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First look at the Skandia Report: ‘First Steps to Wealth’

The report by the financial investment company Skandia First Steps to Wealth has been covered in the press in terms of the impact on the tax payer. However, the report contains a lot more than this headline, covering the relative benefits to young people of different routes to employment post-16. This first look at the report seeks to look at all aspects and not just the impact on the perceptions of the affordability of the Government’s current financial arrangements for tuition fee loans. Nonetheless, that element of the report is clearly very significant. The report estimates that the recurrent annual liability to the Government of the current fees regime is approximately £9bn, and that this could grow depending on the level of economic growth, the number of students and the rate of inflation.
This article is more than 12 years old

Professor Patrick McGhee is Assistant Vice Chancellor at the University of Bolton and former Vice Chancellor of the University of East London.

The Skandia Report

The report by the financial investment company Skandia First Steps to Wealth has been covered in the press in terms of the impact on the tax payer.  However, the report contains a lot more than this headline, covering the relative benefits to young people of different routes to employment post-16.  This first look at the report seeks to look at all aspects and not just the impact on the perceptions of the affordability of the Government’s current financial arrangements for tuition fee loans. Nonetheless, that element of the report is clearly very significant. The report estimates that the recurrent annual liability to the Government of the current fees regime is approximately £9bn, and that this could grow depending on the level of economic growth, the number of students and the rate of inflation. That there would be a shortfall has never been doubted. Even when the fees legislation was being passed in November 2010, it was accepted by the coalition that only a third of graduates would pay all of their loan back with a further third paying nothing at all. But the size of the shortfall has never been estimated to be this high. To put this in some perspective £9bn is more than the total amount currently being spent on incapacity benefit, five times the Criminal Legal Aid budget and four times the amount set aside for all academies in England in 2011-12 . It should be reiterated that the shortfall is recurrent. Overall the lifetime of the 2015-20 parliament this approaches £50bn. That figure is the total cost of the November infrastructure boost announced by the Chancellor to kick-start growth.

However, the Skandia report itself is primarily focused on the impact for young people of different life choices. The relatively new data analysis and the report itself – unlike most of its type –  consider options related to pre and post-A level entry to the workforce, apprenticeships and university entry side by side. It also seeks to look at subject and sector differences, an angle which gives an additional edge to the data. But what might universities make of these analyses?  If potential applicants and their advisors take the messages on board then universities might want to think about how they present their offer to young people.  There are certainly issues here for careers advisors and college advisory schemes generally. However, there are caveats to the figures and to the interpretations we are invited to make of them, some of which are more clearly highlighted in the report than others.  The report looks only at young people and to that extent fails to cover the full range of student experiences. This is particularly important in the context of decline in university applications from mature students and arguably the role of education, further and higher, at a time of economic restructuring and ‘rebalancing’ where upskilling and reskilling is key issue.   Additionally, some of the data sources are difficult to track down in detail and could have been better referenced. However, what the report does cover it covers well and makes an important contribution to the ongoing debate on higher education funding.

The Graduate Premium

Let’s consider the key findings for students first of all. According to Skandia the ‘graduate premium’, that is the total lifetime earnings difference between a graduate and someone who does not go to university post A-levels, is higher than had been previously thought:

An average graduate should earn (at today’s prices) £1,611,551 over a working career of 45 years compared to £1,023,840 for an 18-year old entering the workforce (48 year career span) and £783,964 for a 16-year old (49.5 year career span).

The comparison between A-level entry into the workforce and graduate entry to the workforce is obviously an important one. However, we need to remember that there are still many young people who, although capable of going on to A-levels, opt out of school at 16. These data remind us how critical to life chances is the advice and guidance given to young people in the period 14-16.  The report (p5) highlights that someone entering the workforce at 16 will earn 10k per annum less than a graduate.  It is also important to compare graduates with A-level workforce entrants with similar qualifications.

The other key graduate related findings from the report include the observation that the range of student debt at graduation post-2012/13 enrolment is £33,975 up to £48,750, (reflecting in this analysis the differential loans available, not the pricing system of different institutions and courses)

Of course this focuses only on tuition and maintenance related debt. As the report makes very clear, and as everyone in the sector is well aware, this ‘debt’ is only repayable when the graduate starts earning over £21k and even then only at a rate of 9% of the margin between that threshold and total annual earnings. However, many students have other debts which are not subject to these generous terms. Students obviously run up significant overdrafts with banks which need paying off no matter what earnings are secured post graduation and there is certainly little or no prospect of banks writing those that debt off. Additionally many students borrow money from family members with repayment terms that are undocumented.

