Sustainable Childcare - key policy developments

This has been the case for several years now for childcare providers and there are signs that increasing numbers of settings are struggling to remain sustainable, particularly in disadvantaged areas.

Rising costs affect provision

The rising cost of energy over the past 18 months has affected early years providers more than most. Data from the Institute for Fiscal Studies shows providers’ energy and food bills have risen 15 per cent over the past year compared to nine per cent for the average household. These rises have come at the same time as an increase in staffing costs - a recent survey of members by the National Day Nurseries Association (NDNA) found staffing bills had gone up 14 per cent in the past year due to the uplift in the national minimum wage and the cost of recruiting.

In response to rising costs, nurseries have been forced to put up fees – an approach that is more viable in affluent areas than economically deprived ones that rely more heavily on government-funded childcare entitlements, says Courteney Donaldson, managing director, childcare and education, at business advisory group Christie & Co (see expert view). There is growing evidence that the financial squeeze is resulting in more settings closing: NDNA research shows there was a 50 per cent rise in closures in the year to September 2023, with one in seven being in the most deprived decile (see infographic). Data from Ofsted shows that since 2015/16, the number of providers registered with the inspectorate has fallen by 25 per cent from 83,000 to 62,000 in March 2023.

Inadequate funding rates

The early years sector has long highlighted the shortfall between the funding rates provided by the government via councils for the early education free entitlements and the cost of providing such places. This funding gap has been exacerbated by the cost-of-living crisis with a recent education select committee inquiry hearing evidence from providers that on average they lose between £1-2 an hour for delivering funded places. A 2022 research report for the DfE found that the rate paid to providers by the government has risen at a slower rate than that for parent-paid fees since 2019. Evidence from Coram’s 2023 Childcare Survey suggests that availability of early education places declined seven percentage points in the last year, while 43 per cent of councils said fewer free entitlement places were available. The NDNA has concluded the government’s underfunding of childcare places in England has led to an 87 per cent increase in nursery closures, with the average setting losing more than £32,000 a year just for their 15-hour funded places for three- and four-year-olds.

Last spring, the government pledged an extra £500m over the next two years to address the funding deficit for existing entitlements. In addition, £2.2bn will be spent up to 2025 to extend access to the 30-hours entitlement to all eligible working parents of children aged nine months up to three years (see ADCS view). The funding will see hourly rates rise but childcare leaders such as June O’Sullivan of London Early Years Foundation (LEYF) warn that it still might not be enough to offset rising costs (see panel debate).

Workforce crisis gathers pace

Another factor affecting the sustainability of settings is the growing recruitment crisis across the sector. According to Coram’s 2023 Childcare survey, 71 per cent of local authorities say that childcare settings are finding it “very difficult” to recruit staff with the required qualifications and experience. A 2023 study by the Early Years Alliance found that 84 per cent of providers were finding it difficult to recruit suitable staff.

LEYF’s O’Sullivan says the workforce shortage is resulting in a retention crisis bearing out a 2019 NDNA survey that found annual staff turnover was 24 per cent, compared to the UK average of around 15 per cent. Low pay is a factor – the Social Mobility Commission has reported that the average early years practitioner salary is below the average for a female worker – as is the demanding nature of the role: O’Sullivan says more experienced staff often work 10-hour days to accommodate the needs of working parents.

The jury is still out on whether changes to childcare ratios that will allow one practitioner to look after five two-year-olds, instead of four currently, will alleviate or exacerbate the workforce problem: some experts say it could make the role more stressful while others say it could allow some staff to leave work earlier. If the latter transpires it could help reduce providers’ and parents’ costs too – cutting 30 minutes from the end of the day has helped the sustainability of one Lancashire provider (see practice example).

Sector trying to adapt

The government must provide a “sufficient” funding rate for the sector to deliver the ambitions of the extended free entitlements, the education committee inquiry concluded last summer. It also recommends reforming tax and business rates to help the economic sustainability of providers and as recognition that 80 per cent of childcare will soon be government funded. The need for a more stable workforce is called for with measures to improve the pay and status of the sector. Such changes, if implemented, would take time to have an impact. In the shorter term, providers are being creative in how they reduce costs and generate more income without affecting quality or reducing access to disadvantaged families. For example, one provider has opened a swimming pool linked to the nursery which has attracted parents keen to try aqua-natal classes. Another has expanded term-time only provision, which has allowed more flexibility in how it operates and has been popular with staff, improving retention rates (see practice examples).

