EEF response to apprenticeships levy: employer owned apprenticeships training

ABOUT EEF

1. EEF, the manufacturers’ organisation, is the voice of manufacturing in the UK, representing all aspects of the manufacturing sector including engineering, aviation, defence, oil and gas, food and chemicals. Representing some 20,000 members employing almost one million workers, EEF members operate in the UK, Europe and throughout the world in a dynamic and highly competitive environment. 2. EEF’s Technology Training Centre currently runs over 50 different technical training courses and trains around 250 apprentices a year in a variety of vital engineering and manufacturing skills. The centre works in partnership with over 70 employers, ensuring that their apprentices and other trainees learn how to use the cutting-edge technology and techniques used in manufacturing today. EEF is therefore both an employer representative body and a training provider. 3. Manufacturers have a proven track record in offering high-quality apprenticeships. Over seven in ten EEF members offer apprenticeships. There is some difference by size with 92% of large manufacturers stating they offer apprenticeships to bring in new skills to the workforce compared to 78% of medium size companies and 62% of small firms. 4. Apprenticeships give manufacturers the opportunity to shape their training programmes so they are confident that the learner will make every success in the job role offered to them upon completion. Three-quarters of EEF members saying all their apprentices stay with them after they have finished their apprenticeship, it is an investment that clearly pays off. Manufacturers also see apprenticeships as a way to secure the next generation of workers the industry needs with almost half saying they offer apprenticeships to get more young people into manufacturing.

KEY RECOMMENDATIONS

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5. Manufacturers support the government’s ambitions to create more high quality apprenticeships, such as those in manufacturing. Government’s three million target will be challenging. Manufacturers are nevertheless willing to play their part and support the creation of a number of new quality apprenticeships with government support. Delivering quality apprenticeships must remain the government’s priority, above quantity. Manufacturers see quality as defined by outcomes – likely to be influenced by the length of the apprenticeship, level of qualification attained and career prospects (long-term employment, opportunities for career progression, salary levels) which result from the successful completion of the apprenticeship. It is against this background that EEF is responding to this important consultation. 6. Manufacturers have a proven track record in offering high-quality apprenticeships. Apprenticeship reform, including the proposed new levy, must then better support the creation of more apprenticeship starts in industries such as manufacturing, which deliver gold-standard apprenticeships. We therefore want to see a commitment from government to better support the manufacturing industry to increase the number of apprenticeships to represent 20% of all starts – up from the current 15% of all starts. If the target for government is to create 600,000 starts per year (to achieve its 3 million target), we would want to see 120,000 of them in engineering and manufacturing technologies. Any proposed levy system must operate in a way that ensures the government meets this target. 7. The stated objectives of the levy are to increase the level of employer investment and increase the number of quality apprenticeships starts over the Parliament to 3 million. There is a real risk however, that the levy - in its current form - will lead to some employers rebadging training as an apprenticeship or reducing their investment in high-quality, longterm apprenticeships, simply in order to off-set the levy. Some may disengage with apprenticeships altogether. Neither of these actions will result in meeting the government’s 3 million target or indeed our own target as stated above. The case that a levy, in the form which has been announced, will lead to the creation of 3 million quality apprenticeship has not therefore yet been made. 8. There is a perception that the levy is a tax, and comes at a time when business costs are set to rise. The potential loss of tax relief on employer pension contributions, the impact for some of the new National Living Wage, and the new skills surcharge on those recruiting non-EEA workers together create a perception that the new government is burdening business unreasonably. 9. However, given the commitment expressed by the government to pursue an apprenticeship levy, we have made the following recommendations: 1) The levy contributions from larger firms must not be used to fund non-levy payers. Non-levy payers must continue to be supported directly by government. 2) Government must meet all the training costs needed for level 2 English and maths and other functional skills.

