Funding finance and pensions Briefing 20/2/25

Revenue funding and public spending

There has been a lot of bad news in the first seven weeks of 2025. Here's a note on where we are on FE funding:

• DfE missed its 13 February 2025 deadline to provide an update on 16-18 funding. With £300 million (4%) extra in the 2025-6 financial year budget compared to 2024-5, DfE will be able to increase funding rates but there is a clear prospect of measures to keep a lid on spending for the 2025-6 academic year.
• The decision to allocate £50 million to colleges between April and July 2025 and the message that these funds should be used to address staffing issues means that it is highly likely that this money will be consolidated into the funding formula along with post 16 funds allocated to schools since September 2024. this, in turn, implies that 16-18 funding rates will rise by at least 3.5% in 2025-6 and will go above £5,000.
• Back in November 2024, the government published the Get Britain Working Again white paper which said 9in a section on the youth guarantee) that "we will act to prevent young people losing touch with education or employment before the age of 18, with a guaranteed place in education and training for all 16 and 17-year-olds". This implies that DfE will honour the long-standing promise to provide full funding in Year 2 for the learners recruited n Year 1. With FE colleges reporting a 7% increase in 16-18 student numbers in autumn 2024, this is a significant financial commitment though it is possible that school sixth form enrolments have increased at a lower rate.
• Confirmation of funding to cover the National Insurance increase is on its way but it is worth noting that the funds allocated to local government do not fully cover their costs.
• DfE has published very little information on adult skills funding for 2025-6 but has told Mayoral Combined Authorities the 2025-6 financial year budget will be 2% less than 2024-5. This implies a 3.3% reduction for the 2025-6 academic year which, in turn, an overall cash reduction of £45 million (£28 million off devolved budgets and £17 million off the non devolved budget).

Taking a step back and looking at the rest of the DfE budget:

• The Autumn 2024 budget announced a 2% productivity, efficiency and savings target for all departments for the 2025-6 financial year. HM Treasury's efficiency framework allows "non-cash releasing savings" to be counted against some targets but DfE officials report that budget pressures limit what they can do in some areas. There may yet be measures taken that affect DfE staff numbers or funding spent via third parties.
• Government departments don't do much to explain their budgets in advance. DfE didn't publish its budget (for 2024-5 financial year) until September 2024 (month 6)
• There has been no information on higher education grant funding managed by the Office for Students. Last year, DfE finalised the 2024-5 financial year grant letter to OfS on 4 April 2024 (three days after the new financial year had started).
• HM Treasury promised big reforms of special education needs and children's social care in the Autumn budget. These are both now bigger spending areas than further education. High needs provision is a growing activity for colleges but even with a £1 billion (6% real-terms funding increase) in the 2025-6 financial year, there are many councils who are overspending their budget and where plans to tackle this may yet lead to restrictions.

• The Chancellor has scheduled a fiscal statement for Wednesday 26 March 2025 and asked the Office for Budget Responsibility (OBR) to update the economic forecast that it last made in October. OBR's productivity forecast was more optimistic than those produced by other organisations and it forecast lower inflation in 2025 than the Bank of England predicted a few days ago. CPI hit a 10-month high in January 2025 at 3% which makes interest rate reductions less likely. On a more positive note in terms of government revenue, rising incomes mean more tax is being paid in 2024-5. However the actions of the new US government create new reasons for caution about domestic economic policy. The US may levy tariffs on UK exports at short notice and there is new pressure to increase government defence spending (currently 2.35 of GDP).
• There is still no date for the 2025 spending review but HM Treasury asked for proposals by early February. AoC's paper (summarised here) makes the case for increased public spending on skills and FE to deliver economic growth and provide places for a growing population of 16-18 year olds. The paper argues for annual increases in the 16-18 education budget of £500 million to meet several objectives and for a single skills fund for use by mayors to agree funding and plans with colleges. Devolution will fragment adult funding so our case is to simplify as much as possble.

Local government pension scheme contribution rates and the DfE guarantee

A recap and a reminder:

• DfE issued a guarantee to LGPS funds which promises to cover debts in the event that a college closes
• There have only been 3 cases in 30 years where a fund has lost money but fear meant that some funds are charging colleges higher contribution rates in the three-year period from April 2023 to March 2026
• All funds will take account of the guarantee when assessing rates in the next valuation but the Local government department issued guidance to funds back in 2020 recommending that they have policies covering circumstances where they will carry out mid-valuation reviews.
• Most LGPS funds have adopted mid-valuation review policies and many funds have already applied these to look again at the rates being charged to colleges. For some colleges, this is leading to a six figure saving for the 12 months from April 2025 to March 2026.
• The case for a mid-valuation review are the facts that DfE issued the guarantee in a formal statement to Parliament on 1 December 2024 and the fact that this represents a significant change in the risks relating to college LGPS liabilities.
• Employer contribution rates are set on the advice of the LGPS fund actuary so any mid-valuation review will inevitably require an additional report. The costs may be chargeable to the college asking for a review. There are several cases where colleges have grouped together to cover these costs. There are only 4 firms of actuaries covering the 80 funds so it is highly likely that the firm used by your fund has already produced a report on this topic for another fund.
• There are several cases where, back in 2023 LGPS funds assessed colleges risks as low without the guarantee. In these circumstances, colleges won't get a 2025-6 saving from the guarantee.
• LGPS funds are covered by public sector transparency rules so it is relatively easy to check their policies (summarised in funding strategy statements) and the contribution rates paid by each employer (included in valuation reports or annual financial statements). This also means that any reduction secured via the guarantee will not be confidential.
• This is one of these cases where those who ask and persist can win. Those who wait definitely won't

I am keen to gather information covering all 80 funds and all 200+ colleges so that I can advise others. I also think we need to encourage DfE to think of other measures that might secure savings for the sector. The current estimate is that the guarantee might cut college contributions by £30 million a year. Given the low incidence and cost of college LGPS losses, that implies that colleges put £1 billion more than they needed to over the last 30 years.

Please share information on your success or otherwise with your LGPS fund to julian.gravatt@aoc.co.uk

Julian Gravatt