Financial sustainability health check of the childcare sector in Scotland

The financial sustainability health check has collected evidence on the sustainability of the childcare sector and the impact of COVID-19.

It has been informed by detailed surveys of childcare providers, in-depth case study interviews with providers, and analysis of trends in registration data.

Executive Summary

1. The Financial Sustainability Health Check has collected evidence on the sustainability of the childcare sector, in particular on the impact of COVID-19.

2. The Health Check has been informed by evidence and analysis from: detailed surveys of childcare providers; in-depth case study interviews with a range of providers; discussions with provider representative bodies; and analysis of trends in registration data.

3. Updated information has also been published on the sustainable rates that local authorities have set for private, third and childminding services delivering funded early learning and childcare (ELC).

4. Since March 2020 childcare services in Scotland have been subject to varying levels of restrictions on their operations as a result of the COVID-19 pandemic. The nature of these restrictions, set out through public health guidance, has varied across different types of services at different times.

5. Childcare services in Scotland have been able to access a range of financial support during the pandemic. This has ranged from:

  • Targeted Scottish Government grant support for the childcare sector.
  • UK wide support schemes introduced by the UK Government; and
  • Scottish Government economy wide grant support schemes.

Key Findings from the Analysis and Evidence

6. The Health Check highlights that whilst all parts of the childcare sector have been impacted by the pandemic to some extent, the nature and scale of these impacts has varied across different types of services.

Trends in service registrations

7. Analysis of Care Inspectorate (CI) registration data highlights that third sector services have been disproportionately impacted during the pandemic. Whilst there has been year on year decreases in the number of registered third sector services since 2017 the highest annual rate of decline was reported in the year to June 2021 (with a decline of nearly 6% in registered services over this period).

8. Changes to registrations and capacity in private sector services have been broadly in line with pre-pandemic trends. There has been a continuation of the decline in childminding services although the pandemic has not, to date, led to increases in the cancellation rate of these services (with a very small easing in the rate in the year to June 2021). However, despite this, the continued increase in the rate of decline in childminding services highlights that there are also challenges in attracting new entrants to this part of the sector.

9. It will be important to continue to closely monitor these trends as two of the main UK Government financial support measures (i.e. the Coronavirus Job Retention Scheme (CJRS) and the Self-Employed Income Support Scheme (SEISS)) come to an end in September 2021. The Scottish Government’s position remains that these schemes should be kept in place for as long as they are required and that, if they are to be removed, the UK Government should set out well in advance what further assistance will be in place to support jobs and the necessary labour market transitions in sectors that are deeply impacted by COVID-19.

Assessments of service sustainability

10. In March 2020 the majority of providers were generally positive in their assessment of the financial sustainability of their services. However, considerable declines were reported across all types of providers in their assessments of sustainability between March 2020 and the time of completing this survey (the majority of respondents completed the survey in May 2021).

11. The largest decline in self-reported sustainability has been for school age childcare (SAC) only services. SAC only services and childminding services that are not delivering funded ELC were most likely to have considerable concerns over their current sustainability. Funded ELC services in the private and third sectors were most likely to give a higher assessment of their own sustainability.

Costs of delivery and charges to families

12. Average delivery costs have increased for all types of day care of children services since March 2020. Childminding services, in particular those delivering funded ELC, reported lower rates of change in average delivery costs compared to day care of children services.

13. Respondents reported a number of reasons for increased delivery costs including: increased cleaning costs, reflecting both additional supplies and additional staff time; purchasing PPE; reduced demand for the service; requirement to work with smaller cohorts (bubbles); staff having to self-isolate; higher supplier costs (food, utilities, rental charges, waste, etc); costs of paying staff the real Living Wage; and changes to let agreements.

14. Hourly charges to parents and carers for paid for childcare (i.e. not funded ELC hours) have generally increased for most types of provision. However, the surveys indicate that average increases in charges are, in general, lower than average increases reported in the costs of delivery across most service types. Some services reported that they delayed previous planned price increases due to the impact of the pandemic.

Demand and income

15. Overall levels of demand (measured as occupancy levels) is lower for all types of service compared to March 2020. The largest falls in demand have been in school age childcare (SAC) only services. At the time of the survey only 8% of SAC services were operating at 75% or more occupancy compared to 67% of SAC services in March 2020.

16. Demand has held up better for funded ELC services, with 55% of both day care of children and childminding services who deliver funded ELC operating at 75% or more occupancy at the time of the survey.

17. Reduced demand has resulted in lower levels of monthly income from fees paid by parents and carers (e.g. non-ELC income) for all types of services. The largest declines in average monthly income were reported for SAC only services with an average decline of 50% compared to the period to March 2020. The lowest levels of decline have been for funded ELC services in the private and third sector.


18. The Health Check highlights concerns about staffing, in particular loss of staff from private and third sector services (including some who have left the sector altogether) and challenges in recruiting suitably experienced staff. The majority of services who responded to the survey had lost at least one member of staff since March 2020. Services in the private sector were most likely (86%), and third sector services least likely (62%), to have lost a member of staff since March 2020.

