Financial Sustainability Health Check of the Childcare Sector in Scotland

Key Findings from the Provider Surveys

43. This section presents the key findings from the analysis of the provider surveys. More detailed information is available in the supporting Analysis and Evidence paper.

44. The surveys were live from 20 January until 27 February 2023 and asked for information on changes in costs of delivery, income, capacity, and staffing, to capture all aspects of the sustainability of services. Drawing on lessons from the previous exercise, a decision was made to update and make non-mandatory some of the questions to limit the ask on providers, while allowing for some level of comparability with the 2021 surveys.

45. Nevertheless, it is important to note that the response rate to the surveys was lower than in 2021. There were 108 responses to the day care of children services survey. Based on the latest registration data for the sector this represents around 6% of all registered private and third sector services. There were 58 responses to the childminding services survey, which represents around 1.7% of all registered childminding services.

46. The key comparisons for day care of children services are between: those delivering funded ELC and those not delivering funded ELC; services in the private and third sectors; and those services that deliver only school age childcare. There are overlaps across some of these categories. For example, all private sector services will include both private services delivering funded ELC and private services not delivering funded ELC. However, the use of these broad categories allows for general variations across provider types to be identified.

47. Due to a low response rate to the childminding services survey, we have not been able to make comparisons between different types of childminding services. Therefore, the focus of this analysis is the childminding sector as a whole.

Self-reported sustainability

48. As in the 2021 Health Check, the updated surveys asked respondents to provide an assessment as to how sustainable they viewed their service on a scale of 1 to 10 (with 1 indicating very unsustainable/potential need to close in near future and 10 indicating very sustainable/no concerns). Following this question, respondents were then able to explain the reasons that led them to make their assessment.

49. Table 5 sets out a summary of the provider sustainability assessments at the time of completing the current surveys (February 2023), and how that compares with the results from the previous Financial Sustainability Health Check (for the majority of respondents this would have been during May 2021).

50. It is important to note that the compared samples vary in size and make up. This includes differences between samples for each type of provider. Therefore, these comparisons should be treated with a degree of caution and are intended to provide an indication of potential changes in reported self-sustainability.

51. The sustainability assessments have been grouped into three categories depending on their sustainability rating: (1) services with significant concerns regarding sustainability – ratings between 1 to 4; (2) unclear on overall sustainability - ratings of 5 and 6; and (3) sustainable services – rating of 7 or higher.

52. Table 5 highlights that:

• Provider confidence in their financial sustainability has declined across all types of childcare services since the previous Health Check (2021).
• School age childcare only services and private services were most likely to have considerable concerns over their current sustainability (a score of 1-4).
• The largest shift in the assessment of sustainability has been for funded ELC services (with a decline from 64% of these services indicating a score of 7 or more in May 2021 to 41% of services at the time of the survey); and for private services (a decline from 51% to 30% respectively).
• Third sector services and services delivering funded ELC were most likely to rate their current sustainability at 7 or more.

53. The key factors raised by respondents to explain their current sustainability assessment were:

• Increased costs of delivery over the last year due to the costs crisis, particularly in relation to significantly higher energy and food prices; and increased mortgage interest rates.
• Whilst income has, on average, increased this has not kept pace with rising costs. Some services are facing pressures on income levels due to reduced occupancy levels (particularly school age childcare providers and childminders).
• Concerns about limited ability to generate additional income streams, as some providers indicated that increasing fees has only had a limited impact on their overall income. A number of respondents also reported feeling reluctant to pass on cost increases to families through higher fees. Some respondents also emphasised that they did not have the capacity to increase numbers of children attending their service due to the additional staff they would need to employ to keep within the required ratios, or not having the physical capacity in rooms for more children.
• Continued concerns about staffing - in particular the pay gap between local authority and the private and third sector settings, resulting in the loss of practitioners and challenges in recruiting suitably experienced new staff members. Some providers also reported that their current income levels prevented them from having additional staff to cover absences.
• Being a funded ELC provider was considered by a number of respondents as being positive for sustainability – however, some providers felt that the hourly rate that they received from their local authority for delivering funded ELC did not cover their current costs of delivery. A few respondents also noted that a higher contribution of ELC funding to their total income meant they had less direct control of overall income levels, and that any uncertainty over future rates setting timescales and decisions by local authorities would have a greater impact on the overall business. The average reported share of income from funded provision, for services delivering ELC, was 46% for private sector services and 84% for third sector services.
• Payment of the real Living Wage, in particular given the scale of the most recent increase, was highlighted as one of the main challenges for providers delivering funded ELC.
• Concerns about lasting impacts of the pandemic which have put a significant pressure on financial reserves and the ability to create funds for some providers. A number of respondents indicated that they were currently sustainable but had no surplus for contingency, investment or replacement of resources.
• Some specific challenges for third sector providers were raised, such as costs that are difficult to be quantified in voluntary led, committee based settings.
• A number of childminders highlighted concerns about additional administrative requirements, paperwork and preparation needed.

