State of independents
Friday 31 May 2019
State of independents
The independent sector in the UK is facing several challenges over the coming years. And they appear to be tougher than any previous threats. Economically and politically, the sector needs to prepare to mitigate the risks posed, whether considering the prospects of Brexit (see sidebar) and/or the precarious state of the global economy or try to second-guess the changing political landscape.
With fee rises still higher on average than pay rises1, there is an inevitable strain on the finances of the professional middle classes who have previously been the bedrock of support for the sector. Both of the main political parties have an antipathy towards the sector. The travails of the current government could conceivably lead to a Jeremy Corbyn administration at the next election, which brings the threat of VAT on fees2. And either of the Tories or Labour may look to what’s happening in Scotland with the removal of rates relief by 2020 (see sidebar).
Against this backdrop, there is the lingering issue of affordability of the sector. According to a report by Verdict of financial advisers published in February 2018, a UK family needs an income in excess of £150,000 a year3 in order to be able to afford sending two of their children to an independent education. And in the same report, Andy Harris, from Student Fees Investment Advisers, calculates the total cost of sending two children to an independent day school for 13 years from the age of five would be £500,000, allowing for inflation.
Cause and effect
But first, let’s look at the potential impact of Brexit on the sector. Boarding schools may be hit hardest as overseas parents fear a mix of a Britain that is potentially unwelcome towards their child and the (at least, short term) reduced influence of Britain on the world stage. According to Robin Fletcher, chief executive of the BSA, in an article for the Daily Telegraph in December 2016, there are 19,500 overseas boarders coming to British independent boarding schools: and with each paying “an annual average fee of around £20,000 a year (the mid-point between junior and senior school full boarding fees), they generate revenue of roughly £400 million.”
Currently, non-EU boarders, who are classified as overseas, need approval to study here, which involves schools becoming “trusted sponsors” to meet Tier 4 visa arrangements and all its attendant paperwork. However, a free movement deal could prevent this particular barrier going up.
Independent school parents who are non-British EU citizens who currently work here may find that, should their employers decide to leave the UK, they follow as a consequence. According to a survey carried out in September 2017 by Swiss bank UBS, 15 per cent of EU companies with operations in the UK plan to move out after Brexit. And, in the previous month, KPMG produced a survey of EU nationals in the UK that said only half of them planned to stay. With approximately 10,000 pupils from those families enrolled in ISC schools, this may not have a major overall impact on the sector but will have specific, local effects.
The outlook for a post-Brexit UK from the economic impact assessments indicate that certain areas will be particularly hit hard, especially if no deal is negotiated. The probable worst affected areas are: the North-East, North-West, the West Midlands, Northern Ireland, Scotland and Wales. No region, however, except perhaps for London, is likely to be unaffected.
But the global economy is not in the best shape either, so even without the potential threat of Brexit, times would be tough for parents.
There are other battles to fight too:
- Reduced fee affordability, leading to the professional classes being priced out.
- Fewer pupils entering the system at the lower age end and parents choosing different entry points rather than full independent education for their children (see article in the previous edition of Independent Insight).
- Rising payroll costs.
- Rising energy costs.
- Compliance failures in managing the 400+ regulations (in particular, safeguarding and the single central register).
- Maintaining new builds (vanity projects?) from operational expenditure.
- Cashflow management and debt recovery.
- Competition from other schools and an improving state sector.
Other factors that may be less important but still could have an impact include the following:
- Risk of non-association schools bringing the whole sector into disrepute, in particular with poor (Ofsted) inspections. Also the unregulated sector could be conflated with independent education.
- New low-cost schools eg in Durham and Scotland. However, the impact of these is yet to materialise.
So, what can be done to protect your school’s future?
A strategy to survive
There are things that a proactive school can do to mitigate or neutralise some or all of the perceived threats.
- Analyse your accounts (a sensitivity analysis) to consider the impact of either a rates relief loss or an introduction of VAT on fees. The latter will have the greater impact financially, even if no pupils are lost from your roll. However, it is vital to know the actual consequences should either materialise (wherever your school is based).
