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How to fix the apprenticeship levy

Flexibility is needed to fix the skills pipeline.

By Ed Almond

Apprenticeships are a valuable way of developing skilled engineers and technology specialists to maintain thriving and world-class UK industries, solve humanity’s global challenges and deliver tomorrow’s commercial opportunities. Their value is unquestioned in terms of career progression and development. But, as with everything, we need to assess and refine policies to ensure they are fit for purpose and realising their full potential.

We know that businesses have long been calling for improvements to the Apprenticeship Levy regime, including asking for greater flexibility for businesses to be able to reallocate unspent money. While the levy does work well for many employers, the 2023 Institute of Engineering and Technology (IET) Sustainability Skills Survey found that 45 per cent of engineering employers surveyed think there should be more flexibility, 47 per cent saying there should be greater awareness of how it works. In particular, they say it needs greater flexibility and support for SMEs, as they are often critical in the innovation system, but have least confidence in utilising the levy.

Skill shortages

Research from the 2023 IET Skills for a Digital Future Survey found that the UK has persistent and critical skills gaps in new technologies – with nearly half of employers agreeing that it harms productivity, and over a third concluding that it restricts growth.

In total, England faces a shortfall of 2.5 million highly skilled people by 2030. However, the Industrial Strategy Council’s research estimates that more than 80 per cent of the UK’s 2030 workforce has already left the education system. This means that upskilling and reskilling current employees will be critical to closing the UK’s technical skills gap, and hence driving the innovation that creates sustained economic growth. Over half of UK engineering employers in the IET Sustainability Skills Survey favour upskilling and reskilling as a way to reduce skill shortages, and report that this would have the biggest impact in addressing their skills shortages.

However, among employers in ten countries surveyed, the UK was the least likely to offer training in new technologies (15 per cent) – a critical skills gap in the future workforce.

Repurposing funding

Only around 4 per cent of employers are spending their full Apprenticeship Levy funding, according to City and Guilds, while a Freedom of Information request in 2022 revealed that, under the government’s ”use-it-or-lose-it” rules, over £3bn of unused Apprenticeship Levy funds had been returned to the Treasury since May 2019.

This is a clear missed opportunity: if employers were able to repurpose that money into upskilling and reskilling their employees, this would cover the annual training costs of around 200,000 employees and help substantially reduce the £1.5bn burden Stem businesses are facing due to skills shortages.

Upskilling and reskilling 200,000 more workers per year, particularly with micro-credentials in digital skills to harness new technologies such as AI, would also boost the productivity of the UK economy. If we use the government’s 2019 Employer Skills Survey estimate of there being a £2,500 annual training cost per (new) employee, with McKinsey’s low-end estimate of a 6 per cent productivity gain per worker and the OECD’s estimate of £43 of productivity per worker (GDP per hour worked), then we can estimate that a reformed Levy might generate around £858m a year from productivity increases alone.

Technology potential

“Digital twins” are a prime example of the potential of new technologies: the concept of a digital twin has existed in various forms since early space exploration, where it was referred to as a “mirrored system” and first used by Nasa nearly 50 years ago to rescue the Apollo 13 mission. The term “digital twin” itself appeared in the early 2000s. In the current workplace, digital twins, combined with other new digital technologies such as AI, can enable cutting edge solutions to various sectors. For example, the IET’s 2019 Digital Twins for the Built Environment report found that in manufacturing they can provide predictive maintenance models and reduce downtime by 30 per cent. The concept has huge potential for the UK, but the skills deficit has led to a lack of adoption, meaning it is not being harnessed to its full capability.

Our sustainability skills survey shows that, compared to other countries surveyed, UK engineering employers are least likely to recognise digital twins as a priority technology for reaching net zero, with only 3 per cent from the construction sector identifying it as important. Furthermore, less than a quarter of respondents think that the UK has the skills needed in this field. It is a clear example of an area where skill Allowing unused funds to be redistributed to skills training would catalyse growth shortages are having an impact on the UK as an innovation powerhouse.

Micro-credentials

The UK should focus on support for upskilling and reskilling for lifelong learning by establishing a small funds initiative alongside the Apprenticeship Levy, which will enable unused funding to be rapidly and effectively re-purposed depending on an employer’s skills gaps.

Alongside this, a series of microcredentials – bespoke short courses – in areas of cutting-edge technology such as digital twins or AI would enable UK employers to remain competitive and agile in a changing environment. Short training courses would also allow employers to gain a greater awareness of new technologies and how they can be utilised by their business in an informed way – without needing to invest in expert training, which can be expensive and time consuming before yielding results.

Flexibility is key

Creating a small funds initiative alongside the Apprenticeship Levy to allow unused funds for short courses in areas of critical skill shortages, such as new digital technologies, would support UK businesses’ innovation and growth, as upskilling is foundational to an approach which puts innovation at the heart of the UK economy. Training often takes time that workers and businesses, particularly SMEs, don’t always have when it comes to new technologies such as AI. That is why it is important that this model brings greater agility to the current system.

The next decade presents challenges on national security and net zero that will require the mass mobilisation of new digital and sustainability-themed technologies. This requires government to provide a skills training system that focuses on what employers are asking for – flexibility. Small but important reforms to the Apprenticeship Levy would allow employers to upskill and reskill in priority areas. Giving employers the flexibility to decide where funds are used will amplify the economic benefits of upskilling.

This article first appeared in our print Spotlight report on Skills, published on 2 February 2024.

[See also: Bridging the skills gap]

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