You need cookies enabled


You need cookies enabled

Executive summary


1. This report provides an overview of the forecast financial health of the HEFCE-funded higher education sector in England. The analysis covers the financial forecasts for the period 2014-15 to 2017-18, based on information submitted by higher education institutions (HEIs) to HEFCE in July 2015. This does not include directly funded further education, or other colleges or alternative providers of higher education.

2. The report has been published to provide HEIs with feedback on the projected financial performance of the sector as a whole. The analysis may also be of interest to others connected with the higher education sector. It supplements our previous analysis published in March 2015 (‘Financial health of the higher education sector: Financial results and TRAC outcomes 2013-14’, HEFCE 2015/07).


3. The analysis provided in this report is based on financial forecasts submitted by HEIs to HEFCE. 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.

4. Due to the timing of these submissions, however, the impact of the £150 million funding reduction announced by HEFCE in July 2015 is unlikely to be fully reflected in these latest forecasts. Our analysis also indicates that the sector is assuming, in its financial forecasts, no significant changes in public funding within the period to 2017-18.

5. In analysing the current forecasts we have attempted to highlight the limited margins in which the sector operates by modelling the impact of changes in what HEIs are forecasting for the years 2015-16 to 2017-18. For example, a 5 per cent reduction per annum in public funding for the next three years could see the sector in a deficit position by 2017-18. This shows how relatively small changes in key assumptions can have a significant impact on an HEI’s ability to generate surpluses.

Forecast financial performance

6. The financial results for the higher education sector in 2013-14 showed a sound position overall but there was significant variation in the financial performance of individual institutions across the sector.

7. The latest forecasts, for the period 2014-15 to 2017-18, show an increasing variation in the financial performance of institutions, with a widening gap between the lowest and highest performing institutions.

8. At a sector level, the projections show that operating surpluses are expected to remain at 3.9 per cent of total income in 2014-15 (the level reported in both 2012-13 and 2013-14). Thereafter, surpluses are expected to fall to 2.4 per cent of income in 2015-16 and 2016-17, before rising to 3.3 per cent of income in 2017-18. These are relatively small margins in which to operate, and mean that even small changes in income or costs could have a material impact on the financial performance of institutions and the sector.

9. In the current climate of lower public funding, HEIs are under greater pressure to generate higher surpluses in order to remain sustainable. The latest Transparent Approach to Costing (TRAC) submissions from HEIs show that, in the medium to long term, the sector still needs to generate larger surpluses to make progress towards covering the full economic costs of its activities and maintaining sustainability. Overall, the sector reported a sustainability gap (the 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 in 2013-14; a deterioration against 2012-13, when the sustainability gap was £870 million.

10. The trend of falling liquidity (cash) and increasing sector borrowing continues in this forecast period. The sector expects its liquid funds to fall from £7.7 billion as at 31 July 2014 to £5.0 billion as at 31 July 2018, equivalent to 67 days of expenditure; the lowest level reported since 31 July 2006. At the same time, the sector expects borrowing to increase from £6.7 billion at the end of July 2014 to £9.2 billion at the end of July 2018, by which time the sector would be in a net debt position of £4.1 billion. The trend of increasing borrowing and reducing liquidity is unsustainable in the long term.

11. As charities, HE institutions are obligated to ensure that they remain sustainable and do not expose themselves to undue risk. Strong liquidity is particularly important given the level of uncertainty and risk that currently exist in the sector, and we continue to monitor liquidity levels to assess whether HEIs are able to maintain sufficient cash levels to manage their risks effectively.

Capital Investment

12. The latest financial forecasts show that the sector is planning on delivering a substantial increase in capital investment over the forecast period (2014-15 to 2017-18). At over £17.1 billion, this represents an average annual investment of £4,264 million, nearly 60 per cent higher than the previous four-year average (2010-11 to 2013-14).

13. Despite this increase, forecasts show that nearly a third of HEIs in the sector are planning to reduce their expenditure on infrastructure over the forecast period.

14. Investment in infrastructure is particularly important given that the Estates Management Statistics show that, as at 31 July 2014, the sector still needed to invest £3.4 billion into its non-residential estate to upgrade it to a sound and operationally safe condition. It should be borne in mind that these upgrade costs do not fully reflect the level of expenditure needed to bring the estate up to the standard required to benefit the student experience and to attract new students and staff. This will help to ensure that the sector can compete in the increasingly competitive global market.