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3) Every £1 paid into the levy must be spent on apprenticeship provision– with government funding any administration costs and no quango intermediaries involved. 4) The levy must deliver the announced policy commitment that employers can get back more from the levy than they pay in. Should this result in the levy being overspent, then government must subsidise the overall funding pot to ensure employers can continue to recruit apprentices as their business needs. 5) Those employers paying into the levy must have flexibility on what it is used for, including costs associated with training apprentices. 6) Government must not take this policy is isolation. There is an immediate need to address issues such as increasing the quality and quantity of the candidate pool and access to quality, relevant provision. 7) The levy, and the vouchers, must be simple for employers, of all sizes, to operate. 8) The levy, and its rate, must remain predictable and stable over time. 9) Employers should be involved in setting the levy rate, and deciding upon its distribution, which could include all forms of vocational training, and be free to allow greater support for employers providing higher quality apprenticeships.

PAYING THE LEVY

Q1. Should a proportion of the apprenticeship funding raised from larger companies be used to support apprenticeship training by smaller companies that have not paid the levy?

10. No. Smaller companies should not be cross-subsidised by larger firms. Instead the government should pursue the co-investment model mooted under the coalition government and trialled by the Trailblazers. Under this model for every £1 the employer put in, government put in £2, up to a cap based on the cost of the framework (standard). Additional payments should also be distributed for completion of the training and to support employers recruiting younger apprentices. 11. Moreover, manufacturers in scope of the levy would be more supportive if there was a commitment from government to co-invest. Currently, those companies that will be in scope of the levy will not have access to government funding as they do now – including for 16-18 year olds. 12. Government must remember that the employer is just one key stakeholder in apprenticeships. The other primary stakeholders are the learner (the apprentice) and the state (the government). Each party plays a role in investing in the apprenticeship and importantly each party gains from the outcomes. The apprentice is expected to work, be paid, and then benefits from increased skills and experience and a job. The employer 3

invests time and money in training the apprentice and reaps reward through increased productivity. The government, and indeed the wider economy, benefits from a more highlyskilled workforce, increasing overall productivity and improving the UK’s global competitiveness as well as positive contributions through taxation and national insurance contributions.

13. Over a third (36%) of manufacturers say they (the employer) funds their apprenticeship programmes entirely themselves. Anecdotally, these companies indicate they do so as they cannot find the quality training provision needed locally and therefore bring their training in-house and therefore do not currently access public funding. The majority (60%) use a combination of employer and public funding. The majority of manufacturers then are willing and able to invest in apprenticeships, if this investment is supported by government funding. 14. The government must continue to fund basic English and maths as well as functional skills regardless of the age of the apprentice. Employers cannot be expected to foot the bill for what is essentially a failing of the UK’s education system. In addition, government should contribute to the overall apprenticeship fund, including any necessary top-ups that may be required on an annual basis where the levy contributions are insufficient to meet the needs of business (i.e. where the levy is overspent). Only by co-investing can the government be confident that it can maintain its principle that firms that offer apprenticeships will be able to get back more than they put in. In addition the government must ensure all overheads associated with the levy and the online system (including the digital voucher model) are funded completely by government and no levy payments (from employers) are used for this. 15. A co-investment model is used by other countries operating a levy system. In Denmark for example, all employers are levied and the government also contributes to the overall levy pot. Some of the levy funding pays for apprentice training and assessment, however the fund can also be used for other training and costs associated with vocational training and apprenticeships. We discuss our recommendation for the levy funding to be used outside of apprenticeship training and assessment later in our submission. Q4. Should employers be able to spend their apprenticeship funding on training for apprentices that are not their employees? 16. The levy should provide employers as much flexibility as possible. Therefore, those employers that wish to use their levy payments to, for example, support other companies in their supply chains or wider sector should be able to do so. It must however be the decision of the levy-payer. The government should continue to fund SMEs and not assume that large employers will continue to have sufficient funds to fund apprentices in their own companies as well as their supply chains. Allowing the transfer of vouchers should not be seen by government as a funding measure but instead the choice of the levy-payer measure to attempt to ‘get back what they put in’ by supporting employers in their respective sectors.

