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Assessing the apprenticeship levy three years on

This year marks the third anniversary of the government’s apprenticeship reforms, and with each passing year, we’ve seen the commentary on it evolve.

From the initial drop-off in starts, to the looming expiration date of levy funds, the quality of the standards on offer and now to the lack of available funding for SME apprenticeships.

Given that the 2017 shake-up of the system was the most significant in a generation, such teething problems are to be expected. The current levy is a tax on organisations with a payroll of more than £3 million, requiring them to pay 0.5% of their wages bill into an apprenticeship fund, with the money needing to be used within 24 months.

Last March, as that two-year expiration date approached for the first time, concerns were raised about the amount of levy funds still left unclaimed.

At the time £3 billion of levy funding had yet to be used and was due to expire at a rate of £120 million per month. This clearly was the impetus employers needed and it led to a 15% increase in apprenticeship starts in 2018/19.

However, the most recent figures are less than encouraging. In the first quarter of the 2019/20 academic year, new starts were down 4.7 per cent to 125,800 from 132,000 in the same quarter the year before.

Despite this downturn in new starts, apprenticeship funding is running out - at least for non-levy payers. Under the current system, a levy-paying business can transfer up to 25% of its funds to other non-levy paying SMEs in its supply chain.

The government had envisaged that this would create enough funding to supplement the cost of apprenticeships for SMEs, but recent research by the Association of Employment and Learning Providers (AELP) found this not to be the case.

On average, apprenticeship providers are turning down approaches from 40 SMEs per month due to lack of funds. In designing the system this way, the government seems to have underestimated how much of their entitlement levy-payers would actually use and what they would spend it on.

The most recent HMRC statistics for August to October 2019 reveal that ‘starts’ on level six (degree-equivalent) and level seven (masters-equivalent) apprenticeships have risen 49.4 per cent since the same quarter in 2018/19 and are now nearly five times higher than the same period in 2017.

Consider that a level seven, MBA-style apprenticeship can cost up to £27,000 and you start to uncover some of what’s at the root of the funding shortfall.

“The fact that it’s running out of money actually means that it’s working well,” says Anthony Impey, founder of business ISP Optimity and chair of the Federation of Small Business’ (FSB) skills and apprenticeship policy group.

David Hare, director in the talent solutions team at Grant Thornton, agrees: “What we've seen is that the uptake of apprenticeships has perhaps been a bit higher than the government initially anticipated. There is more spending going on in the system that the budget had allowed for.”

That may be the case, but the dramatic increase in the degree-level apprenticeships certainly prompts speculation as to whether employers are using their funds in the right places; is such spending going to help organisations meet their future skills needs, and, crucially, what role does HR have to play in influencing how that money is spent?

Hare says that skills shortages have prompted employers to take action and many are coming alive to the fact that apprenticeships can be a good solution for this. But he also acknowledges that there will have been some pressure from finance directors to ensure the money is spent before it expires.

“The dilemma is that the system incentivises employers to look at how they can reclaim their levy funding,” says Ben Willmott, head of policy at the CIPD. Tom Richmond, founder and director of educational think tank EDSK, believes that this model has led to an explosion of ‘fake apprenticeships’.


A 2020 report by EDSK claims that over £1.2 billion of levy funding has been allocated for apprenticeships which, prior to 2017, wouldn’t have been classed as such.

“In many respects, employers have responded rationally to the incentives created by the government. For levy-paying employers, they are keen to re-label their existing training courses as ‘apprenticeships’ to draw down their own levy contributions as quickly as possible,” comments Richmond.

“For non-levy employers, the small pot of money reserved for them operates on a first-come-first-serve basis, so they are understandably keen to use up the available funding before someone else does.”

According to Willmott, the rebadging of existing, and often expensive, training programmes undermines the ambition of the apprenticeship system, and makes them a “proxy for all workplace training”.

But Mark Dawe, chief executive of AELP, argues that overall, the commitment by levy payers to spend their funds is predominantly a good thing. “My view is that the more levy payers engage, the more they're showing everyone the power of apprenticeships, the better,” he comments.

David Phillips, interim managing director of skills credentialing at City & Guilds says that fundamentally we just need to trust that employers are making the right choices for their organisations.

Impey, who also chairs the Department of Education’s Apprenticeship Stakeholder Board, agrees: “We can't create a system, which is based on giving employers control...and then turn around to employers and say, ‘we know we gave you a choice, but I'm afraid you've been making the wrong choice’.”

But how does HR know what the ‘right choice’ is for their organisation? “HR should have a very good strategic understanding of the skills that they have and that the organisation needs, in order to succeed,” says Willmott. “That way decisions around investment in skills are not purely tactical and are not made simply to utilise levy funding.”

Upskilling the workforce

The key to getting this workforce planning right is to resist the temptation to solely focus on immediate skills gaps, says Sebastian Tindall, head of L&D at Vitality. “For us, the pressure has never been to spend the money at all costs but rather invest it wisely to get the best out of our people,” he comments.

Andy Moat, people director of B&Q, agrees that sometimes the incentive to spend the levy funds can be a distraction for employers. “We’ve fallen into the trap in the past of treating government funded learning like a KPI and chased a target, at the expense of the learning experience,” he says.

