The Public Accounts Committee has set the Department for Education a list of tasks to address the “fragile” financial health of the further education sector.

Its report published today on ‘Managing colleges’ financial sustainability’, includes proposals on amending the college funding formula, how they pay VAT, and the expensive yet ineffective intervention regime.

As well as collecting evidence from the sector, the PAC grilled the Department for Education’s top civil servants on these issues in November following a National Audit Office inquiry into college finances.

Here are the seven recommendations from the PAC report.

1. DfE should make clear when it will commit funding for FE white paper reforms

The college sector has lacked a “proper, integrated vision for too long,” the report argues, saying the FE Commissioner-led area reviews in 2016 and 2017 were “successful to a degree, but significant strategic challenges remain”.

Last week, the government published its ‘Skills for Jobs’ white paper, which laid out plans for the further education sector up to 2030.

However, many in the sector have voiced their concerns they have only received a one-year funding settlement, rather than a multi-year one like schools have.

The committee has said the DfE “should make clear when it expects to set out funding commitments to support reforms proposed in the white paper”.

2. What is being done about pension cost pressure on colleges?

While the government provided additional funding to colleges to meet the costs of teacher pension contributions in 2019-20 and 2020-21, and recently announced it would extend support to 2021-22, the MPs report colleges “are worried about the affordability of contributions in future years”.

Colleges’ academic staff usually pay into the Teachers’ Pension Scheme, where employer contributions have risen from 14.1 per cent in 2015 to 23.68 per cent in 2019, an increase of 67.9 per cent.

A deficit in the Local Government Pension Scheme, which support staff use, has grown to £3.5 billion, according to the Education and Skills Funding Agency.

Colleges have had to make additional payments to cover the deficit, creating concerns about the potential impact of these extra payments on colleges, including otherwise financially healthy ones.

The DfE has been asked to write to the committee in three months, explaining what assessment it has made of pension cost pressures on colleges, and how this has been taken into account for funding decisions.

3. ‘Iniquitous’ sixth form colleges pay VAT while post-16 schools do not

There has been a long-standing issue where sixth form colleges must pay VAT, while sixth form academies and school sixth forms do not.

The Sixth Form Colleges Association told the committee the VAT requirement on colleges means they divert around 4 per cent of funding away from frontline provision, which equates to around £20 million a year across sixth form colleges.

The PAC reports 24 sixth form colleges have converted to academies by 2018-19, after the option was offered to them following the area reviews, and FE Week reported in 2019 converted colleges were saving as much as £250,000 by not having to pay VAT.

Today’s report calls the situation “clearly iniquitous,” but despite “frequent” discussions between the DfE and the Treasury on the issue, the department believes this “inconsistent treatment is not a priority” for the latter.

The PAC recommends the DfE push the Treasury to assess the merits of making the rules on VAT consistent for schools and colleges.

4. PAC wants reassurance on T Level industry placements

The committee has said it “remains concerned about the practicability of implementing the T Level programme,” as the colleges have said it has been “difficult” to secure the “crucial” industry placements students are required to complete for the course.

FE Week reported earlier this month colleges were having to suspend industry placements due to Covid-19 and the lockdown.

The MPs have requested another letter from the DfE, giving up-to-date assurance there will be enough placements for T Levels.

The letter should also say what impact the pandemic has had on the availability of placements, and what plans there are to use virtual placements – which are currently banned for T Levels.

5. An end to the lagged funding model

The DfE has been asked to consider changing the formula for funding colleges to take account of real-time, or at least more recent, information about student numbers.

Currently, funding decisions are based on colleges’ student numbers from previous years, and the Association of Colleges reported in November 2020 there were around 20,000 “unfunded” 16 to 18-year-old students in colleges this year.

The PAC reports learner numbers are expected to increase over the next few years, so has asked the DfE to report back to them by the summer on how funding could be delivered better reflecting colleges’ real-time situation.

The FE white paper has committed the government to simplify the FE funding system.

6. DfE needs to ‘improve’ its intervention arrangements

The government’s approach to intervention in colleges, led by the DfE, ESFA and FE Commissioner, “takes too long, costs too much and is not effective in making colleges more sustainable,” the report argues.

This comes after senior DfE and ESFA civil servants told the MPs last November that 64 colleges were at risk of running out of cash and that the insolvencies of the Hadlow Group of colleges were going to cost the taxpayer over £60 million.

In its report, the PAC highlights how the DfE spent £253 million on emergency funding for 36 colleges with cashflow problems between November 2014 and March 2019.

Dame Mary Ney’s review of college financial oversight, published in 2019 and commissioned after the Hadlow insolvencies, called for a “more proactive relationship with all colleges individually,” to “allow a stronger culture of prevention to be developed”.

And the DfE, as part of the white paper, has said it will “introduce new powers to intervene when colleges are failing to deliver good outcomes for the communities they serve”.

The PAC has given the department three months to outline how it will improve intervention, and also how it will assess the success of their plans.

7. Research whether college support services are meeting student needs

Students, the report says, are “losing out” on mental health and other support services, cut by colleges due to financial pressures.

The committee found as DfE funding for colleges fell by a fifth in real terms between 2013-14 and have cut back on activities to improve students’ experience, as well as welfare services like mental health support.

The DfE has accepted it needs to monitor this area, and the MPs have recommended a “firm commitment” to research the extent to which college support services are meeting student needs, which should get students’ input.