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17. There has been some confusion over this consultation question, with some manufacturers clearly stating to us that apprentices should be employed in the levy-paying company. The government should allow levy-paying companies to use their electronic vouchers to support apprentices not directly employed by them, but instead employed within their supply chain. An OEM for example that has contributed to the levy but does not need to recruit additional apprentices in their business, may allow those in their supply chain to use their levy vouchers – which would therefore increase the skills base of the OEM’s supply chain. The consultation document is however not clear on the proposal.

EMPLOYERS OPERATING ACROSS THE UK

Q5. How should the England operations of employers operating across the UK be identified? 18. Some UK-based manufacturers will have employees in Scotland for example, but no turnover, or alternatively a turnover in Scotland but no employees. Identifying therefore the value of operations, and how the size of any levy varies according to this value, is not straightforward. There will be additional complexities whatever metrics are used. There are mobile workers, who will cover more than one home nation, workers with a base of operations in one home nation but work in another, and there will be difficulties in allocating the value of turnover between different home nations. 19. Discussions with our members have revealed that the allocation of the levy outside England is likely to be contentious. Given the complexity of determining a value to operations in different home nations, we believe that the only practicable way of allocating the levy is on the basis of an established platform, such as the Barnett formula.

ALLOWING EMPLOYERS TO GET BACK MORE THAN THEY PUT IN

Q6. How long should employers have to use their levy funding before it expires? 20. Large firms are more likely to offer apprenticeships on an annual basis. When asked whether they planned to recruit a manufacturing and engineering apprentice in the next 12 months, 76% of large firms did, 74% of medium sized firms did but this fell to 55% of small firms. 21. Depending on who is in scope of the levy may affect the length of time the voucher/levy funding would need to be available to the employer. It all depends on what the business needs – which can of course fluctuate. Apprentice recruitment decisions can often be outside of their control. Therefore there needs to be sufficient flexibility to ensure that those companies that cannot recruit apprentices annually are not disadvantaged. 22. Moreover, three-quarters of EEF members say their apprenticeships last up to 4 years. Enforcing an expiring date on the vouchers that employers will be able to access to draw 5

down their levy funding will therefore be difficult as some employers will always be at a loss as they may not be able to recruit an apprentice/apprentices that given year. At a minimum, the expiring date should be one year reflecting the minimum duration period of an apprenticeship. In the manufacturing sector this will be longer. However, defining the ‘year’ will be difficult. Some businesses will want the year to be based on an academic year for example to align with their apprentice recruitment. Others however, may want it to align with their financial years. Q7. Do you have any other view on how this part of the system should work? 23. We do not agree that the overall pot of funding available for apprenticeships – or indeed the levy contributions - should be withdrawn if not used annually. Manufacturers do not always recruit apprentices annually. They will recruit when there business requires them to. Therefore in the first year they may recruit 2, then the second year 10, then the third year 5. They should not be penalised (by not being able to draw down adequate funds) because of fluctuations in demand for entry-level employees – which apprentices are. Instead sufficient funding should be available to them to recruit the required number of apprentice each and every year. 24. If demand for apprentices does significantly increase in the coming years then the government – not employers – may feel be required to fill any deficit. We do not agree, as stated in the consultation document that ‘in any year the amount of apprenticeship training the levy can pay for will be limited by the amount it raises from employer contributions.’ The government has publicly stated that firms that offer apprenticeships will get back more than they put in. If the levy collected from employer contributions is used then it is the responsibility of the government to fund further apprenticeship training. Q8. Do you agree that there should be a limit on the amount that individual employer’s voucher accounts can be topped up? How do you think this limit should be calculated? 25. This again goes against the government’s founding principle that ‘firms that offer apprenticeships will get back more than they put in.’ If an employer wants to recruit apprentices then they should not be limited in doing so. Calculating a limit would be extremely difficult as it would need to vary with the sector the company was in and the likely standards that they would use. Some standards – such as those in engineering – will be more expensive and require a large proportion of the levy funding to be drawn down. Therefore applying a flat limit on employers will not work. Consideration would also have to be made for company size. A large firm with 5,000 employees is likely to be able to recruit more apprentices (and therefore draw down more levy funding) then one with 300 employees. Q9. What should we do to support employers who want to take on more apprentices than their levy funding plus any top-ups will pay for? 26. In his Summer Budget the Chancellor announced that firms that offer apprenticeships will be able to get back more than they put into the levy. Therefore any employer who wants to offer additional apprenticeships, must be able to do so and government (not employers) should ensure there is adequate funds to do so. 6