Early years providers will continue to innovate to make ends meet, but with demand for funded childcare set to increase substantially in the next few years whichever party wins the election, a long-term plan for sustainable funding will need to be put in place if it is to deliver the good quality childcare system to which it aspires.

EXPERT VIEW

Commercial conditions are tough but management information can help sustainability

Courteney Donaldson, managing director, childcare and education, Christie & Co

How tough is the financial situation facing childcare settings?

For many, very challenging, evidenced by an increase in closures – especially smaller settings in deprived areas – and for those with lower occupancy and/or facing staffing challenges, and/or increased burdens with operational costs.

What are the key factors influencing this and what can providers do about it?

Inflation; workforce recruitment and retention challenges; the cost of capital/finance – commercial business mortgage cost increases, rental increases, utility and wider cost increases. Providers have limited control over those increased costs and not all are able to increase fees to a level that would offset the additional costs being incurred.

What cost factors do providers have more control over and what trends are we seeing with these?

Fee increases. Wages. Resources. Capital expenditure (CAPEX). Providers that produce monthly management accounts will have greater visibility over items of expenditure against income enabling them to have visibility and forward plan/adapt more nimbly than those that don’t maintain monthly management information.

How important is economic sustainability to acquisitions and what do buyers look for?

It’s a factor. An unstable economy can create nervousness which can impact confidence and lending. Buyers are looking for good quality settings with good occupancy levels – settings that are well-run and have established staff teams, properties well CAPEXed, and can demonstrate consistent and stable earnings.

ADCS VIEW

Policy must focus on better outcomes not just access to work

John Pearce, ADCS president 2023/24

The greatest opportunities to make a real and tangible difference to a child’s life chances occur when they are very young, in the first five years. Evidence shows that babies born into poverty are more likely to have low birth weight and by the age of three are, on average, nine months behind in development terms than their wealthier peers. The attainment gap widens further in the school years. Access to early education and high-quality childcare is linked to better academic results and improved cognitive and socio-emotional development in primary schools, particularly for children from disadvantaged backgrounds. It plays a crucial role in reducing the outcomes gap between the most and least disadvantaged children.

Improving children’s outcomes should be at the heart of any early years policy. While childcare has been a policy priority for successive governments, the aim has predominately been to get more parents into work. The 30 hours “free” childcare offer for working parents of three- and four-year-olds is poorly targeted, it effectively excludes the most in need households, yet individuals who earn up to £100,000 per annum can benefit from this offer. We are losing opportunities to make a difference to the most disadvantaged children and families. Reducing the income threshold would helpfully narrow the policy focus to the most in need households and any funding could be reinvested to help the early years sector recruit, and retain, the workforce they desperately need.

The funding attached to the existing 30-hour “free” offer is insufficient to meet actual costs with providers having to pass costs on to families to make up the shortfall or face closure. This is affecting the viability of both individual providers and the sector. According to the Women’s Budget Group (WBG) £1.8bn is required to make up the shortfall for existing funding entitlements, following years of chronic underfunding and pressures exacerbated by the cost-of-living crisis. There is significant underinvestment in the expansion of the offer to younger children the WBG says, estimating that an extra £5.2bn would be needed in 2025/26 in addition to the extra £4.2bn the government expects to be spending to cover the true cost of provision for all the funded hours.

By expanding the “free” childcare entitlements more households will be able to benefit from the offer, however, these reforms have come at a time when the sector is facing significant challenges including high costs because of the cost-of-living crisis and severe workforce challenges, with a significant proportion of the workforce choosing to leave for higher paid roles in retail. A recent government consultation on how early years funding is distributed has concluded. However, no matter how carefully funding is distributed, if the funding envelope is not sufficient the market will not be able to successfully deliver on these new expectations, children and families will lose out.

The unique ability of the early years sector to close the attainment gap must be at the heart of designing and implementing any future reforms over getting parents into work. This should be backed by sufficient funding from central government to ensure the funding available reflects the costs of delivering the reforms.