Changes in costs, occupancy, income, and charges

54. Respondents to the provider surveys were asked for information on changes in their monthly costs of delivery, occupancy, income and charges. These questions asked for detailed information that enabled for comparisons to be made, where possible, between the position at the time of completing the surveys and at the same point 12 months ago. Table 6 provides a summary of the survey analysis across these themes.

Table 6: Summary of survey analysis of costs, occupancy, income and charges

Changes in monthly costs of delivery

• The main focus of the analysis was on the changes in the total monthly costs of delivery, as the response rate to the surveys didn’t enable a full analysis of how the estimated costs of delivering childcare vary across age groups. Some respondents to the surveys also had difficulties in presenting their average costs of delivery on an hourly basis.
• The analysis indicates that average monthly costs of delivery have increased by around 14% across all types of day care of children services over the last year.
• The analysis also estimates that the highest increases in the cost of delivery may be for delivering to school age children, with estimated increases of around 19%.
• The average monthly costs for childminding services have increased, on average, by around 12%.
• The main reasons indicated for increasing costs of delivery are:
  • The costs crisis was the most commonly reported factor - covering a wide range of specific cost elements, including increased prices of energy, fuel, food, utilities, equipment and learning resources
  • Staffing costs (higher wages due to pay rises, pension contributions, cost of accessing bank staff)
  • Costs of paying staff the real Living Wage
  • Costs associated with staff training and recruitment
  • Increase in insurance costs
  • PPE costs and cleaning resources
  • Higher rental rates
  • Rising mortgage interest rates (especially reported by childminders)
  • Increased professional membership fees
  • Cost of outings and transportation (relevant particularly to childminders).
• Some respondents highlighted it was the cumulative effect of all costs increasing that resulted in real challenges for their services.
• In addition, a number of providers reported continued reduced demand for the service as a lasting impact of the pandemic, in particular school age childcare and childminding services. Services delivering funded ELC were less likely to report falls in demand/occupancy.
• The majority of survey respondents anticipated that in the next 6 month period their costs of delivery would increase, with only 19% of respondents expecting that their costs would remain broadly unchanged (and none anticipating a decrease in costs).
• In terms of future costs, the most commonly reported factor was an increase in the real Living Wage and the National Minimum Wage in April 2023.
• The majority of day care of children survey respondents reported that they let all or some of the premises that they use. For most school age childcare services premises were let from their local authority or other public sector organisation; whilst the majority of services delivering funded ELC rented their premises from a private owner, charity or church.

Demand and Income Flows

• Overall levels of demand (measured as occupancy levels) have decreased for all types of services over the year.
• The percentage of day care of children services operating at 60% or less capacity (in terms of registered places) has increased from 24% to 30% over the year.
• The percentage of childminding services operating at 60% or less capacity (in terms of registered places) has increased from 14% to 33% over the year.
• The analysis indicates that over the year, day care of children services have, on average, experienced an increase in monthly income of around 5%.
• Average monthly income has remained relatively flat across childminding services.
• Income for the delivery of funded ELC as a percentage of total service income has not changed substantially since 2021, with the exception of third sector services which have seen a potential increase in percentage of total income from funded ELC.
• Reported share of income from funded ELC was higher for third sector services (84%), compared with Private Sector Services (46%).
• The main reasons highlighted for changes in total monthly income were:
  • Sustainable rates for the delivery of funded ELC considered insufficient to cover current costs of delivery
  • Limited possibility to fundraise by voluntary and community based settings due to the costs crisis
  • Reduction of service users due to parents still working from home and wider costs crisis implications (particularly raised by school age childcare providers)
  • A number of providers indicated that last year their shortfall was covered via the Coronavirus Job Retention Scheme and other Government support grants, which have now stopped
  • Limited capacity to cross-subsidise income by funded ELC providers
  • School age childcare providers highlighted that families were switching to using blended childcare (i.e., funded term-time only provision and family members delivering the childcare through school holidays or at the end of the day), rather than placing their children in formal settings
  • A number of childminders reported that children moved to nurseries for their funded entitlement
  • Some childminders highlighted that the number of funded hours they were being allocated didn’t enable them to operate their services in a financially sustainable way.