27. However, we have yet to find one EEF member that are confident they are able to ‘get back more than they put in.’ On the assumption that the levy payment will be 0.5% of payroll on businesses with over a 250 headcount then the majority of manufacturers have told us they would need to, as minimum, double their apprentice intake. Examples of this can be found in Annex 1. However, manufacturers cannot simply double their apprentice intake for the following reasons: i)

There is neither the quality nor quantity of apprentice candidates for manufacturers to significantly increase their apprentice intake. Manufacturers already tell us they struggle to recruit quality candidates. At EEF’s own Apprentice Training Centre, 60% of applicants did not have the right qualifications to be successful in the advertised manufacturing and engineering apprenticeship vacancies this year. Manufacturers report similar difficulties themselves. Moreover, the number of young people is declining therefore even if quality improved, there will still be a shortage of young people to take the apprenticeships that employers offer.

ii)

Manufacturers do not have the personnel resource to recruit additional apprentices. An apprenticeship requires significant time and investment by the employer. Companies will need to recruit mentors and training managers to ensure the learner receives high-quality training when spending time on the job. This comes at a cost. If a business was to increase their apprentice intake, but maintain their current number of apprentice mentors/training managers this would have a damaging effect on the quality of that training. This is not a risk EEF members are willing to take.

iii)

Manufacturers already offer the number of apprenticeships their businesses require. For the manufacturing industry an apprenticeship is substantial training that leads to a job. Therefore the creation of additional apprenticeships, is the creation of additional jobs. Businesses cannot create jobs (apprenticeships) when they are not required. Any unfilled apprenticeship vacancies are a result of a lack of good quality candidates (as stated above). Moreover, we do not want to see employers recruiting additional apprentices in a bid to increase numbers in the knowledge that a job will not be available upon completion of the training.

iv)

Manufacturers cannot cover the additional salary costs of offering more apprenticeships. In manufacturing and engineering, apprentices are paid well above the national minimum wage for apprentices. Therefore a requirement to double their apprentice intake is doubling their salary costs (which will ultimately increase their payroll and therefore their levy contribution). It would be a worrying unintended consequence of apprentice pay decrease as a result of the introduction of the new levy.

v)

Manufacturers are not confident that providers or FE colleges will have the capacity to deliver additional apprentice training. Employers are not confident that if they were to significantly increase their apprentice intake that local providers and FE colleges would have the capacity to deliver the training. Already, 7

manufacturers have concerns around access to quality, local training. Too often, EEF members tell us they cannot demand the provision their business needs – particularly as engineering is a more expensive apprentice course for colleges and providers to run. They are not then confident that the FE sector could easily respond to additional demand, given some have failed to do so to date.

