Government must urgently reform the apprenticeship levy and provide additional funding to prevent the loss of up to 75,000 apprenticeships at SMEs, according to new research "Bridging the Gap: next steps for the apprenticeship levy", from a leading research institute published yesterday (28 Oct).
New data uncovered by Learning and Work Institute shows the assumptions that underpinned the apprenticeship levy are flawed. Large employers are using more of their levy funds than forecast, with the amount left for SMEs being only half as much as expected.
On current trends, the levy could be over-spent by £1bn in the next year. This is despite the fact that the number of apprenticeships has been lower than expected. Apprenticeship starts have fallen by a fifth since the introduction of the levy, meaning the government are on course to miss the target they had set of 3 million apprenticeships by 2020.
The over-spend risks leading to a creeping rationing of apprenticeships at SMEs
Three in four (74%) apprenticeship providers working with small firms said in a recent survey that the level of funding was insufficient to meet demand, with many being forced to reduce or cease recruitment as a result. Learning and Work Institute analysis suggests that on current trends, this could mean up to 75,000 fewer apprenticeships at SMEs.
The overspend is driven by two factors:
- First, there has been an exponential growth in higher and degree level apprenticeships – which tend to be far more expensive – as levy-paying employers seek to recoup as much of their funds as possible. In the last two years the number of apprenticeship starts fell by a fifth, but the number of higher apprenticeships more than doubled, with the number of degree apprenticeships increasing by a factor of 12.
- Second, the new and more rigorous apprenticeship standards, introduced at the same time as the levy, are significantly more expensive than expected.
These changes risk limiting opportunities for young people
SMEs are more likely to take on young apprentices and provide entry level training opportunities. However, a larger proportion of funding than planned is being spent by large employers on higher level apprenticeships for older workers and for existing staff. This learning has value, but it should not come at the expense of opportunities for young people or training at small firms.
Learning and Work Institute has called for urgent action to prevent the imminent over-spend and ensure funding is available for SMEs and young people. This includes:
- Investing an additional £150m per year for apprenticeships at SMEs;
- Funding apprenticeships for 16 – 18 year olds from the education budget, rather than the apprenticeship levy, requiring an additional £400m per year;
- Requiring employers or individuals to provide top-up funding for higher and degree level apprenticeships for workers aged 25 and over. This would require employers to provide 50% of the cost of apprenticeships at level 4 and 5, and 75% of apprenticeships at level 6 and 7 for this age group, from outside of their levy funds. This would reduce levy spending by around £318m per year.
In the medium term, Learning and Work Institute have called for a fundamental re-think of the levy, so that it delivers the skills that employers need, and drives economic growth and social justice. This could involve expanding the apprenticeship levy into a skills levy, which would give employers greater flexibility to use their funds on other forms of high quality training, in return for larger employer contributions.
Introduced two years ago, the apprenticeship levy will raise nearly £3 billion this year. Large employers are required to pay the levy, and can use their funds to cover the cost of training apprentices they employ. Any funds that are unspent by levy-paying employers are used to cover the cost of apprenticeship training at small and medium sized employers.
Higher level apprenticeships are those at level 4 and above. Degree apprenticeships are those at level 6 and 7.
Between 2016/17 and 2018/19 the number of apprenticeship starts fell by 21%, the number of higher apprenticeship starts increased by 103%, and the number of degree apprenticeships increasing increased by 1215%.
A DfE spokesperson said:
“The apprenticeship levy means more money is available than ever before for training, giving employers of all sizes the freedom to invest in the skills they need.
“This year we have increased investment in apprenticeships to over £2.5 billion, double what was spent in 2010-11 in cash terms.
“We are continuing to work with all employers so they can take advantage of the benefits apprentices can bring to their business, and we are also looking carefully at the future priorities for the programme.
"Large businesses can now transfer up to 25% of their levy funds to smaller employers so they can invest in high-quality apprenticeship training for their staff. We have extended from 12 to 24 months the period employers have to spend their levy funds.
"To help smaller employers manage their own apprenticeships more effectively, we're beginning the process of bringing them onto the digital apprenticeship service."
Graham Hasting-Evans, Group Managing Director NOCN, said:
“As we raised in the ‘Close the Gap’ report published in September, 'hidden’ rationing of apprenticeships is happening because Levy rules are disproportionately moving money into degree apprenticeships, resulting in a decline in much needed level 2 apprenticeships.
"The Government needs to urgently deal with this.”