- While public benefit in Scotland is focused primarily on bursaries, in England and Wales there is a greater focus on partnerships. So, instead of investing in bursaries for the time being, perhaps invest in reserves as, effectively, a fighting fund to cover potential shortfalls.
- Carry out a staff audit to ensure that you have the right number of staff on your school roll. Compare staff:pupil ratios for the last five years to identify an imbalance.
- Drop unpopular courses.
- Carry out an audit of school facilities to see where you can make more money from your facilities.
- Engage fully in serious fundraising and development work.
- Benchmark your KPIs with similar schools.
- Consider an international iteration of your school. A successful project should bring in somewhere between £100,000 and £1 million per school, depending on the global nature of your school brand (but is not necessary to have some success). By 2027, the international schools sector is predicted to rise in the number of schools by 79 per cent by 20274.
- Engage in joint procurement and share resources with other schools. This can save money but will take up management time to execute.
Despite the obstacles facing the sector, there are some evergreen positives that must be remembered. The sector has:
- A strong brand.
- Great results.
- Parents who will be reluctant to move their children to a different school unless they absolutely have to. If they have to, then perhaps offer a part-bursary to help them stay at your school.
Priorities for the sector:
- Demonstrate value for money. Cost of house near good state schools = go independent and live in a less salubrious area.
- Attain affordability (offset fee income?).
- Reassure parents.
- Maintain your distinctive quality. However, if this is that your school has small class sizes, then think again5. There is little evidence to support higher student attainment in smaller class sizes; it is largely thought that it is effective teaching and parental support that carry more weight. After all, schools in East Asia perform particularly well in PISA tests yet have large class sizes. If you can add two or three more pupils per school year, then the effect on your bottom line could be transformative.
- Offer outstanding customer service.
Also, remember that the sector saves the taxpayer billions of pounds per year and delivers a world-beating standard of education.
Independent education is older than the state offering. To continue to thrive, there are some tough times ahead but there are things that can be done, and many positives that can be celebrated. Now is the time for the sector to speak as one voice, perhaps through the Independent Schools Council, to challenge the politicians so that the sector can set the agenda and not be a victim of it.
1 The former is 3.5 per cent according to the ISC census in 2017, and, according to Howard Archer, chief economic adviser of EY Item Club, it will be 2.7 per cent for the latter in 2018.
2 From the Labour manifesto: “To aid attainment, we will introduce free school meals for all primary school children, paid for by removing the VAT exemption on private school fees.”
3 The top one per cent of earners, according to HMRC’s Survey of Personal Incomes.
4 2018 survey by ISC Research.
The story from Scotland
The Barclay Review of Business Rates was set up to “to better support business growth and long-term investment and reflect changing marketplaces”. However, it could be argued partly to have been a political front against the independent sector in Scotland, with its exclusive statement on restrictions on rate relief: “The Review concludes that it is unfair and inequitable that independent (private) schools that are charities benefit from reduced or nil rates. The recommendation is that charity relief should be abolished for such schools.”
John Edward, director of the Scottish Council of Independent Schools (SCIS), says: “In an early review meeting, other sectors represented in the room included those from hospitality, farming and utilities – all large industries. And yet the independent sector was singled out for the removal of rates relief. SCIS had provided a lot of evidence for what the sector does for the country as a whole but it was ignored, so the decision was clearly political.”
Edward goes on: “The rates relief removal was estimated to bring in around £5 million gross to the Scottish finances, but if there is a drop of just 3 per cent in the number of pupils in the independent sector as a result, this sum will be wiped out by the state provision that would be needed to educate those children.
“But the biggest irony is that we were given probably the most stringent test of anywhere in the world to validate our charitable status, we met it and yet a key element of that charitable status has been removed. That test, devised in the Scottish Parliament, was originally passed 98-0.”
The Office of the Scottish Charity Regulator (OSCR), the equivalent to the Charity Commission in England and Wales, has carried out checks on the 50 or so Scottish schools under its remit. It has judged those schools on a case by case basis: according to fee levels, number of schools nearby and fee assistance, among other criteria. Edward continues: “It’s a nuanced test, but it was never intended that OSCR should be focusing its efforts so narrowly. There are bigger financial and management concerns such as those seen recently with international development agencies and others.”