THE LEVY IS FAIR

Q10. How can we ensure that the levy supports the development of high-quality apprenticeship provision? 28. Manufacturers do not think the proposed levy will increase the quality of apprenticeships, or indeed apprenticeship provision. Instead, the levy has the potential to have a detrimental impact on quality. Outside of our sector, we expect some employers will want to ensure that they claw-back all of their levy payment. This can be done in a number of ways including offer short, low quality, low level apprenticeships. As long as the company uses a registered standard and provider, there is little government can do to prevent this. Manufacturers have great concerns that we will move back to a time when training was rebadged as an apprenticeship. This will have a damaging impact on quality, the apprenticeship brand and undo the good work that had been done under the last Parliament to increase quality in apprenticeships. We want to see government commit to our target for a larger share of apprenticeships to be in manufacturing and engineering where the standard, level, pay and quality is high. 29. In addition, high-quality provision will only be secured if employers have full control of the funding and are able to buy the provision they need – creating a market in training. However the consultation sets out a number of restrictions and limitations on the use of apprenticeship funding which suggests that such a market will not be created. Manufacturers continue to report that they cannot access the provision they need and do not see the levy as a driver to overcoming this. Employers must have the freedom to draw down the funding they require to fund the number of apprentices their business needs. They must then have control of that funding to ensure they become the customer and are able to freely buy the provision they choose. The voucher model has the potential to achieve this, however it needs further consultation with business to ensure that employers have direct control. Q12. How best can we engage employers in the creation and wider operation of the apprenticeship levy? 30. The government should have formally and publicly consulted on the principle of the levy before the announcement at the Summer Budget. It is vital that the government now consults fully and comprehensively with the business community to ensure that the introduction of the levy does not negatively impact quality or quantity. We are concerned that the proposed implementation date of 2017 is not sufficient time for government to consult on the principles, the mechanism and get the levy mechanism and digital voucher model up and running. It is neither sufficient time for employers to prepare for such radical 8

changes. Moreover, the timetable for the transition from old frameworks to new standards was due to be in the year 2017/18. It is our understanding that we are some way off from this target and therefore it is likely to be postponed. To ensure employers are fully aware of the changes collectively, government should align the introduction of the new standards with the new funding mechanism.

GIVING EMPLOYERS REAL CONTROL

Q14. Does the potential model enable employers to easily and simply access their funding for apprenticeship training? 31. Prior to the announcement of a new apprenticeship levy, EEF supported the digital voucher model. Manufacturers have continued to support the principle of giving employers control of funding so they can buy the training provision they need. EEF has always maintained that such a system needs to be simple and accessible to all employers. It should also be flexible to allow those companies – particularly SMEs – to hand control of the admin to their provider – if they wish to do so. 32. It is difficult at this early stage, without a great level of detail, to determine what impact the levy system will have in terms of the ease and simplicity of the digital voucher model. There will in fact be at least two different types of digital voucher. One will be for non-levy-payers and the other for employers paying the levy. For non-levy papers, the vouchers will only be redeemable if they co-invest. However, vouchers for levy-payers will be redeemable at their face value. This is likely to be very confusing. 33. The levy model, which will underpin the collection and distribution of funds, ultimately adds an additional layer of bureaucracy for companies before they are then able to take advantage of the digital voucher model. In addition, government must consider how it could make the new system more effective for those employers that currently have direct contracts with the Skills Funding Agency (SFA). The new levy model would require such companies to be levied, then to draw down the vouchers, to spend on provision within their own companies, which amounts to a complete re-circulation of funds. Q15. Should we maintain the arrangement of having lead providers or should employers have the option to work directly with multiple providers and take this lead role themselves if they choose to do so? Q16. If employers take on the lead role themselves what checks should we build in to the system to give other contributing employers assurance that the levy is being used to deliver high quality legitimate apprenticeship training? 34. Manufacturers want as much flexibility as possible to buy the training provision they need. This could be through a single or multiple providers. Many companies, in particular SMEs, currently opt for a lead provider model and will continue to do so. This is because the model allows them to place the responsibility of any required contracting-out provision 9

upon their lead providers. This model may be adopted where the lead provider for example specialises in engineering, however the company requires another framework or module outside of this discipline. Some companies however will be willing and able to take this responsibility on themselves and should be allowed to do so. If a company is to have the freedom to train in-house for example then some quality assurances should be put in place to maintain quality and ensure compliance.

