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Financial health of the higher education sector 2011-12 to 2014-15 forecasts

November 2012 | ref: 2012/30

To:

Heads of HEFCE-funded higher education institutions

Of interest to those responsible for:

Audit, Estates, Finance, Governance, Management, Planning
This report provides an overview on the financial health of the higher education sector in England. The analysis covers the financial forecasts for the period 2011-12 to 2014-15, as submitted by higher education institutions to HEFCE in December 2011 and June 2012.

Executive summary

Purpose

1. This report provides an overview on the financial health of the higher education sector in England. The analysis covers the financial forecasts for the period 2011-12 to 2014-15, as submitted by higher education institutions to HEFCE in December 2011 and June 2012.

2. The report is being published to provide universities and higher education colleges with feedback on the sector’s projected financial performance. The analysis also provides other stakeholders with information about the sector’s current and future financial health. It supersedes our previous analysis published in March 2012 (‘Financial health of the higher education sector: 2010-11 financial results and 2011-12 forecasts’, HEFCE 2012/05).

Key points

3. Higher education institutions (HEIs) in England are required to send us their annual accountability returns in December each year. These returns form a significant part of the way in which HEIs can demonstrate accountability for the public funds distributed to them. The accountability returns enable HEFCE to reassess HEIs’ overall risk assessments and to ensure that HEIs are meeting their accountability responsibilities.

4. For this year’s annual accountability returns we deferred the submission of financial forecast data (relating to the academic years 2012-13 to 2014-15) and financial sustainability commentaries until June 2012. The decision to defer submission was taken due to the degree of uncertainty in the higher education sector about, among other things, student number limits, future HEFCE funding and student recruitment in the new fee regime. While not eliminating all of the uncertainty, we considered that deferral would enable institutions to produce more reliable forecast information in June 2012 for both HEFCE and internal use, because by then institutions would have known the outcomes of the HEFCE grant letter from the Department for Business, Innovation and Skills (BIS) and would have a better indication of student demand in 2012-13. A consultation on our future teaching funding methodology was also under way at that time.

5. As well as submitting forecasts for the period 2012-13 to 2014-15, we requested that institutions send us any material updates to their 2011-12 forecasts. All institutions took the opportunity to send us updated forecasts for 2011-12.

6. As previously reported, the overall financial results for the sector in 2010-11 showed a stronger financial position than previous years. The projected sector performance in 2011-12 is not as strong as the results for 2010-11, but is significantly better than forecast by institutions in December 2011. This improvement in projected performance may be due to greater certainty of outcomes and prudent forecasting earlier in the financial year. Given that the latest forecasts have been submitted so close to the financial year-end, it would be reasonable to assume that these projections provide a reliable indicator of the financial outturn for the sector in 2011-12.

7. The overall financial results projected by the sector in the remainder of the forecast period (2012-13 to 2014-15) are sound overall though this is heavily dependent on the sector achieving its student recruitment targets. It is too early to say what the effects of the funding reforms on students and institutions will be. However, information we have received from UCAS and HEIs indicates that student demand is lower in 2012-13 than forecast by the sector and that some institutions are experiencing some pressures on student recruitment, suggesting that enrolments will be down by more than planned. This increases the risk that financial performance for these institutions will be poorer than forecast. We currently do not know whether the reduction in enrolments is a one-off or permanent, and this will be carefully monitored over the coming year.

8. In 2012-13 forecasts show the first major fall in public grant funding which is countered by a significant increase in fee income from home and European Union (EU) students. This comes at a time when the sector is projecting increases in expenditure, and when many institutions are planning to invest substantial sums into their capital programmes to make the necessary improvements in their estates. The effect of this is a sharp reduction in surpluses and a fall in cash levels. Thereafter, surpluses and cash flow from operating activities are expected to rise. Some of this rise is attributed to the continued strong growth in fee income from non-EU students.

9. There is a risk that the widely reported revocation of the London Metropolitan University Tier 4 licence could affect the UK’s reputation and lead to a decline in overseas applications. Universities UK and the Government are aware of this risk, and are taking action to promote UK higher education abroad. It is too early to predict whether there will be a reduction in demand in future, but fees from overseas students are a significant source of income for many HEIs so this is an important issue for the sector.

10. In terms of short-term viability, the forecasts show that the sector is in a sound surplus position overall. However in an increasingly competitive environment and with reductions in public capital funding, some institutions will need to increase surpluses even beyond those currently achieved to finance future capital investment and maintain their long-term sustainability. If surpluses do not increase there is a risk that the quality of the infrastructure in the higher education sector will reduce, which will harm its long-term sustainability.

11. Based on the financial forecasts no institutions are presently close to the risk of insolvency. This is supported by independent going-concern opinions of institutions’ external auditors and the projected continuation of positive cash in-flows and healthy cash-backed reserves. Strong liquidity is necessary for HEIs to efficiently manage the potential increased volatility and unpredictability of the new funding system and the increasing competition from international higher education institutions.

12. The sector has, over recent years, shown that it can deliver efficiencies. For example it has reduced its cost base with pay costs being curtailed after a period of strong growth. These efficiency measures have helped support the current financial performance of the sector. It will be important for the sector to maintain this efficiency drive in order to deliver a long-term sustainable future.

13. The financial forecasts submitted by the sector in June 2012 may not have been able to include assumptions about the medium-term effects of the UK economy. There continues to be a risk that future public funding of higher education could be constrained if the overall economic climate does not improve.

Action required

14. No action is required: this report is for information.

Enquiries should be directed to:HEFCE assurance consultants or assurance advisers

Page last updated 8 November 2012

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