Dear Vice-Chancellor or Principal
Annual accountability return requirements: Financial forecasts submission
1. This letter clarifies our requirement for the submission of financial forecasts and commentary as part of our annual accountability returns requirements. A response is required from all higher education institutions by Thursday 31 July 2014. We will send detailed guidance on how to make the submission of annual accountability information directly to heads of finance by the end of May and how to access the financial forecast tables.
2. Institutions are asked to submit full financial forecasts for the three academic years from 2014-15 to 2016-17, and to update the 2013-14 forecasts submitted in December. These should take into consideration our recent grant announcements and any other information that the institution considers pertinent.
Financial commitments threshold
3. We recently published ‘Analysis of responses to consultation on HEFCE’s financial memorandum with institutions’ (HEFCE 2014/09). Following this, and after further dialogue with the British Universities Finance Directors Group (BUFDG) and key lenders to the sector, we are planning to introduce a new financial commitments threshold, to replace the current 4 per cent Annualised Servicing Cost threshold with effect from Friday 1 August 2014.
4. The new threshold will be based on an institution’s multiple of earnings before interest, tax, depreciation and amortisation (EBITDA), as defined by BUFDG. As a transitional arrangement to the new system, where an institution has already agreed financial commitments with us that exceed the revised threshold, we will automatically increase the threshold and write separately to confirm this.
5. We have included a table in the financial forecasts tables which will automatically calculate your institution’s average EBITDA over the period of the forecast, although you should check this calculation for accuracy. This average is multiplied by five to arrive at your institution’s financial commitment threshold. Below the threshold calculation, institutions should complete the box showing the value of outstanding financial commitments (including all long-term and short-term commitments on the balance sheet) as of 31 July 2014, plus any undrawn facilities agreed with lenders.
6. Where the institution plans to increase its commitments beyond its calculated threshold or higher threshold as of 31 July 2014, it should apply to have a revised financial commitment threshold approved, in accordance with the revised financial memorandum (to be known as the Memorandum of Assurance and Accountability), which will be published in June.
7. We request that institutions include future financial commitments in their forecasts and forecast commentary as far as possible, and check Table 7 of the financial forecasts tables to ensure that the borrowing information is accurate up to 31 October 2013. Because we are moving to a threshold based on EBITDA, there is no need to amend annualised servicing cost values.
Financial forecast commentary
8. In the commentary that accompanies the financial forecasts, institutions must answer the following questions, as listed in paragraph 56 of ‘Annual accountability returns 2013’ (HEFCE 2013/23).
- Explain how the institution is ensuring its
- sustainability (including the institution’s strategy for this),
- quality of teaching and research,
- management of key risks, including cash flow management
- proposed borrowings or material leases
- investment in estates and infrastructure.
- Explain the assumptions about student recruitment and fee income over the period of the forecasts, including how the institution is mitigating any risk and what scenario planning or sensitivity analysis has been undertaken.
- Explain significant movements (±10 per cent in any one year) in the income and expenditure account, and material changes on the balance sheet (including the detail on any material exceptional items). In particular, please provide an explanation for material increases in staff costs or numbers.
- Explain the key assumptions made in developing the financial forecasts.
9. We expect the commentary to explain any significant differences between the 2013-14 projected outturn and that submitted in December 2013.
10. Some concern has been expressed in the sector about the cash-flow implications of the current funding arrangements, and the need to borrow as a contingency in the short term. Concern has also been raised about the financial risks arising from pensions arrangements. To help us and the sector to better understand the risks and to present these to stakeholders, we are asking institutions to provide enhanced information about financial commitments, the effect on liquidity of the current funding arrangements, and the impact of expected increases in employers’ pension contributions, as follows.
- Financial commitments: We request that institutions include better information about the future financial commitments they are planning to undertake (on and off the balance sheet). Although we have always requested this information in the commentary, many institutions do not provide adequate information.
- Liquidity:For most institutions, the new fee regime will apply to all cohorts of students at some stage during the forecast period. Do you expect the current pattern of cash payments to create a need for short-term liquidity support (such as overdraft or revolving credit) from your banks? If so, over what period or periods each year will you need that support, and what is the forecast maximum level?’
- What assumptions have you made in determining forecast pension costs?
- What scenario planning or modelling have you carried out in respect of longer-term rises in pension cost?
- What cost-reduction plans do you have to enable you to manage increased pensions costs in the longer term?
11. We expect the financial forecast submission to have been approved by the governing body.
12. We will send detailed guidance on how to make the submission of annual accountability information directly to heads of finance by the end of May.
13. This year we have been issuing annual risk assessment letters to institutions in March, April and May, following our assessment of their December accountability returns. However, if issues are raised in an individual institution’s forecasts, or at any other time in the year, that materially affect its future financial sustainability, this may lead to a review of the institution’s risk status and a revised risk letter.
14. We will issue guidance about the annual accountability returns process for 2014 at the end of September.
Professor Madeleine Atkins