Charges for families

• The surveys indicate that the majority of day care of children services have increased charges to parents and carers for non-ELC childcare over the last year.
• Some services reported that they have delayed price increases due to the impact of the costs crisis and in order to prevent a drop in demand.
• A number of respondents highlighted that the increase in charges haven’t kept up with inflation.

Workforce and pay

55. The provider surveys asked for information on staff vacancies, recruitment and the payment of the real Living Wage. Respondents were also able to provide more information as to whether the need to train and support new recruits had impacted on service delivery in the last year. Table 7 provides a summary of the survey analysis across these themes.

Table 7: Summary of survey analysis of workforce and pay

Staffing

• The majority of day care of children services who responded to the survey had lost at least one member of staff in the last 12 months, with private sector services being most likely to have lost a member of staff (89% of private services).
• 41% of day care of children services reported having at least one vacancy, with services in the private sector reporting the highest estimated vacancy rate in their setting.
• Where members of staff have left in the last year, they were most likely to have joined another service in the childcare sector (and most likely a local authority childcare provider).
• Where services have recruited new members of staff in the last year, new recruits came from a mix of backgrounds. 31% joined directly from school/college or university, 28% moved from another job not in the childcare sector, and 26% joined from another service in the childcare sector.
• The analysis indicates that about half of the new recruits were not fully qualified, although it is worth noting that this is very common in the sector. Around two thirds of those entering the childcare workforce do so by gaining vocational qualifications. In other words, they work toward their qualification while gaining practical experience in the workplace and are therefore not fully qualified upon joining the sector. The most common qualification reported was SVQ (25% of new recruits), followed by HN, and Foundation or Modern Apprenticeship (9% of new recruits respectively).
• Respondents indicated that the need to train and support new recruits had impacted significantly on service delivery, including:
  • On the quality of delivered care and experience for the children, though providers worked very hard to minimise this

A financial impact and pressure on current staff members to support new recruits; more time required off the floor for training

• Increased senior staff and management time dedicated to mentoring and induction
• Significant levels of support for new staff members who joined straight from school or college.

Payment of real Living Wage

• 51% of all day care of children services reported that they currently pay the real Living Wage to all staff.
• Services in the third sector and services delivering funded ELC were most likely to report that they currently pay all of their staff at least the real Living Wage (55% of third sector services and 56% of services delivering funded ELC respectively).
• School age childcare only services were least likely to report that they currently paid all their staff the real Living Wage (39% of SACC services).
• 81% of funded ELC providers paid the real Living Wage to either all staff or staff delivering funded ELC.
• Reasons given by respondents for not paying all their staff the real Living Wage were:
  • The hourly rate that they received from their local authority for delivering funded ELC did not enable payment of the real Living Wage to all staff (sustainable rates paid to services delivering funded ELC includes funding to enable payment of the real Living Wage to those staff delivering funded ELC)
  • Some respondents indicated that staff working towards qualification were paid at least the National Minimum Wage; paying more at this level given the amount of supervision and training support required would make the business unsustainable
  • Some providers highlighted that this would not be affordable without increasing fees and passing on the cost to parents and carers, which they were reluctant to do.
  • 72% of childminders reported that they did not currently pay themselves the real Living Wage. Childminders estimated that, on average, they paid themselves £8.21 per hour.
  • The main reasons offered by childminders for not paying themselves at least the real Living Wage were not making enough profit and limited ability to increase parental charges, as some respondents felt that would result in families leaving their service for a cheaper alternative.

The majority (68%) of day care of children services indicated that they planned to pay all staff in their setting the real Living Wage by August 2023. This was highest for services delivering funded ELC (73%).