Report 99/46

Holdback of HEFCE grant 1999-2000

Executive summary

1. This document explains how we will monitor whether institutions are meeting their funding contract with the Council, and the action we will take if not. Each institution's funding contract is contained within its funding agreement, which specifies terms and conditions of our funding.

Key points

2. There are four constraints on recruitment within the funding contract, although not all apply to all institutions. They are:

1. The contract range. Under our funding method for teaching, we calculate a standard level of resource for each institution, and an assumed resource (actual HEFCE teaching grant plus an estimate of income from fees). The percentage difference between assumed and standard resource for the academic year 1999-2000 must be within a given range - known as the contract range.
2. The maximum student number (MaSN). This is an upper limit for the student numbers on full-time undergraduate and all initial teacher training courses.
3. The sub-degree target. This only applies to institutions that have been awarded additional places below degree level for 1999-2000. Those institutions need to ensure that their total number of students on sub-degree programmes is not lower than the aggregate of their sub-degree student numbers in 1998-99 plus the additional sub-degree places allocated for 1999-2000.
4. The contract full-time equivalent (CFTE) number for students on undergraduate medical and dental courses to which a quota applies, setting minimum numbers.

3. These measures are designed:

1. To ensure that public expenditure on higher education remains within the overall spending limits set by the Government each year.
2. To ensure that resource levels do not fall to the point where the quality of the student experience is put at risk.
3. To encourage the expansion of higher education below degree level.

4. To achieve these objectives we will withhold grant from an institution which:

1. Is found to be above its contract range.
2. Recruits above its MaSN plus margin.
3. Under-recruits against its CFTEs for medicine and dentistry.

5. In cases where an institution:

• is found to be below its contract range
• does not recruit sufficient student numbers on courses below degree level

6. In relation to paragraphs 4 and 5, we will give institutions an opportunity to tell us about any material changes in definitions or mitigating factors.

Action required

7. No response is required.

Background: the funding contract

8. We expect each institution to provide a certain level of teaching activity in return for our funding. The Government also requires us to set overall targets each year: a target for the maximum number of full-time undergraduates, and a target for the minimum number of students on courses below degree level (whether funded by the HEFCE or not). Full-time undergraduate numbers are regulated through a maximum student number (MaSN) for each institution.

9. There are four separate elements of the funding contract, although not all apply to every institution:

10. In addition, we monitor separately recruitment against the additional student places awarded in response to institutional bids.

11. We monitor recruitment, and may withhold grant if an institution under-recruits or over-recruits against these measures. The details of this funding contract are set out in the funding agreement we have with each institution. For higher education institutions, the funding agreement forms Part 2 of the Financial Memorandum between the HEFCE and institutions.

The contract range

12. Our funding method for teaching is designed to fund similar activities at similar rates across the universities and colleges we fund. To do so, we calculate a standard level of resource for each institution and compare it with the resources that the institution receives (actual HEFCE teaching grant plus an estimate of income from fees). The method is designed to ensure, for all institutions, that this 'assumed resource' comes within a tolerance band of ±5 per cent of the standard. Where institutions fall outside the band, they are expected to move within it ('migrate') over an agreed period (although adjustments to this are made to meet the special funding requirements of certain institutions). The funding contract seeks to support this objective.

13. The funding method regulates the resource per student. Resources will vary according to the mix of students between subjects, and mode and level of study. This means that we cannot express the funding contract in terms of a minimum number of full-time equivalent (FTE) students to be taught by each institution.

14. Instead, we express the main element of the funding contract in terms of the percentage difference from the standard resource. We set a range for each institution, referred to as the contract range. For many institutions, this will be the same as the tolerance band, that is, between -5 per cent and +5 per cent of the standard. However it may be larger for those institutions that are migrating towards the band.

15. To monitor institutions' positions, we will recalculate both 1999-2000 standard resource and 1999-2000 assumed resource for each institution. To do so we will use the FTE data returned in the December 1999 aggregate student recruitment surveys (1999 Higher Education Students Early Statistics (HESES) Survey for higher education institutions, and the 1999 Higher Education in Further Education: Students (HEIFES) Survey for further education colleges). The funding agreement defines the FTE measure.

Calculation of standard resource

16. Standard resource is calculated by multiplying the weighted FTE student numbers for each institution by a standard unit of funding known as the base price. FTEs are weighted by subject-related price group, and by a variety of student-related and institutional premiums. The student-related and institutional premiums are shown below. The funding agreement specifies the weights which apply to FTEs at each institution.

17. The base price for 1999-2000 is £2,682.

Calculation of assumed resource

18. Assumed resource comprises actual HEFCE funding for teaching, plus an estimate of fee income. We estimate fee income by multiplying the assumed fee rates by the FTE data returned in the HESES or HEIFES surveys. The funding agreement defines the assumed fee rates.

