1. This report provides an overview of the financial health of the higher education sector in England. The analysis covers financial results for the academic year 2011-12 and forecasts for 2012-13, as submitted to HEFCE in December 2012.
2. The report is being published to provide universities and higher education colleges with feedback on their financial performance in 2011-12 and their estimates for 2012-13, before they submit their updated financial forecasts in July 2013 (as requested in ‘Annual accountability returns 2012’, HEFCE 2012/23). The analysis also provides other stakeholders with information about the current financial health of the sector.
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. Following consultation with the sector, through the British Universities Finance Directors Group, we made the decision to continue with dual submission dates for the financial forecast data and financial commentaries. This year’s financial forecast data (in the form of material updates to the 2012-13 forecasts and forecast data for the academic years 2013-14 to 2015-16) and financial sustainability commentaries are due to be returned to HEFCE in July 2013.
5. The financial results for the sector in 2011-12 are sound overall, and stronger than projected by the sector in June 2012, but not as strong as the results reported for 2010-11. The improvement in the financial outturn when compared with projected performance may be due to prudent forecasting, which is a pattern we have seen in previous years. Overall the sector reported sound surplus levels, good cash balances and healthy reserve levels, despite the fall in public funding which saw its first real-terms fall in total income since financial information was first collected across the whole sector in 1994-95. It should be noted that there continue to be significant variations in the financial performance of individual institutions across the sector. The improvement in surpluses relative to the earlier forecast position provides some evidence that the sector made good efficiency savings during the year. The most significant of these savings related to staff costs, which fell in real terms for a second consecutive year in 2011-12.
6. In terms of student recruitment in 2012-13, recent analysis of Higher Education Students Early Statistics (HESES) data indicates that numbers of full-time undergraduate entrants will be about 9 per cent below student number control limits for 2012-13, with much of this shortfall being attributable to fewer students in the 2011 UCAS application cycle deferring entry until 2012-13. However, the sector’s financial forecasts show that the most significant fall is expected in the part-time undergraduate group, where numbers are expected to fall by 14 per cent across all years of study.
7. The projected financial results for 2012-13 indicate that the sector will remain in sound financial health overall, although the reductions in public teaching grant funding, shortfalls in student recruitment and projected increases in expenditure will cause surpluses to reduce sharply.
8. Capital expenditure in 2011-12 totalled £2,353 million, which was less than originally forecast. However in 2012-13 the sector is projecting an increase in capital expenditure to £3,142 million. This is despite reductions in public capital funding which have seen HEFCE capital grant funding falling from an average of £825 million per annum over the period 2008-11 to £299 million in 2011-12 (a reduction of 64 per cent).
9. Given the reductions in public capital grants, the sector is now funding a significantly higher proportion of capital expenditure from internal cash reserves or through other sources to help maintain the quality of infrastructure. In 2012-13, forecasts show that the sector requires £1,499 million from its own cash reserves, equivalent to 6 per cent of total income, to help fund the capital investment planned for that year. Some institutions will need to increase surpluses in future years above current levels to ensure that the quality of the infrastructure in the higher education sector does not deteriorate, which would harm its long-term sustainability.
10. Based on the revised financial forecasts for 2012-13, no institutions are close to the risk of insolvency. This is supported by independent institutional audits and the sector’s own projected continuation of positive cash in-flows and healthy cash-backed reserves. Strong liquidity is necessary for HEIs efficiently to manage the potential increased volatility and unpredictability of the new funding system and the increasing competition from international higher education institutions.
11. We will publish an update on the financial health of the sector in the autumn, when we have received and analysed all HEIs’ financial forecasts for the period 2013-14 to 2015-16.
12. No action is required: this report is for information.