Apprenticeships and traineeships for 16 to 19 year olds - Education Contents

6  Reform of apprenticeship funding

Proposed funding reforms

99. The second key element of the Government's response to the Richard Review was to propose a reform of the funding model based on the principles of employer co-investment and employer-routed funding.[123] Under current arrangements, funding for apprenticeships is directed via training providers. Employers are required to contribute to the cost of training for apprentices over the age of 18, but training costs for those aged 16 to 18 are met in full by Government. In March 2014 the Government announced that it intended to pursue one of two new funding options to apply from 2016/17. Both options involved the routing of funding via employers, either via the PAYE system or through an Apprenticeship Credit Account.[124]

100. In either model there would no longer be a Government commitment to funding 100% of training for apprentices aged 16 to 18. Instead, firms employing an apprentice aged 16 or 17 would be entitled to a grant from Government in addition to the Government's contribution to the cost of training. Small businesses with fewer than 50 employees would also be entitled to a further grant.[125] Training to achieve level 2 in English and maths would continue to be fully funded.[126] The Government also proposed a maximum Government contribution to apprenticeship training, setting caps on funding which vary according to the complexity of the standard and the amount of training required.[127]

101. During the 2014/15 academic year the Government has piloted elements of the new funding model, including employer contributions set at a rate of one third of the total cost of training, as well as the grants available for small businesses and those employing young apprentices.

102. While we received some submissions supporting the principles behind the Government's reforms, opposition to the method of implementation was nearly universal. The Construction Industry Training Board warned in their submission that requiring employer contributions could cause many employers to disengage:

    In a survey of 566 construction employers (mainly SMEs), 86% surveyed stated an increase in employer contributions to the cost of an apprentice would reduce their apprenticeship recruitment plans.[128]

Similarly Sally Hunt, General Secretary of the University and College Union, highlighted the extra burden that could be placed on SMEs:

    I sent out a questionnaire to all of our members who are involved in working with apprentices […] Their concern is that, working with SMEs, they know that the admin burden on them is much greater. If we are looking at a change that will mean their having to shoulder the admin, the training and the development, that will impact in a very negative way on the students. What they are not saying is that employers should not be involved. They welcome that.[129]

103. The Federation of Small Businesses has been supportive of the employer-led approach, but also raised concerns about the potential for increasing the bureaucratic burden on small businesses:

    We support the employer-led approach to the point that financial and administrative burdens are reduced for small businesses, so there is a debate to be had around the amount of administration that training providers and employers take on.[130]

104. The Government's consultation on funding reform closed in May 2014. The consultation document suggested that the Government would publish its final decision on funding reform in Autumn 2014.[131] We held an oral evidence session on funding reform in December 2014, at which point no decision had been forthcoming. Sally Hunt told us that the uncertainty over the outcome was unhelpful: "If there is not certainty in the system, you are making it more difficult for any young person to access it".[132]

105. On 13 January 2015, the day before our session with the Minister, the Government announced that it would not pursue either of the options outlined in the March 2014 consultation.[133] The Minister told us during the session:

    The concerns that were raised were ones that I thought were important for us to listen to, which were that either of those models might be off-putting, particularly to small and medium-sized businesses that do not want to get involved in a huge administrative process, and perhaps do not have the cash flow to be able to bankroll the training and then get their money back from the Government. That is why we have today published the response to the consultation saying that we are not going to pursue either of those models […] I am absolutely confident that we can come up with a system that puts the purchasing power in the hands of employers, but leaves the administrative and regulatory burden with providers. Providers are full time dedicated to doing this and know about the ILR records and satisfying the Skills Funding Agency, so we need to leave all that work with them, while giving employers a greater ability to shop around.[134]

106. It may be difficult to devise a specific alternative approach. Most witnesses to our inquiry supported greater choice for SMEs about how funding should be handled, although there were concerns about making the funding system too confusing. Steve Radley, Director of Policy and Strategic Planning at the CITB, suggested that employers should be offered a "menu" of funding options.[135] On the other hand, Dan Hooper from the FSB told us that there was a risk that "small businesses would look at a menu of options and become slightly confused about the options available".[136]

107. Simplicity in any new arrangements will be very important: many employers do not understand the current funding arrangements. A 2012 survey by UKCES found that 30% of employers who had apprentices were not aware that Government fully funded apprenticeships for 16-18 year olds at that time.[137] Effective communication about the operation of the Government's revised arrangements will be key to their success.