The Implications for the Treasury and the future of Funding Arrangements

The report goes on to point out that graduate starting salaries are not only well below the trigger of £21k but that the earnings threshold at which the debt would be repaid in full is very much higher than £21k and higher than had previously been assumed:

Despite this being a personal debt, unless a student starts earning £50,000 per year immediately upon graduation, it’s likely that a significant amount of this debt will be written off by the Government. The average first year salary for a graduate is £19,653.

As a consequence says Skandia there is a significant hole in the funding model:

In 30 years’ time the UK Government is likely to have to write-off debt of between £30,649 and £64,935 for every full-time university student who graduates in 2015.

As I wrote in a piece for The Guardian online last summer the current overall funding model is probably unsustainable for precisely this reason. This raises the prospect of this Government, or a future one, being unable to offer 100% deferred contingent loans for tuition. The temptation to get students to pay something up front might be irresistible. This would be funded from savings or borrowed as real loans at market rates, with repayment liabilities that were not earnings contingent. Such an arrangement really would deter applicants from the financially less well off. Setting up the machinery for the recovery of income-contingent loans and raising the ceiling on tuition fees was the hard part; making students pay something upfront is just a matter of political will. That has always, in my view, been the real danger of the privatisation of university funding: that we would move into a real loan system as in the United States. One other model is to reduce the number of students the Government is prepared to fund upfront. This is politically unpalatable especially in terms of the size of cut that would be required. Alternatively, a future administration might seek to combine these two models, guaranteeing deferred income-contingent loans for a fixed number but supporting self-funding through commercial ‘real loans’ for others. This would be a hugely socially regressive move, and should be contested at every level, but the logic of the privatised funding regime creates a momentum in that direction.


The report also looks at apprenticeships and interestingly finds that there is a huge range within this option in terms of lifetime earnings. For the construction and public service/health care sectors the figure is just over £1.5m while Retail, Manufacturing and Media sectors just under £1.2m.

The margin therefore between graduate earnings and apprenticeships though clear and significant is in some cases not as great as might have been imagined. However, there are some notes of caution that have to be sounded here. These lifetime figures in both cases are calculated on the basis of the assumption that all individuals enjoy an “unbroken work career”. This is a strong assumption to make both in terms of the idea that those trained in different sectors as apprentices, and that apprentices and graduates are equally likely to face unpaid unemployment. While the report acknowledges in a later section (p23) that unbroken employment is unlikely for anyone, it does not address the differential probability of broken employment for apprentices versus graduates. Nor does the report address the related issues of likelihood of accelerated promotion or of successfully setting up businesses/working freelance. In neither of these areas should we assume that all graduates have a clear benefit over all apprentices, of course. Further, in terms of the salary projections across different sectors for apprentices, the data reflect the fact that in the UK both construction and the public sector have been relatively buoyant over the last decade. In the future it might well be that the prospects for Arts, Media & Publishing and Tourism & Leisure apprentices will increase more than for other sectors. Beyond this is the need to recognise that apprenticeships and non-graduate entry are differently structured in the different sectors. Apprentice training and employment in construction is relatively well structured while the corresponding arrangements in the media and arts are much less so. This means that we are not comparing like with like, yet it is difficult to assess what this means for salary projections or security of employment. Like so much else in sector-related analyses, the salary data in this area are not necessarily as robust or stable as we would want them to be.

The November 2011 DBIS report Returns to Intermediate and Low Level Vocational Qualifications indicated that

The lifetime benefits associated with the acquisition of Apprenticeships at Level 2 and 3 are very significant, standing at between £48,000 and £74,000 for Level 2 and between £77,000 and £117,000 for Level 3 Apprenticeships.

The Skandia report suggests a greater premium for those who enter apprenticeships especially in construction and the public sector.

Of course many apprentices seek to go on to higher education, so in some cases the apprentice route to the workplace could well be via university.

Lifetime earnings calculations

There are some observations that need to be made about some of the detail around these lifetime earnings calculations. They do not perhaps undermine the broad message of Skandia but are likely to become more important as we look at specific sectors or degrees. And of course for individual young people the overall pattern is not really the main issue.