But SCIS schools also offer far more than means-tested fee assistance, in terms of shared facilities and assets. “Glasgow independent schools, for instance, each pay towards a rugby coach for state schools, but this isn’t really recognised. Also, in our state schools, there are no governors; schools report to local authorities. So we can’t ‘share’ governors for public benefit.”
The argument runs that state schools “pay” business rates, yet not in any meaningful way since they don’t receive bills. So it’s taxpayer money that circulates from and to the state between different departments.
Can the Barclay recommendation be defeated? “We will review the wording of the legislation. So far, the Government did not consult OSCR, consider any SCIS evidence, or even consult their own charity team. There is no schedule for any legislation yet, other than they want it on the statute books by 2020. We will have to see what the legislation looks like, how it is framed, before we consider any further steps,” says Edward.
One of the unintended consequences of rate relief removal may be on teachers; if additional costs are not all loaded on to parents the school workforce might suffer. The challenge for the influential teaching unions will be to act to support members – irrespective of their views of the independent sector. Likewise, the boarding sector alone currently contributes £30-40 million annually to the Scottish economy.
So, assuming rates relief is lost from 2020, what will schools do about their public benefit responsibilities? “Those who have used business rates as a proxy for their own opposition to the independent sector should take no satisfaction from this decision. There is not the slightest chance it will diminish the dedication, energy and expertise that independent schools and their staff have shown over decades, if not centuries; and there will be no stepping back from their national contribution offering choice, diversity and excellence for schools, for families and for Scotland’s young people.”
To measure the mood within our schools, Independent Insight has set up an ongoing survey of sector sentiment on Brexit and the sector overall, which will be updated in each issue. It includes these questions:
- What impact will Brexit have on your school?
- What impact will Brexit have on the independent sector as a whole?
- How confident are you about the viability of the independent sector over the coming years?
From 67 respondents from a randomly selected group of 152, the initial results show:
Impact on my school: 41 per cent likelihood of impact
Impact on sector: 51 per cent likelihood of impact
Viability of sector: 66 per cent chance of a viable future
Perhaps the most worrying statistic here is the current confidence about the ongoing viability of the sector.
Comments from respondents:
“There is little effect of Brexit per se; the impact is in the contraction of the economy that will result and the impact of jobs and confidence.”
“The uncertainty is probably the biggest impact: parents unwilling to commit to independent education as they themselves don’t know what their personal impact will be. There may be a greater impact for independent schools with overseas offshoots in EU countries as trading arrangements may change post-Brexit.”
“If England follow Scotland’s lead and abandons rates relief and/or introduces VAT on fees, there will be mass collateral damage.”
“It rather depends on the terms of Brexit – it is too early to tell.”
“Fewer schools in five years. I’m slightly more concerned about prep school and domestic boarding markets.”
“I am confident about the future of the independent sector in south-west London where we operate, notwithstanding the Brexit impact. However, I am not convinced that it will be as comfortable outside the M25. The political impact and uncertainty is the key concern at this stage which could result in a change of government in the UK, which would not be an easy passage for the sector.”
“Significant improvements in the maintained sector through academies intensify, leaving day schools more exposed – a problem exacerbated by increasing affordability issues. (If) the Tories are voted out (following what’s perceived to be an unsuccessful Brexit deal) then it could be that a Corbyn government wields a proper axe at the independent sector, including imposition of 20 per cent VAT; this adds to the already building pressures. The effects of VAT plus (the potential) loss of business rates relief plus expelling teachers from the Teachers’ Pension Scheme are likely to push most schools’ fees into the unaffordable bracket. All but either the best or the cheapest independent schools probably don’t survive.”
“Not too confident for small schools as I suspect most families will find it difficult to raise the fees; although cuts in the state sector might result in families reassessing their priorities.”
Andrew Maiden is editor of Independent Insight: www.iexcellence.co.uk.