The retailer has recently seen 123 employees complete its level three retail team leader apprenticeship and has bigger plans. By May 2020 B&Q aims to have 1,100 of its employees on apprenticeships, across 28 standards that encompass all of its business functions. “We were determined not to repeat the same mistake, so we are very much focused on quality not quantity,” adds Moat.

At both Vitality and B&Q, the majority of apprenticeships have been delivered at level three but they’ve also each invested in higher-level apprenticeships too.

“A lot of people will assume that when you invest in an MBA-style apprenticeship, you'll be doing it for an executive with 15 years of experience and they don't need it,” comments Tindall. “But it's a viable alternative to university for a young person. They’ll build experience, get none of the student debt and draw a salary.”

Vitality currently spends about 80% of its levy on level three standards, with approximately 20% portioned off for specialist and higher-level training. It’s a balance that works for them, says Tindall, and allows them access to niche skills such as actuarial science, which is key in their industry.

While these employers might have made the strategy work for them, there are many other non-levy payers who have yet to feel the benefit of the 2017 reforms, despite now having access to the digital apprenticeship service (DAS).

Impey says that while opening up the DAS to SMEs is a really positive move, it creates another crisis to navigate because there’s not enough funding.

Furthermore, because of concerns about affordability, the government has limited each SME to three apprenticeship starts. “I would describe that as having an unsatisfactory situation for the last three years to an unacceptable situation in the future,” remarks Impey.

SME impact

It’s a stark contrast to the apprenticeship landscape prior to 2017, when SMEs accounted for the majority of apprenticeships. The current situation could have wide-ranging consequences both for the organisations themselves and the communities they’re based in.

“The impact on small businesses is that they're not able to grow. They're not able to respond to changes in the marketplace brought on by automation and digitisation, and it risks stifling their productivity,” says Impey.

And while large organisations tend to cluster near big cities, SMEs are based everywhere, meaning their impact is, arguably, greater. “Small businesses are great agents of social change because they have this footprint that is truly nationwide.

"They are embedded in their local community, suppliers are local, customers are local and so are employees,” adds Impey. “If the government is genuinely committed to a strategy of ‘levelling up’, then enabling small businesses to train and develop their staff is really, really important.”

Pre-coronavirus, there were expectations across the industry that the March budget would bring a much-needed cash injection, allowing SMEs to take full advantage of their access to DAS. The AELP, for one, has called for the further allocation of £1.5 billion pounds.

“We don't really care where the money comes from,” says Dawe, “But that money is needed, just to bring things back to where they were for SMEs prior to 2017.” Any such boost will surely only be a temporary fix for what is fundamentally a design flaw, but many stakeholders caution against further reform.

Phillips says that what is needed is patience and persistence to make the current system work. Impey agrees: “It's quite important that we don't look at what's happening in the apprenticeship system as a system failure. It's actually to do with market demand exceeding the funding available.”

From the HR perspective, Tindall believes that the levy system has made L&D more effective. “The money is sitting there, and the only consideration is how to allocate that money fairly,” he comments. “If we said that three or four years ago, you would think: ‘we'd love to be in that situation’. We are in that situation now and yet people are calling for reform.”

It's unlikely that calls to overhaul the system will subside anytime soon. The CIPD has long argued for reform with its own research showing that 53% of levy-payers would prefer a wider training levy compared to 17% whose preference is for an apprenticeship levy.

Sandra McNally, director of the education and skills programme at London School of Economics’ Centre for Economic Performance, says that some degree of further reform is inevitable. “It is a good idea to have a policy that incentivises firms to take on apprenticeships,” she says. “But this is not enough to address the skills deficit in Britain.”

With many employers now using the levy for that very purpose, it has resulted in a marked shift in demographics. Apprenticeship starts by over-25s have increased by 44.8% since the 2017 reforms, while starts by those under 19, have fallen by 12.8%.

Moat argues that everyone should be able to take advantage of the levy. “There’s a tendency to assume apprenticeships are just for younger candidates, but I strongly believe that apprenticeships should be available to everyone, from those who have just left school to people who have been in the workforce for many years, including older workers,” he told HR magazine.

“We have one of the most age diverse apprenticeship schemes in the industry, with apprentices aged from 20 to 61-years-old.”

But McNally notes that while we do need to focus on reskilling and upskilling, not every employee will require the extensive training that an apprenticeship provides. “It would be useful to consider ways of incentivising [reskilling] that go beyond apprenticeships,” she comments. “One possibility would be to extend research and development tax credits to [include] training, which is done in Austria.”

There are further lessons to be drawn from abroad, McNally says, noting a proliferation of apprenticeship standards in the English system. The Institute of Apprenticeships website currently shows 710 standards, where Germany has 320 and Switzerland has just 240.

Richmond also points to this and believes the Swiss and German systems focus on quality where the English one offers quantity, often at a lower skill level. “No other country would allow these courses into their apprenticeship system,” he claims.

Despite the impact on SMEs, Impey - a long-time apprentice employer himself - advises against reforming the system at the moment. “I think the question around funding is much, much bigger than ‘how do we make apprenticeships affordable?’ It's ‘how do we respond to this new economy?’,” he comments.

“In the modern global economy, talent is your most important infrastructure. It’s the engine of the economy. Having the right skills investment and the right lifelong learning system in place is almost the most important infrastructure consideration that we need to make now.”

This piece appears in the April 2020 print issue. Subscribe today to have all our latest articles delivered right to your desk