The first issue is the London factor. In the report the impact of study, living or working in London is reflected only in the higher rate that will be borrowed by students for maintenance if studying in the capital. What the report does not cover is that young people based in London not only receive higher loans but have higher starting salaries if they go on to work there. This obviously raises the net lifetime earnings premium, particularly in the context of tuition fees not being London weighted.

The 2011 High Fliers report confirms that 86% of the top 100 graduate employers have vacancies in London but only 56% have vacancies in the next highest region, the North west. Only 41% have vacancies in East Anglia. According to the most comprehensive survey by HECSU in 2010 the average salary nationally in 2009 was  £19,695 but £22,228 in London.

Similarly the 2011 HECSU report indicated that the average salary ranged from £17,720 to £23,335 with London reporting the highest average salary of £22,480.

This relationship between location of study and employment is increasingly an issue given that according to the 2011 ‘High Fliers’ report up to a third of all graduate jobs in blue chip companies go to “undergraduates who have had previous work experience with their organisations, such as internships, industrial placements, vacation schemes or sponsorships” (p12).

However, these data also need putting into context more generally in terms of the data source for salaries. HECSU quite understandably use the DLHE (Destinations of Leavers from Higher Education) survey which only measures the status of graduates six-months after graduation. It is widely recognised that this survey fails to fully capture the true early employment outcomes of those from non-traditional backgrounds or in non-traditional subjects or careers. For example, many graduates will accept low paid work in the media industry to get a foot in the door, some practical experience and to develop of networks. Other graduates take any employment in order to pay off bank or parental loans. Students with families who can pay off the bank overdraft or are able to subsidise children without an urgency to be repaid do not have this pressure. It would be interesting to examine the extent to which the DLHE overestimates or underestimates true graduate salaries (and consequentially the lifetime earning premium) in London compared to other regions.

Lifetime unemployment

The grimmest statistics in the report relate to long-term unemployment. The report estimates that:

If an 18 year old were to remain on Job Seekers allowance for their whole ‘would-be’ working life with zero part-time work, they would receive a total of £166,876 at today’s payment levels – a mere 10.3% of what an average graduate can hope to earn during their working life.

Further, those who work the minimum part-time hours  to supplement Job Seekers allowance would only earn around a quarter (25.6%) of a typical graduate’s income over the course of their working life.

Implications of the Skandia report

Overall this useful report will be seen as providing supporting evidence both for those who support young people entering higher education and those who argue that apprenticeships are a viable and undervalued alternative.

The report confirms that a university degree remains a strong predictor of higher lifetime earnings compared to non-graduate entry. This premium appears higher than had previously been estimated compared to A-level entry but lower than had been estimated in relation to the apprentice route. While all such salary calculations and projects are complex and depend upon a range of assumptions it can be argued that in the current economic climate with historically high unemployment particular youth unemployment, the geographical uneveness of the recession and public sector cuts and the changing structure of employment in different sectors, as those sectors change, we might need to reexamine some of our assumptions in relation to lifetime earnings calculations. In any event the overall burden on the Treasury through the Student Loan Book, is on the basis of this report likely to be higher than had previously been anticipated. Given the coalition’s focus on reduction of the deficit and the Opposition shift to supporting the need for austerity, the implications for higher education funding are significant. It would be easy to argue that focusing on cost, fees, earnings, taxation and deficits as this report does, drives the debate into consideration of a university education being purely a commodity to be bought, sold and paid for, it remains that a recurrent subsidy requirement of £9bn or higher is unlikely to be countenanced as sustainable by this or future administrations. What has to be put alongside this report and the kind of argument it makes, is the significant economic benefits to a nation a highly educated workforce provides. Almost any estimate with almost any reasonable assumptions would set a figure far in excess of £9bn in terms of domestic productivity and export earnings. Beyond the direct economic benefit are the multiple indirect benefits linked to reduced welfare, custodial, healthcare and other costs. And of course the inestimable public benefits for a society and its citizens of a nation that treats the value of education seriously and is recognised globally for so doing.

This post first appeared on Professor McGee blog.

3 responses to “First look at the Skandia Report: ‘First Steps to Wealth’

  1. The Skandia report confirms the findings of analyis undertaken by million+ and London Economics. The implications of the Coaliton’s univeristy funding system for England are profound not only for graduates but also taxpayers more generally. The Treasury will also lose out if those who have the ability are put off from studying for a degree. But as Patrick McGhee points out, this is not just about economics. The non-monetised and long-term benefits of studying for a degree are highly significant – for example, better health and improving educational aspiration of the next generation – just a pity that this was never factored into the equation.

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