Nursery Management: Living wage - Paying up

The 'national living wage', which comes in next April, is predicted to pose significant challenges for the childcare sector. So what does it mean in practice, and how will nurseries cope? Ruth Stokes takes a look.

The new 'national living wage' (NLW) will be a welcome pay rise for practitioners. After all, wages in the early years sector are notoriously poor. Employers have said they support nursery staff receiving more money for the important job of looking after other people's children. But can nurseries afford to give staff more money?

The NLW of £7.20 an hour, announced in the Chancellor's latest budget, is in reality an increase in the wage floor - making it a new minimum wage for over-25s (and lower than the living wage, which is set based on the cost of living by the independent Living Wage Foundation, at £7.85 an hour).

The rise comes against the backdrop of underfunding - estimated to be at £206.6m annually for the private, voluntary and independent (PVI) sector even before the free entitlement is extended to 30 hours - and other new costs such as auto-enrolment for pensions.

For the majority of nurseries, the NLW will mean increasing wages. The National Day Nurseries Association's (NDNA) NLW survey found that 62 per cent of the workforce is currently paid below the NLW, with about two-thirds of these over 25. Other reports have also put the proportion of low-paid staff as sizeable: the Pre-School Learning Alliance's Counting the Cost report found that a fifth were paid less than £6.28 - nearly £1 less than the NLW. Government data from 2013 shows a quarter of staff are paid an average of £6.80 per hour.

Staff is by far the biggest single outlay for a setting - 77 per cent of total costs, according to think tank the Resolution Foundation. Nurseries anticipate they will need to raise payrolls by 10 per cent from next April, when the scheme comes in, and a staggering 35 per cent by 2020, according to the NDNA figures.

The Pre-School Learning Alliance has forecast a sector-wide shortfall of £404.57m in 2016/17 if the PVI sector implements the NLW for staff aged 25 and over - and this increases to £446.12m should all employees receive a 3 per cent pay rise.

Add the underfunding deficit to the money needed for the NLW and you get a funding gap of about £650m - that is before the 30 hours costs are factored in.

NDNA's survey found that a common response to the plan, from 58 per cent of nurseries, was to recruit younger staff or use tighter ratios to save money. The Government is currently undertaking a review of the funding offered to nurseries providing the free entitlement (a consultation ended in August), and the Department for Education has said it is considering the NLW within this. Will the result will be enough to close the gap?

In danger of closure?

NDNA director of policy, membership and communications Claire Schofield notes that there 'isn't much room for manoeuvre' for businesses looking to increase pay rates. 'Nurseries tend only to make a few thousand pounds' surplus. The only real thing that nurseries can do to increase their income is to put up fees to parents,' she explains.

Laura Gardiner, senior policy analyst at the Resolution Foundation, says location is another crucial factor. 'The impact of the NLW will vary in different parts of the country,' she says. 'Employees in London-based nurseries may be getting something closer to the NLW than employees in other areas. The effect on individual nurseries will depend on the age of their workforce, their existing pay rates and their ability to continue to make their business more efficient.'

Sean Sheerin is managing director of Manor House Nursery School in Margate, Kent, an area which has previously been picked out by experts for its levels of poverty. He believes childcare staff 'more than deserve higher than average pay increments', and says he would not employ under-25s simply to cut costs. Instead, he will have to raise nursery fees to cope.

'Under our current business plan we would not be able to implement the scheduled increases without a substantial reduction in the service,' he says.

'We have had to outsource our meals to another provider, which provides a substantial saving. However, this has resulted in the loss of housekeeping staff as well, which for our family of staff is a tangible loss.'

He adds that the business has had to 'seriously reconsider' its aspirations of expansion and growth, which it hoped to achieve by opening more settings. 'Instead, it has made it more a battle to merely survive,' he says.

Mr Sheerin sees it as inevitable that some settings will end up closing. 'Private childcare providers are already squeezed,' he says. 'When costs like the minimum wage are raised so irresponsibly fast and with no increase in funding to balance, there can only be one result - and that is the loss of many, many provisions across the country.'

John Thomson, co-founder and managing director of The Spinney Day Nursery in Cheshire, is conducting a review of outgoing costs, although he says that most of these will be tied to contracts that will have to run their course. He will also be ensuring that staff:child ratios are as efficient as possible, but adds that 'the danger is that this may necessitate a reduction in the number of children we take, to maximise the effect of the optimum number per room'.

He also rules out employing younger staff just because they are cheap, but is worried about the impact of the fee increases he is going to have to implement. 'If we take our fees too far, trying to cover our overheads, it'll mean a large section of the working population will get to the point where they may not necessarily be able to meet those costs,' he says.

Of course, a nursery that raises the pay rate for one set of employees cannot leave it at the original rate for the others. A recent report by KPMG into the costs of paying the true living wage of £7.85 an hour in Birmingham also found that just giving below-minimum wage staff a rise 'was not a likely outcome'. 'Employers wish to maintain pay differentials.' Mr Thomson agrees. 'You have to maintain a differential for all the salaries for the people above, otherwise it's not going to be worth someone's time taking on extra responsibility, and it could cause a lot of unrest.'

Other costs

'The decision to make company pensions mandatory is yet another added cost to our already struggling sector,' says Mr Sheerin. 'Combined with wage increases, it is currently beyond comprehension how many providers will now be able to exist once these fully take hold.

'Clearly the legislation is poorly thought-out, ill-planned and implemented in a fashion that will create a rush to only employ those under 25, discarding experience and life skills for yet more cost-effective measures of providing some level of service.'

Mr Thomson suggests the Government could help by making nurseries exempt from paying VAT (as schools are) and business rates. In January, childcare minister Sam Gyimah called for councils to provide business rate relief for childcare providers. The NDNA wrote to 156 local authorities in England to ask if business rates would be reviewed and says that, to date, it has heard back from just 13. 'Most of these say no, but some say they are looking into it or have further hoops for people to jump through to apply,' says a spokesperson, adding none have committed to a review.

The NLW could have far-reaching implications for childcare. 'We mustn't force nurseries to make harsh decisions that will either undermine the work that Ofsted is doing to raise standards or undermine the Government's thrust to get people back to work (by making childcare too expensive),' says Mr Thomson. 'The current system offers choice for parents, but if we're not careful smaller nurseries could be starved out of the system and we'll end up with one-size-fits-all.'


When? From April 2016.

Who? Those aged 25 and over.

How much? £7.20 an hour.

What is it currently? £6.50 an hour for those age 21 and over.

Will it rise? Yes, to £9 a hour by 2020.

What about people younger than 25? From October this year, the minimum wage will be £6.70 for 21- to 24-year-olds and £5.30 for 18- to 21-year-olds.

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