THE LEVY IS SIMPLE

Q19. How should the new system best support the interests of 16-18 year olds and their employers? 35. The government should contribute to the overall pot of funding for apprenticeships that the levy-payers will pay into. This should include additional top-ups for employers that recruit 16-18 year old years. While three-quarters of EEF members generally recruit apprentices aged 16-18 years old, anecdotally manufacturers are reporting a shift towards older (1821) apprentices. This is for two key reasons. Firstly, many young people are staying on at sixth form or college and therefore are undertaking an apprenticeship at a slightly later stage and secondly, as manufacturers are increasingly looking forwards level 3 and above apprenticeships, those aged 16/17 do not always have the right skills, experience and qualifications to start on this level. 36. We do not think that employers are aware of the fact that when they are in scope of the levy they will not have access to any public funding, including that for 16-18 year olds. This is a significant shift given that 100% of the training costs for 16-18 year olds are currently funded. Some manufacturers we spoke to incorrectly assumed that the withdrawal of government contribution applied only to 19+ apprentices. Businesses need more detail on how the levy, and the voucher model, will apply to apprentices of different ages. Q20. Do you agree that the apprenticeship levy funding should only be used for the direct costs of apprenticeship training and assessment? Q21. If not, what else would you want vouchers to be used for and how would spending be controlled or audited to ensure the overall system remains fair? 37. Manufacturers want to be able to use their levy funding not just for direct costs of apprenticeship training and assessment but the wider infrastructure that would be required should they then take on additional apprentices. As explained earlier, if a manufacturer wants to significantly increase their apprentice intake then they would need to absorb further costs of salaries, personnel/training managers and other recruitment costs as well as invest in additional capacity. This is particularly the case for the manufacturing and engineering sector where the majority of apprenticeship training is on-the-job. Therefore manufacturers want to be able to use their levy payments to support these wider costs. Q22. Are there any other issues we should consider for the design and implementation of the levy that haven’t been covered by the consultation questions we have asked you? 10

Manufacturers need certainty of apprenticeship funding between now and 2017. 38. The new apprenticeship levy is set to be introduced in 2017. However, there has been no detail on how the government will fund apprenticeships between now and the proposed introduction date (2017). Our survey data found that currently two-thirds of manufacturers plan to recruit an engineering apprentice in the next 12 months. Manufacturers must have clarity that government will commit public funding to apprenticeship training for all apprentice starts before 2017. Without this co-investment from government, it is highly likely that the number of employers offering apprenticeships will fall considerably.

ANNEX 1

COMPANY A – A manufacturing company with a 680 headcount calculated that 0.5% of their total payroll bill – and therefore their potential levy contribution – would be £100,000 per year. The company currently takes on 9 apprentices a year. This is the number their business needs. The apprentices are currently on manufacturing and engineering frameworks and therefore are eligible to approximately £5,000 per year of public funding. Currently as they recruit 9 apprentices a year and can claim £5,000 then they could therefore drawdown a possible £45,000. However, this leaves them at a disadvantage £55,000. (£100,000 levy contribution - £5,000 x 9 apprentices). Company A could consider increasing their apprentice intake to 20 apprentices a year. This would ensure that they regained their levy contribution. However, the company has already struggled to recruit the numbers they currently need due to a lack of quality candidates. Moreover, while the government contribution may be £5,000, the company pays an additional £5,000 for the training as well as the salary of their apprentices. Therefore another 11 apprentices would add £55,000 to training costs. The average salary for their apprentices is £15,000 a year. Therefore an additional 11 apprentices would add £165,000 to their salary costs.

COMPANY B currently recruits 60 apprentices each year in the UK. At 0.5% of their payroll, their levy contribution would be £950,000. Assuming again that the company is able to draw down £5,000 per apprentice then their total current drawdown would be £300,000. This puts them at a disadvantage of £650,000. (Company B’s levy contribution – the maximum draw down per apprentice). If Company B sought to draw-down all their levy funding, they would need to increase their apprentice intake to 190 apprentices – this is an additional 130 apprentices.

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Company B has calculated that the total cost of recruiting an apprentice (training costs, salary costs and all other admin fees) is £26,000. Therefore recruiting an additional 130 apprentices would cost the company £3,380,000

FOR FURTHER INFORMATION CONTACT: Tim Thomas Head of Employment Policy [email protected] 020 7654 1523 Verity O’Keefe Senior Employment and Skills Policy Adviser [email protected] 020 7654 1572

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