19. Our website contains templates which calculate standard and assumed resource for 1999-2000. These are blank forms of the individual recurrent grant tables for teaching, separately for higher education institutions and for further education colleges, and may help institutions to assess the effects of different recruitment patterns. The templates can be found at www.hefce.ac.uk, under 'learning & teaching'.

Quantifying divergence from the contract range

20. We express assumed resource as a percentage of standard resource. If, when we recalculate this using 1999-2000 recruitment data, the percentage difference is within the contract range, there will be no further adjustment to the HEFCE grant notified in the July final allocations. If it is outside the contract range, we quantify the extent of divergence as the variance between the percentage difference and the contract range, multiplied by the recalculated standard resource.

Example 1

• an institution has a contract range between -12 and +5 per cent
• its assumed resource is found to be 10 per cent below the standard (-10 per cent)
• therefore the institution is within its contract range and no adjustment to grant will apply.

• an institution has a contract range between -5 and +5 per cent
• its assumed resource is found to be 6.3 per cent above the standard (+6.3 per cent)
• therefore the extent of divergence is the difference between 6.3 and 5 = 1.3 per cent of standard resource.

• an institution has a contract range between -8.7 and +5 per cent
• its assumed resource is found to be 10.5 per cent below the standard (-10.5 per cent)
• therefore the extent of divergence is the difference between -10.5 and -8.7 = 1.8 per cent of standard resource.

21. However, the action we take in relation to holdback of grant as quantified above will depend on whether an institution is above or below its contract range, and other particular institutional circumstances.

Holdback of grant for institutions above the contract range

22. Where the percentage difference from standard resource is above the contract range, institutions will be liable to holdback of grant. An institution's 1999-2000 grant for teaching will be reduced by the total amount of holdback for exceeding the contract range, calculated as in example 2 above. This reduction will be consolidated into the 2000-01 grant for teaching. The reduction in 1999-2000 grant will be subject to the current moderation rules - that is, the rules which limit the year-on-year reduction in overall funding so that no institution is required to make unmanageably large short-term cuts. No institution will receive a reduction in resource (HEFCE funding for teaching and research plus regulated tuition fee income) of more than 2 per cent in real terms (0.5 per cent increase in cash terms).

23. We will not withhold grant from an institution which exceeds its contract range if the reduction in funding would be less than £50,000, or 10 per cent of total funding for teaching, whichever is lower.

Institutions below the contract range

24. We will not apply holdback to institutions below the contract range. This is because such institutions are spending less on their teaching programmes than our funding model assumes to be consistent with the maintenance of quality, so withholding grant would only compound that divergence.

25. We will, however, want to discuss with these institutions why they have not met the contract range, and will ask them to provide an action plan specifying how they intend to meet it in future. If this is the first year in which they have come below their contract range, we will work on the presumption that institutions will take the action necessary to come within the range. So long as the institution provides a credible action plan setting out how that will be done, and comes within the contract range set for the following year (year 2), no further action will be taken. In the unlikely event that either an action plan is not provided, or not implemented, we reserve the right to take appropriate action at that stage.

Migration trajectories

26. The funding contract with each institution also identifies a 'migration trajectory'. This sets the provisional contract range (subject to annual review) for each year up to 2003-04 and shows how we expect the institution to move within the ±5 per cent tolerance band around standard resource over an agreed period. The trajectories will only be extended in exceptional circumstances. Institutions which are currently migrating from a position below the tolerance band should bear in mind that if they come below their contract range in 1999-2000, they will need to migrate even further the following year. For example:

1. An institution's assumed resource is currently 25 per cent below the standard (-25 per cent). It has a four-year migration trajectory as follows:

   Academic year	Contract range (provisional from 2000-01)
   1999-2000	-20% to +5%
   2000-01	-15% to +5%
   2001-02	-10% to +5%
   2002-03	-5% to +5% (the tolerance band)

2. When resource levels are recalculated based on actual recruitment in 1999-2000, the assumed resource is found to be still at -25 per cent (5 per cent below the contract range) and the institution is therefore required to submit an action plan. This will need to show how it will migrate by 10 per cent to achieve the contract range of -15 per cent to +5 per cent for 2000-01.

Institutions with small numbers of HE students

27. We recognise that for institutions with only a small amount of funded HE provision - notably further education colleges with few HE programmes - small changes in recruitment can have a significant effect on their percentage difference from standard resource. To allow for unpredictable variations in recruitment, we will not apply holdback of grant where such institutions come within an acceptable margin. This margin will be calculated as equivalent to 10 FTE students (reflecting the average mix of students at the institution between price group, mode, level and course length, and the institution's own part-time load factors). It will apply to institutions with 400 or fewer FTEs funded by the HEFCE.