108. Some witnesses suggested that greater involvement of providers, Local Enterprise Partnerships or local authorities in the administration of apprenticeships could be key to a successful funding model.[138] The Minster indicated that this sort of activity would be covered by the Government's revised proposals,[139] but the interim response to the funding consultation had already specified that training providers would be able to support employers with the administration of apprenticeships,[140] and this in itself has not mitigated employers' concerns about shouldering increased administrative burdens.

Incentives to employ younger apprentices

109. The Apprenticeship grant, introduced in February 2012, was described to us as "one of the biggest success stories in this field of this Government's period in office".[141] The grant provides £1,500 to businesses with fewer than 1,000 employees (from January 2015, fewer than 50) who employ an apprentice aged 16 to 24 and have not done so in the previous 12 months.[142] The scheme is due to close in December 2015. Under the Government's new funding proposals, firms employing an apprentice aged 16 or 17 will be entitled to a grant from Government, on top of any Government contribution to the cost of training. As with the current scheme, small businesses with fewer than 50 employees will also be entitled to an additional grant. Grants under the new system are tied to the level of government contribution, which varies according to the complexity of the apprenticeship standard being funded. Grants for employing young apprentices range from £600 to £5,400, and those for small businesses from £500 to £2,700.[143]

110. While it is welcome that grants for young apprentices will now focus on 16 and 17 year-olds, we heard from Professor Fuller that there is a risk that the new funding arrangements, which introduce employer contributions for 16 to 18 year-olds, will shift employers away from younger apprentices,[144] particularly given the limited understanding that employers have of the current grant system.[145]

Value for money following funding reforms

111. As set out in chapter 3, there is a general consensus that current government funding for apprenticeships provides a good return on investment. The impact of the new reforms on value for money is unclear. The Minister suggested to us that employer contributions and minimum apprenticeship standards would ensure value for money,[146] but this does not address whether the return on the Government's contribution to apprenticeships will be better or worse following reforms to funding.

The apprentice minimum wage

112. Apprentices have traditionally accepted lower wages while on an apprenticeship in recognition of the investment that employers are making in them. Our fifth principle of apprenticeships is designed to ensure that this delayed gratification is worthwhile for the apprentice, but apprentices must still receive a fair, albeit reduced, wage.

113. The current apprentice minimum wage for 16-18 year olds and those aged 19 and over in the first year of their apprenticeship is £2.73/hour. Many employers pay their apprentices more than the statutory minimum, but we have heard evidence that some are flouting the law on the apprenticeship minimum wage. The University and College Union and the TUC both quoted a 2013 survey by BIS which showed that 29% of apprentices were paid less than the minimum wage in 2012.[147] The most recent survey of apprentice pay shows that this figure has improved to 15%,[148] which is welcome but still leaves cause for concern.

114. On 6 October 2014 the Secretary of State for Business, Innovation and Skills announced that the Low Pay Commission would look into whether the apprentice minimum wage should be raised to align with the national minimum wage for 16-18 year olds (currently £3.79/hour).[149] A number of the written submissions we received argued for such an increase, [150] but there is a risk that an increase could discourage businesses from taking on young apprentices. Dan Hooper from the FSB suggested that "a quick rise would lead to a fall but [FSB members] are fully supportive of a gradual increase".[151] On 23 February 2015 the Low Pay Commission announced that it was recommending an increase in the apprenticeship minimum wage to £2.80/hour from October 2015.[152]

Conclusions and recommendations

115. Many employers support the principles behind the Government's reforms to apprenticeship funding but the majority of witnesses to this inquiry expressed strong concerns about the proposed methods of implementation. The Government's initial proposals were complex and could have imposed an unnecessary administrative burden on employers that would have been particularly felt by SMEs. We congratulate the Government on listening and dropping them.