Stephen Evans, chief executive of Learning and Work Institute, said;
“The government was right to introduce the apprenticeship levy, but they are at risk of both missing the target and busting the budget. Ignoring this problem is not an option. It would just lead to a creeping rationing of apprenticeships at the small employers that make up the backbone of our economy, and it would limit opportunities for young people.
“Our balanced approach would plug the funding gap, and it would support employers to train young workers and upskill adults with lower levels of qualifications. Beyond this, we need to look at how to ensure the levy can deliver our long-term skills needs”
Kirstie Donnelly MBE - Managing Director, City & Guilds Group said:
“We welcome the new report from the Learning and Work Institute this week, which calls for further reform of the new apprenticeship system.
“The findings in this report reflect those in recent City & Guilds Group research pieces, which found that the system simply isn’t doing everything that it’s supposed to at the moment. Our apprenticeship system is far too important for the future of our country in a post-Brexit landscape and cannot be allowed to fail.
“The UK already has an historic productivity gap, with a workforce which is not as skilled or qualified as those of comparable countries. Now more than ever we need a fully functioning skills system that trains people throughout their careers and meets the needs of UK business for the future.”
Adrian Anderson, Chief Executive, University Vocational Awards Council (UVAC), said:
"We entirely reject the Learning and Work Institute’s proposal on Higher and Degree Apprenticeship. It will stop police forces investing in the Police Constable Degree Apprenticeship they and the Country need and the NHS from investing in Apprenticeships for Nurses. It’s a bizarre proposal that should, and I think will be rejected out of hand by the Treasury, DfE, Home Office and Department of Health.
"Let’s ditch this flawed report and ensure Apprenticeship can be used by public sector employers to deliver the public services the Country needs and private sectors can use the Higher and Degree Apprenticeships their businesses need to raise productivity.
"So what should the Government do when faced with the over-spend of the Apprenticeship levy pot?
"Firstly, levy payments paid by the public sector should be ring fenced. Public sector employers should then be allowed to fully spend THEIR levy on the Apprenticeships, nursing, policing, social work, management etc. they need.
"Secondly, Apprenticeship funding for non-levy paying employers should be prioritised on the basis of the Government's Industrial Strategy. Priority occupations would be allocated a 95% Government co-investment and non-priority occupations a 75% Government co-investment."
Michael Lemin, Policy and Research Manager at NCFE, said:
“The recently published report by the Learning and Work Institute - "Bridging the Gap: next steps for the apprenticeship levy" - is a welcome addition to the current Apprenticeship levy debate. It highlights a number of issues which have been explored and examined in detail and which impact on the efficacy and future of the levy itself.
"Perhaps one of the more compelling arguments put forward is to determine whether apprenticeships for the 16-18 age group should now be funded centrally from the education budget rather than from the levy.
"The contributions by ten experts to our recent policy paper Future Proofing Apprenticeship Funding in England published by NCFE and the Campaign for Learning covers this and many other aspects of the current apprenticeships debate. It’s clear that many people in industry, and the skills sector, see that a review of the levy is overdue in order to reposition what it is, who pays, what it’s used for and, ultimately, how it benefits the apprentice themselves.”
Mark Dawe, chief executive of Association of Education and Learning Providers, said;
“Since AELP surveyed its member providers in the summer, the situation for funding the apprenticeships of SMEs has become palpably worse. The Prime Minister said in July that apprenticeships would be ‘properly funded’ and the Budget will determine whether or not that was just another politician’s empty promise.
“Businesses and young people across the country, especially in areas north of the M25, are extremely frustrated that they are being denied the funding for new places on the programme and so government needs to back up its apprenticeship reforms with a budget which is sustainable over the long term.”
David Hughes, chief executive officer at Association of Colleges, said;
“The apprenticeship levy has successfully engaged many large businesses in the programme for the first time, but the higher costs are resulting in young people and SMEs missing out.
“That has to change if the productivity and social justice aims of the programme are to be achieved. This timely report should be carefully considered by the Government before the Budget when the Chancellor will need to put the programme back on track.”
Joe Dromey, deputy director of research and development at Learning and Work Institute, said;
“It is increasingly obvious that the assumptions on which the levy were based are flawed, and that there is not enough funding in the system. The Chancellor must use the upcoming budget to plug this gap, so that SMEs and young people don’t miss out on opportunities.
“Once this immediate crisis has been resolved, government should look at reforming the levy to give employers greater flexibility and to boost investment.”