19. Services that deliver funded ELC, and services in the private sector, were most likely to report that they currently had one or more staff vacancies in their setting.

20. Services in the third sector were most likely (70% of services), and services in the private sector least likely (37% of services) to report that they currently pay all of their staff at least the real Living Wage. However, 88% of services delivering funded ELC (across both the private and third sectors) indicated that they planned to pay all staff in their setting the real Living Wage from August 2021.

Other issues

21. Some respondents raised concerns over the planned removal of government financial support, in particular the CJRS. The majority of respondents to the survey reported that they had accessed support through the CJRS at some point since March 2020, with school age childcare services most likely (95% of services) to have drawn on the CJRS.

22. SAC only services were also most likely to still be accessing CJRS support (65% of services), with funded ELC services least likely (18% of services).

23. Most childminding services reported that they had accessed some grant support through the SEISS, with those services delivering funded ELC more likely to have received SEISS support than those who are not. However, some respondents indicated that the value of funding they receive through the scheme is low.

24. Being a funded ELC provider was highlighted by a number of respondents as a benefit in terms of their sustainability. However, some respondents felt that the hourly rate that they received from their local authority for delivering funded ELC did not cover their current costs of delivery.

25. Some services indicated that their financial reserves were, or are close to being, depleted and some had seen an increase in their debt levels as they have undertaken additional borrowing through various routes. This included accessing Government-backed loan schemes, in particular the Bounce Back Loan Scheme. Around half of private sector services had accessed a loan through this scheme and most indicated they will have started to make repayments by July 2021.

26. Challenges for specific operating models were also raised in the survey. In particular, committee based groups (usually playgroups in the third sector) were mentioned by a number of respondents who had concerns over their sustainability which were not always financial (for example, challenges in securing appropriate numbers of committee members, workload for committee members etc).

Next Steps

27. We will work with the sector and delivery partners to progress a series of actions to enable recovery and to support the long-term sustainability of the sector, including:

  • Delivering an initial programme of targeted business, financial management, marketing and human resources (HR) support for all types of childcare services. We will then work with the sector to build on the learning from delivering this initial investment in targeted support, and the broader range of existing services, to identify the best approach to supporting all types of childcare services – including community-based, third sector and childminding services – to strengthen their sustainability and to have the capacity to respond to future changes in the sector.
  • A series of actions to support recruitment and retention across all parts of the childcare sector, including developing a five year workforce strategy for the sector and the introduction of a Childcare Taster Programme as part of the National Transitions Training Fund in 2021-22.
  • Strengthen the process for local authorities to set sustainable rates for providers in the private, third and childminding sectors to deliver funded ELC. We will do this through working with partners to review and update the sustainable rates guidance; and exploring the potential for making additional support and advice available to local authorities, where that is required, to support the sustainable rates setting process and ensure that rates reflect the costs of delivery, provide scope for reinvestment and implementation of the real Living Wage commitment. We will work with COSLA to ensure that these changes are made in time to be reflected in the process for setting sustainable rates for August 2022.
  • We will work with the sector to undertake a review of the administrative requirements on providers, particularly for private, third and childminding sector services, and set out what action will be taken to reduce and simplify processes by no later than April 2022. This will build on, and expand, the action in Our Commitment to Childminding to review local tendering approaches and how recent changes, as part of Funding Follows the Child (FFtC), have impacted on small and micro-enterprises such as childminders.
  • To reflect the findings and next steps from the Health Check, and the finding from the Scottish Government commissioned Ipsos Mori report on ‘Perceptions of the impact of childminding services on child, parent and family outcomes’, which will be published in September 2021, we will update and refresh Our Commitment to Childminding. A steering group, which will include sector representatives, will be established to monitor progress in delivering the commitments in the plan.
  • Given the importance of let terms and conditions set by local authorities to the costs of running school age childcare and third sector services we will work with COSLA and local authority childcare teams to map the various existing approaches to the contract management of let agreements. This work will consider how let agreements are reached, and if and how they affect security and sustainability outcomes for childcare services.
  • We will undertake a review to explore how the impact of the core funding that each of the representative bodies receives can be maximised to support outcomes for children, childcare services, and to provide long-term sustainability for these bodies. We will report on the finding of the review before the end of February 2022.
  • We will monitor and assess the impact of recent changes to self-isolation requirements on trends in child and staff absence across the sector, and on service closures due to COVID-19, in order to identify where actions may be required to support the sector to adapt. To support this monitoring, it’s essential that services prioritise completing the Care Inspectorate’s weekly staff absence return and the Scottish Government’s fortnightly childcare survey.

28. We will continue to monitor developments across the sector, in particular as wider support schemes such as the CJRS and the SEISS come to an end, to assess any changes in underlying trends and any impacts on financial sustainability. This includes considering the financial implications for all types of childcare services if any further significant public health restrictions were to be introduced at a future date.

29. In developing plans for implementing new policy commitments over the course of this Parliament, particularly through a system of wraparound school age childcare and the introduction of an early learning offer for 1 year olds from low income households, we will design and fund services to ensure that they are provider neutral and there is a level playing field, learning the lessons from the 1140 expansion programme and the implementation of Funding Follows the Child.



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