Holdback for recruiting above the MaSN margin

28. Table B of the funding agreement shows each institution's MaSN and margin. Recruitment above the MaSN plus margin will result in holdback, save where the increase can be shown to be wholly attributable to students who are funded from public sources other than the HEFCE or the Teacher Training Agency (TTA) - for example, those funded by the NHS. The funding agreement defines which students count towards the MaSN. As in previous years, forecast student numbers will count towards it. The MaSN represents a total for the full academic year and includes students who do not complete their course of study.

29. If any institution recruits above the MaSN plus margin given in Table B, we will reduce its grant for 1999-2000 (save in the circumstances stated in the previous paragraph). The reduction will be based on the amount of tuition fee income attributed to the excess numbers, at a rate of £1,025 for each full-time student and £510 for each sandwich year-out and part-time student.

30. The reduction in grant will be applied by us or the TTA or split, to reflect the extent to which the over-recruitment is attributable to initial teacher training courses leading to qualified teacher status.

Recruitment below the MaSN

31. We will not reduce an institution's grant in 1999-2000 if it under-recruits against the MaSN (unless this results in an institution coming above its contract range - see paragraphs 22 and 23). However, we may take into account such under-recruitment when determining future MaSN allocations. Institutions should expect their MaSNs for 2000-01 (before adjustments for, for example, subjects where intake targets are set) to be either the same as their 1999-2000 MaSN, or 2 per cent above their actual recruitment level in 1999-2000, whichever is the lower.

Holdback for recruiting below the sub-degree target

32. Institutions which have been awarded additional funded places below degree level for 1999-2000 have been given a sub-degree target, expressed in FTE terms. This is to ensure that any additional places below degree level awarded for 1999-2000 are truly additional, and thereby help to expand sub-degree numbers - the objective set by the Government, and reflected in the HEFCE 1998 grant letter. Table B of the funding agreement specifies the sub-degree target, where it applies. The funding agreement also defines which students count towards the target. As with the MaSN, the sub-degree target represents a total for the academic year and includes both forecast student numbers and students who do not complete their course of study.

33. We recognise the difficulties for institutions in predicting the level of demand for sub-degree programmes, particularly where provision nationally is being significantly expanded. So we will take the following approach:

1. We will not apply any holdback of grant if institutions' sub-degree recruitment is less than 10 per cent, or 10 FTEs (whichever is the greater), below their target.
2. If recruitment falls further below the target than this, we will ask the institution for an action plan setting out how it proposes to achieve the target in the following year.
3. If institutions again fall short in 2000-01, they will become liable for holdback. Institutions should expect their sub-degree target for 2000-01 to be no less than that for 1999-2000.
4. We will accept cases for mitigation of holdback where institutions can provide evidence that any shortfall is attributable to reductions in student places below degree level that are supported from other public sources, such as DipHE nursing/midwifery provision funded by the NHS, or INSET(QTS) provision funded by the TTA.

34. Shortfalls in recruitment below degree level may result in an institution coming above its contract range and, therefore, being liable to holdback as described in paragraphs 22 and 23.

Calculating holdback against the medical and dental CFTEs

35. The Government expects the HEFCE to control student numbers in medicine and dentistry. For this reason, we will continue to set a separate contract for students on quota-controlled undergraduate medical and dental courses. This is expressed as a minimum contract full-time equivalent (CFTE); recruitment below this figure will lead to holdback of grant.

36. Any shortfalls in the medical and dental CFTEs will be subject to holdback at an average rate based on the standard five-year medical course. This is calculated as two-fifths of the standard price for price group B, and three-fifths of the standard price for price group A, minus £1,025 fee income. The rate for 1999-2000 is therefore £8,362. Recruitment will be monitored using data returned in HESES99. Any such holdback will be an in-year reduction in grant only: it will not affect the baseline funding for the following academic year.

Verification

37. Where our calculations suggest that grant should be withheld, we will notify institutions of the amount. We will then give them the opportunity to verify the data used, and to tell us about any material changes in definitions or mitigating factors that may have influenced the calculated level of holdback. Changes in definitions could mean that the data collected in the HESES/HEIFES surveys for monitoring compliance with the contract are not entirely consistent with the way the contract has been set. For example, there could be changes to the classification of particular students between price groups. Where any such definitional changes result in an increase in the calculated level of holdback, we will accept them as grounds for mitigating holdback.

Effect on grant

38. We will make adjustments to the 1999-2000 grant in instalments between April and July 2000. Any institution which would not be paid sufficient funds during these months to cover the holdback will be invoiced for the balance.

Further information

39. Institutions should address enquiries to their HEFCE higher education adviser.