having it in the Bill; if it gives reassurance to those working within the sector, I would suggest that, in the absence of any reason not to do it, that should be sufficient reason for it to be included.

I accept that the other points that I raised were beyond the scope of the amendment, and I thank the Minister for indulging me in her response. I praise the perspicacity of the officials sitting behind her, who obviously had an answer pretty much prepared, without knowing that I was going to raise these issues. Maybe it just came off the top of their heads—but either way it was impressive and very detailed.

I will want to take some time to consider what the Minister said. There may well be a case for seeking a report from the Government Actuary on funds that have acted strangely because, if I heard her correctly, she said that two out of 91 funds have suggested that they foresee problems as a result of the provisions of the Bill. I had not realised that it was that narrow. There is still the potential for other funds to adopt a similar position. Perhaps they are holding fire until the Bill becomes law. Can the matter be referred to the Government Actuary for a report on the potential outcome as well as the actual outcomes? At the moment, it seems that problems are being created for some colleges. If they are mainly in the West Midlands, so be it, but the point is that it could happen elsewhere. Will she look at that possibility? On the basis of what she has said to me, we will decide whether to revisit this issue. I beg leave to withdraw the amendment.

Amendment 56 withdrawn.