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.
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The impact of this illogical decision is that the college’s deficit reduction pension contributions will rise from the current annual level of £430,000 to £1 million next
year and £1.3 million the following year. Another West Midlands institution, the City of Wolverhampton College, also has a major issue with its pension costs, but that is far from the only region of England where such problems are arising.
All too often when noble Lords propose amendments to Bills, the Minister responsible will knock them down citing unintended consequences. The Minister will surely not claim that the scenario that I have just outlined is an intended consequence of the Bill, so I ask what he intends to do about it. How bizarre it would be for an insolvency regime designed to act as a safety net for situations which the Minister has told us he envisages arising extremely rarely to itself increase colleges’ costs and perhaps, in extreme cases, help to push them towards insolvency.
I appreciate that the Minister cannot give a detailed response to these issues today—I do not expect that—but I trust that he will acknowledge that the problem exists and that the Bill is impacting in advance of Royal Assent. I invite him to write to me with his understanding of the issues, setting out what, if anything, he feels able to do to assist colleges caught up in them through no fault of their own. On the basis of what he says, we shall consider whether to revisit this topic at Report. I beg to move.