1. This report provides an overview of the current financial health of the HEFCE-funded higher education sector in England. This does not include directly funded further education, or other colleges or alternative providers of higher education. The analysis covers financial results for the academic year 2013-14, as submitted to HEFCE in December 2014, as well as the outcomes from the sector’s Transparent Approach to Costing (TRAC) reporting for 2013-14, as submitted to HEFCE in January 2015.
2. The report is being published to provide universities and higher education colleges with feedback on their financial performance in 2013-14. It also provides other stakeholders with information about the current financial health of the sector. This report focuses on the financial results for 2013-14. For a more definitive assessment of the future financial sustainability of the sector, please see our earlier report ‘Financial health of the higher education sector: 2013-14 to 2016-17 forecasts’ (HEFCE 2014/26).
3. The sector’s financial results for 2013-14 show a financially sound position overall. While the financial outturn was stronger than projected by the sector in July 2014, sector financial results were similar to those reported in 2012-13. There continue to be significant variations in the financial performances of individual institutions across the sector.
4. In 2013-14, the sector reported operating surpluses of £992 million, equivalent to 3.9 per cent of income. These were £49 million higher than surpluses reported in 2012-13 (which were also equivalent to 3.9 per cent of income), and 29 per cent higher than the levels projected by the sector in July 2014. 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, but this also provides some evidence that the sector made efficiency savings during the year.
5. 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 £1.1 billion over the last three years (2011-12 to 2013-14). These efficiency savings 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 long-term sustainability in the future.
6. The recently published Diamond review of efficiency, effectiveness and value for money in higher education notes that while the value for money reports provide a valuable resource for understanding efficiency and cost savings in the sector, a more robust, accessible and comprehensive mechanism is needed. HEFCE will work with the sector to develop this mechanism.
7. Despite the fall in public capital funding over recent years, the latest financial results show that the sector has been able to deliver a significant increase in capital investment in 2013-14, which at £3,250 million represents an increase of 23 per cent compared with the previous year.
8. To help fund this expenditure, the sector used £1,552 million from its own cash reserves (equivalent to 6.1 per cent of total income) and borrowed an additional £501 million. This caused total sector borrowing to rise to £6.7 billion at the end of July 2014 (equivalent to 26.3 per cent of income). Net liquidity also rose by £285 million to £7.7 billion at the end of July 2014, producing a net cash position in the sector of £1.0 billion. This is relatively small compared with an overall income of £25.6 billion and is lower than the net cash position reported in 2012-13, which was £1.2 billion.
9. While the level of capital investment in 2013-14 is a positive sign that the sector is increasing investment in infrastructure, the latest data available from the Estate Management Record shows that, at the end of July 2013, many higher education institutions (HEIs) still had large amounts of non-residential space in poor condition and the cost to the sector of upgrading this was estimated at £3.3 billion. However, it is important to note that this only reflects the cost required to upgrade this portion of the estate to a sound and operationally safe condition, and does not take into account the additional investment needed to bring it up to the standard required to satisfy rising student expectations and ensure that the sector’s higher education provision can stand up to growing international competition.
10. Analysis of the 2013-14 TRAC results show that the sector reported a sustainability gap (difference between the level of surplus achieved by the sector and the level required to cover the full economic costs of its activities) of £883 million; a deterioration against the position in 2012-13, when the sustainability gap was £870 million. This means 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 to secure their long-term sustainability.
11. Without increased surpluses and continued government support, there is a risk that the sector will be unable to deliver the scale of investment required to meet student demands, build capacity and ensure that the sector can remain internationally competitive. Government support also fosters confidence to others to continue to invest in the sector, including willingness of banks to lend money, although the sector’s capacity to lever in funding from other sources, including additional borrowing, is limited and may not be sufficient to meet the sector’s long-term investment needs.
12. Discretionary reserves, after taking into account projections for pension deficits, increased by 6.7 per cent in 2013-14, to reach £12.3 billion as at 31 July 2014, equivalent to 48.0 per cent of total income. However, the sector position masks a significant spread of financial strength, with a concentration of large discretionary reserves in a small number of universities.
13. While sector reserves currently appear strong overall, from 2015-16 reserve levels and pension deficits will be significantly affected by the introduction of a new financial reporting standard (FRS102), which requires institutions to recognise liabilities relating to deficit recovery plans for multi-employer pension schemes such as the Universities Superannuation Scheme (USS) in their balance sheets. While not a new liability, it will increase the transparency of the underlying deficits within the relevant pension schemes, which may impact on confidence levels in the financial strength of the sector.
14. The indicative results of the most recent triennial valuation show that the USS scheme deficit was £13 billion as at 31 March 2014 and USS employers are currently consulting with eligible employees on a range of proposed reforms designed to address this deficit. This includes a proposal to increase the employer pension contribution rate from 16 to 18 per cent. The final decision on all of the scheme reforms is due to be taken by the USS trustees in summer 2015.
15. 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. HEIs are due to submit their next set of financial forecasts for the period 2014-15 to 2017‑18 in July 2015, and we plan to publish an overview and analysis of these forecasts in autumn 2015, which will focus on the future financial health and sustainability of the higher education sector. Until then, our view is that the sector’s financial position is currently stable overall. However, financial projections for the period ending 31 July 2017 (submitted by HEIs in July 2014) predicted lower surpluses, a fall in cash levels and a rise in borrowing, signalling a trajectory that is not sustainable in the long term.
16. This view is supported by the recent report on the sustainability of learning and teaching in higher education in England, published by the Financial Sustainability Strategy Group, which concludes that the sector is financially healthy in the short term, but warns that the impact of the 2012 funding changes may not yet be fully apparent. While the report acknowledges that HEIs are adapting to the demands of a more commercial and competitive environment, in doing so they are facing higher levels of risk and uncertainty. Some HEIs may be able to manage these risks within the type of strategies and operations they have at present but in future a continuation of ‘more of the same’ may not be enough to ensure sustainability.
17. Based on the financial results for 2013-14 and the July 2014 financial forecasts, no institutions are currently close to the risk of insolvency. This conclusion 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 recruitment targets for home and overseas students, and on the level of public funding remaining as projected.
18. No action is required: this report is for information.