Nurseries and childminders that rely on parent fees risk closure after lockdown - study

A report from the IFS highlights the extent of the financial crisis facing the childcare sector as a result of the coronavirus pandemic and warns that families could face a shortage of places.

It points out that many providers were already facing a difficult time financially before the crisis, but that the loss of fees from parents since March, when lockdown started, means that many providers are facing a difficult time staying open.

A total loss of income from parent fees would have put a quarter of private nurseries at risk of running a 'significant deficit' during lockdown. This compares to 11 per cent of providers pre-crisis.

The IFS said the figure was more than double the number which were running a significant deficit prior to the pandemic and is despite Government support through continued public funding and the substantial furlough and self-employment schemes.

The research, Challenges for the childcare market: the implications of Covid-19 for childcare providers in England, analyses how much childcare providers’ finances are likely to have been affected by the lockdown, and what they might look like in the future.

Although nurseries and childminders have been allowed to reopen since the start of June, during the summer holidays demand for childcare was 70 per cent below normal levels.  

Even by mid-July, after lockdown ended, childcare use was only around 30 per cent of its pre-crisis level.

During the coming year, the key question will be how much – and how quickly – demand for childcare recovers, the researchers say.

Christine Farquharson, senior research economist at the IFS, said, ‘Childcare closures during the lockdown saw providers’ incomes take a big hit. While Government support cushioned the blow, especially for settings mostly reliant on public income, we estimate that half of childcare providers were at risk of earning less than £4 of income for every £5 of cost during the lockdown if they took in no fees from parents. The lockdown hit providers of all sizes and in all areas, but childminders – who entered the crisis with weaker finances on average – were more exposed than other types of settings.’

Assuming no further Government support, the IFS estimates that, for every 5-percentage point drop in fee income, an extra 3-4 per cent of settings risk tipping into significant deficit.

Childminders

Many childminders are likely to have been hit hard by falls in their income from parent fees, the research says.  

Even if all childminders received self-employment grants, the total loss of parent fees could see an extra 30 per cent of childminders now earning less than £4 for every £5 of costs (counting what they usually pay themselves in the costs). In practice, many childminders will see their earnings take a hit, which could jeopardise their ability or desire to stay in the market.

Key findings

• Ongoing funding for the free entitlement during the lockdown means providers that rely mostly on local authority funding have so far had their income largely protected. Funding will be reassessed in 2021 based on January pupil numbers, risking a loss of capacity if demand is sluggish at the start of the year before picking up over the spring and summer terms.
• For providers with income from parent fees, support through the furlough scheme and self-employment grants was a significant help but provided far from full protection. The report estimates that the median furlough payment was worth 55p for every £1 of lost fee income, and self-employment grants covered 64 per cent of baseline fee income. 

The research was funded by the Nuffield Foundation and carried out by the Institute for Fiscal Studies (IFS), the University of Birmingham, Frontier Economics, Coram Family and Childcare, and the University of Surrey. 

Dr Claire Crawford, reader in economics at the University of Birmingham and Research Fellow at the IFS, said, ‘Even before the crisis, almost three in ten childcare settings were running a significant deficit, and there was an ongoing debate about whether the funding rate for free entitlement places was sufficient to cover providers’ costs. By squeezing income from parent fees, Covid-19 has magnified these concerns.

'However, our research shows that the providers most at risk of going into significant deficit – and hence potentially most at risk of exiting the market – are those that do not rely on public funding. While the Government might have good reason to prioritise supporting providers of free childcare hours, doing so may not be the best way to secure the capacity provided by otherwise viable businesses that tipped into a temporary deficit as a result of the pandemic.’

Sector organisations have welcomed the findings, which they say backs up their own research into the impact of Covid-19 on settings.

Purnima Tanuku, chief executive of NDNA said, ‘This research and analysis shines a light on the totally unsustainable situation many nurseries now face.

‘Many of these same nurseries remained open to key workers’ children during lockdown at the loss of many thousands of pounds. They now need urgent support. 

‘For the average nursery, public funding only makes up about 38 per cent of their income according to our research, so the vast majority of nursery businesses are suffering this deficit from the lack of parental income.

‘Nurseries have also had to invest in making their nurseries safe – such as installing partitions and additional handwashing stations - but with lower income and higher costs, they are really struggling for survival.’

Neil Leitch, chief executive of the Early Years Alliance, said, ‘Despite the overwhelming evidence that urgent action is needed, the government has so far failed to provide the transitional funding this sector desperately needs to remain sustainable in the short term, nor has it been willing to commit to the investment needed to ensure that providers can stay viable in the long term.

‘If the Government is serious about re-booting the economy, it needs a sustainable early years sector to ensure that parents have access to childcare they need in order to work. We urge the government to listen to the experts, look at the evidence and accept that urgent action is needed if this vital sector is going to survive the next few months and beyond.’

Liz Bayram, chief executive of the Professional Association for Childcare and Early Years (PACEY), said, 'It is sadly not surprising to see the report highlight the particularly devastating impact the pandemic has had on childminders. Our research has shown that at least one in five childminders were unlikely to receive help from the Government’s self-employment support scheme. Without immediate action there will be a devastating loss of flexible, high quality childcare places that will be vital to support parents once they return to work.'

Councillor Judith Blake, chair of the Local Government Association’s Children and Young People Board, said, ‘Childcare providers have been a vital part of the nation’s response to Covid-19 and councils worked closely with them to ensure that vulnerable children and critical workers had the childcare they needed during lockdown.

‘However, early years and childcare providers have not had access to the same funding as schools to stay open. As this report highlights, this along with a slow return to early education is putting settings at risk.

‘It is essential that we have enough childcare places to support families to ensure the country can recover from Covid-19, both economically and socially. We are calling on the Government to provide an urgent injection of funding to protect childcare providers at risk of closure as a result of the pandemic.

‘Despite the overwhelming evidence that urgent action is needed, the Government has so far failed to provide the transitional funding this sector desperately needs to remain sustainable in the short term, nor has it been willing to commit to the investment needed to ensure that providers can stay viable in the long term.’

Tulip Siddiq MP, Labour’s shadow minister for children and early years, said, ‘Coronavirus has delivered a hammer blow to a childcare sector that was already on its knees after years of underfunding by the Government. 

‘This Government’s incompetence has left us on the verge of losing many thousands of childcare places – an outcome that would be devastating for many working families and the children whose life chances are shaped by early education. 

‘Labour has been arguing for targeted support to save sectors like childcare that have been worst hit in this pandemic. Ministers must not allow nurseries, childminders and the families that rely on them to pay the price for their serial incompetence and failure to support essential services.’

A Department for Education spokesperson said, ‘Nurseries, preschools and childminders are integral to this country’s recovery from the coronavirus pandemic. That’s why we set out from the start that we would continue providing councils with funding for free childcare entitlements for two, three and four year-olds, even if settings were closed – which the IFS itself acknowledges has helped protect the sector. 

‘Early years settings have received significant financial support over the past months and will benefit from a planned £3.6 billion funding package in 2020-21 for free early education and childcare places.

‘We are providing extra stability and reassurance to nurseries and childminders that are open by “block-buying” childcare places for the rest of this year at the level we would have funded before coronavirus – regardless of how many children are attending.’