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Executive summary


1. This report provides an overview of the financial health of the HEFCE-funded higher education sector in England. The analysis covers the financial forecasts for the period 2013-14 to 2016-17, based on information submitted by higher education institutions (HEIs) to HEFCE in July 2014.

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 2014 (‘Financial health of the higher education sector: 2012-13 financial results and 2013-14 forecasts’, HEFCE 2014/02).


3. The analysis provided in this report is based on financial forecasts submitted by HEIs. The accuracy and reliability of these forecasts depends on the assumptions and strategies adopted by individual HEIs in response to the latest higher education reforms and current prevailing market conditions. The sector is not assuming, within its financial forecasts, any significant changes in public funding within the period to 2016-17.

Key points

4. The financial results for the higher education sector in 2012-13 showed a sound position overall. However, the sector-wide picture encompassed a wide range of financial results across institutions.

5. The latest forecasts for 2013-14 indicate that, while total income is expected to rise, increases in staff costs and other operating expenses will cause projected surpluses to fall from £943 million in 2012-13 (3.9 per cent of income) to £769 million (3.0 per cent of income). Cash flow from operating activities and liquidity levels is also expected to be lower, at 7.5 per cent of total income and 114 days respectively (compared with 8.3 per cent and 123 days reported in 2012-13).

6. Overall, the projections indicate that the sector will be financially stable in the forecast period. While discretionary reserves are projected to increase each year to 2016-17, when compared with total income the sector is forecasting lower operating surpluses in the forecast period than have been reported in the preceding three years.The sector also expects its liquid funds to fall from £7.4 billion as at 31 July 2013 to £5.5 billion as at 31 July 2017, and at the same time expects borrowing to increase from £6.2 billion at the end of July 2013 to £8.3 billion by the end of July 2017. This trend is not sustainable in the long term.

7. Although liquidity is not a concern for most HEIs at this time, strong liquidity is necessary to efficiently manage the potential increased volatility and unpredictability of the new funding system and the increasingly competitive home and overseas markets. We will continue to monitor liquidity levels in the sector to assess whether HEIs can maintain sufficient cash levels to manage their risks effectively.

8. The sector is planning to invest over £15.2 billion in infrastructure projects during the next four years, an average annual investment of £3,811 million. This is nearly 50 per cent higher than the previous four-year average (2009-10 to 2012-13).

9. These investments will be partially funded by public capital funding for teaching and research, which is expected to increase from £420 million in 2013-14 to £440 million in 2014-15. However, current public capital funding is now significantly lower than historical levels, requiring institutions to deploy more of their own resources or raise finance through external borrowing to maintain and enhance their estates. This places greater pressure on HEIs to generate higher surpluses to remain sustainable.

10. In 2013-14, forecasts showed that the sector required £1,703 million from its own cash reserves (equivalent to 6.7 per cent of total income) to help fund the capital expenditure plans for that year. This was affordable as long as forecasts and income levels were achieved. However, financial projections for 2014-15 to 2016-17 show that cash inflows from operating activities will not be sufficient to fund the major capital investments planned for those years, The sector is therefore forecasting increased borrowing and greater utilisation of its cash reserves.

11. It is also important to recognise that the forecasts assume that the capital markets will continue to have confidence in the sector, which depends upon their risk assessments of the sector and individual HEIs. Strong surpluses, liquidity and sound regulation are required to achieve this. Without it significant elements of the investment programme are at risk.

12. Following the Government’s announcement in 2013 that 30,000 additional student places would be available in academic year 2014-15, student number projections show only a marginal increase in full-time undergraduate numbers (across all years of study) in 2014-15. Greater increases are expected in 2015-16 and 2016-17, reflecting the removal of the student number control from 2015-16, although institutional projections across the forecast period vary a great deal.

13. Projections show that the sector expects numbers of overseas (non-European Union) students to grow between 4.8 and 5.8 per cent per year over next four years, with overseas fee income projected to rise from £2,997 million in 2012-13 (12.3 per cent of total income) to £4,176 million in 2016-17 (14.3 per cent of total income). The latter represents an average annual increase of 8.6 per cent over the forecast period.

14. Overseas student data published by HESA earlier in the year indicated a slowdown in the growth of international full-time undergraduate entrant numbers in 2012-13 which, if it were to continue, would increase the risk of HEIs not delivering the level of growth projected in these forecasts, which would have a significant adverse impact on the sector’s income and surplus projections.

15. Given the current economic environment, the sector is increasingly focused on getting value for money from public funds, and (for the benefit of students) from tuition fees. As part of our annual accountability process, we ask institutions to submit value for money reports to us showing how they make the best use of available resources. Our analysis of the data from these reports indicates that the sector has made an estimated cumulative saving of £716 million over the last two academic years. This provides evidence that the sector is continuing to deliver substantial value-for-money savings that help to support its current financial position. These will be particularly important given the staff cost and pension pressures currently faced by the sector.

16. The affordability of future pension costs is a key issue for HEIs, with the sector facing considerable uncertainty over the value of its pension scheme deficits, and the level of pension contributions required to ensure the financial sustainability of these schemes.

17. There continues to be a wide variation in the financial performance of institutions across the sector in the forecast period. The sector continues to operate on fine margins, with projected operating surpluses ranging between 2.4 and 3.4 per cent of total income in the forecast period. This means that even small changes can have a material impact on financial performance. Despite the small margins, the short-term viability of institutions is not a concern presently, and 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, although these are reliant on institutions achieving home and overseas student recruitment targets and on the level of public funding not deteriorating.

18. Analysis of the sector’s latest Transparent Approach to Costing reporting shows that, in the medium to long term, some institutions will need to generate larger surpluses to make progress towards covering the full economic costs of their activities and maintaining sustainability. Overall, the sector reported a sustainability gap (difference between the value of the economic adjustments and the sector operating surplus) of £869 million in 2012-13: this represents a deterioration against the position in 2011-12, when the sustainability gap was £726 million.

19. While the sector has shown itself to be adaptable in coping with change, there continue to be some significant challenges and risks for the future. These include the sector’s capacity to generate enough financial headroom to sustain the investment in infrastructure and student services necessary to respond to increasing domestic and overseas competition. To sustain the required investment in its infrastructure, the sector will need to generate higher surpluses in the longer term. It is worth noting that all HEIs are charities, and therefore any surplus generated will be reinvested into the HEI for the benefit of its students and other stakeholders.

20. Increased uncertainty over future government funding, student recruitment levels (following the removal of the student number control) and the vulnerability of overseas student income will also require institutions to aim for higher surpluses in future. This uncertainty is likely to lead to greater volatility of forecasting and a widening of differences in financial performance between institutions.

Action required

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

Date: October 2014

Ref: 2014/26

To: Heads of HEFCE-funded higher education institutions

Of interest to those
responsible for:

Audit, Estates, Finance, Governance, Management, Planning

Enquiries should be directed to:

HEFCE assurance consultants or assurance advisers