116. Swift development of new apprenticeship funding proposals is vital to end uncertainty and make sure employers are not deterred from involvement. Further delay caused by the General Election or otherwise could undermine efforts both to drive up quality and engage more employers in apprenticeships.

117. We recommend that the new apprenticeship funding regime offer SMEs a choice between taking a lead on administering the funding or contracting it out to a provider.

118. We recommend that the Government clarify what role training providers, local authorities, Local Enterprise Partnerships and others may have in assisting employers with the administration of apprenticeships under the new funding arrangements.

119. The Government should ensure that the employment of young apprentices is made more, not less, attractive to employers, and particularly small employers, as a result of the funding changes. The benefits of taking on young apprentices also need to be widely and effectively advertised.

120. We recommend that the Government set out in advance the criteria by which the value for money and broader success of the new funding approach can and will be evaluated.

121. Apprentices accept a lower wage in recognition of the investment by employers in their training and the promise of a significant uplift at the end of the programme. We support this principle but this lower wage is rightly a legal minimum and we are concerned that some young people are not receiving it.

122. The Government should take steps to ensure that all employers who flout the law on the apprenticeship minimum wage are identified and swift action is taken against them. Training providers should educate apprentices about their employment rights and how to take action if their rights are breached.

123. Any review of the apprenticeship minimum wage should recognise the need for the internal economics of the apprenticeship to add up for the employer, and particularly the small employer, or the number of apprenticeships on offer will drop further still. So long as a low minimum wage for young apprentices is accompanied by a high quality, sustained input from employers and a transformative impact on earnings afterwards, then it can and should be supported.

123   BIS, The Future of Apprenticeships in England: Funding Reform Technical Consultation, March 2014, p.6 Back

124   Ibid., p. 15 Back

125   DfE () para 4.6 Back

126   BIS, The Future of Apprenticeships in England: Funding Reform Technical Consultation, p.11 Back

127   DfE () para 4.15 Back

128   Construction Industry Training Board () para 19 Back

129   Q282 Back

130   Q283 Back

131   BIS, The Future of Apprenticeships in England: Funding Reform Technical Consultation: Interim Statement, July 2014, p. 3 Back

132   Q317 [Sally Hunt] Back

133   BIS, The future of apprenticeships in England: funding reform technical consultation - government response, January 2015 Back

134   Q401 Back

135   Q279 Back

136   Q284 Back

137   Q22 Back

138   Q64 [Professor Alison Fuller]; Q65 [David Massey]; Q283 [Dan Hooper] Back

139   Q401 Back

140   BIS, The Future of Apprenticeships in England: Funding Reform Technical Consultation: Interim Statement, July 2014, p. 4 Back

141   Q108 [David Harbourne] Back

142   Apprenticeships policy, Standard Note SN030052, House of Commons Library, December 2014 Back

143   DfE () para 4.15 Back

144   Q59 [Alison Fuller] Back

145   Q22 Back

146   Q445 Back

147   BIS, BIS Research Paper No. 121: Apprenticeship pay survey 2012, October 2013, p.32 Back

148   BIS, BIS Research Paper No. 207: Apprenticeship pay survey 2014, December 2014, p.121 Back

149   "Cable to bolster apprenticeship pay", BIS Press Release, 6 October 2014 Back

150   Chartered Institute of Personnel and Development (AAT0034) para 45; 157 Group () para x Back

151   Q326 Back

152   Low Pay Commission, 16th Report: Executive Summary, February 2015, pxviii Back

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Prepared 9 March 2015