15. 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 infrastructure. This places greater pressure on HEIs to generate higher surpluses to remain sustainable.

16. The latest forecasts show that the sector is expecting to use £10.4 billion from its own cash reserves (equivalent to 9.0 per cent of total income) and borrow an additional £3.5 billion to help fund its capital investment plans. Although projections indicate that this will be affordable in 2014-15, forecast cash inflows from operating activities will be insufficient to fund the planned level of investment for the period 2015-16 to 2017-18. This may indicate that HEIs will either have to change their plans or raise additional funds through cash reserves or additional borrowing.

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

Student number projections

18. Student number projections accompanying HEI financial forecasts show that the sector expects full-time home and EU undergraduate numbers (across all years of study) to be marginally lower in 2014-15 when compared with 2013-14, but increases are expected in the period 2015-16 to 2017-18. By 2017-18, the number of full-time undergraduate students is expected to be 8.5 per cent higher than reported in 2013-14, though there continues to be a great deal of variability between institutional projections across the forecast period and with student demand becoming more volatile in the sector, there is an increasing risk that student recruitment projections will not be achieved.

19. In terms of overseas (non-EU) students, projections show that the sector expects numbers to grow between 4.3 and 6.4 per cent per year over the next four years, with overseas fee income projected to rise from £3,316 million in 2013-14 (13.0 per cent of total income) to £4,570 million in 2017-18 (14.8 per cent of total income); an average annual increase of 7.0 per cent over the forecast period. However this overall figure masks significant variation in the assumptions used by institutions in predicting their future overseas income levels.

20. Recruitment of international students is becoming more competitive which increases the risk of a downturn in non-EU students coming to the UK to study. This is happening at the same time as changes are introduced to the UK’s immigration regulations. The latest forecasts show that HEIs are becoming increasingly reliant on overseas income to remain financially sustainable so a downturn in overseas recruitment would have a significant adverse impact on the sector’s income and surplus projections. For example, just a 5 per cent shortfall per annum in projected income from international students would see the sector in a deficit position by 2016-17.

Value for Money

21. There is continued evidence that the sector is focused on securing 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.

22. Our analysis of the data supplied indicates that the sector made an estimated saving of £1.1 billion over the period 2011 to 2014. It is likely, however, that institutions will also be operating value for money initiatives that are not mentioned in their reports. Such initiatives, and any resulting savings, will not have been captured by this analysis. Consequently, the volume of savings reported is likely to be understated.

23. Value for money savings have helped to support the sector’s current financial position, and will be increasingly important going forward given the continued uncertainty in the sector and the growing pressure on costs.

24. HEFCE is currently developing a new methodology to collect and assess value for money information in a more systematic way to better determine and report the scale of sector savings in future.

Reserves and Pension Deficits

25. Reserves are an HEI’s total assets less its liabilities and, in very broad terms, can be used as a proxy of the overall value of an institution.

26. The main indicator used to assess reserves is the amount of ‘discretionary reserves’ held on an institution’s balance sheet. These are the accumulated surpluses of an institution over its lifetime although they are not the same as cash.

27. In light of the increased risk and volatility within the sector, and the recognition that a higher level of reserves is necessary to respond to capital investment needs and fluctuating cash flow, the sector is projecting its reserves to increase. After taking into account projections for pension deficits, discretionary reserves are expected to increase from £12.3 billion as at 31 July 2014 to £17.3 billion as at 31 July 2018, equivalent to 56.3 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.

28. While sector reserves currently appear strong overall, from 2015-16 reported reserve levels are likely to be substantially lower following 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 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. The impact of these changes will not be seen until July 2016: when the sector’s next set of financial forecasts are due to be submitted to HEFCE.

29. The largest multi-employer pension scheme operating in the sector is the Universities Superannuation Scheme (USS). The latest actuarial valuation for this scheme (as at March 2014) confirms that, after taking into account the revised benefit structure effective from 1 April 2016, the actuarial deficit stood at £5.3 billion. This deficit compares with the last full triennial assessment, which valued the deficit at £2.9 billion as at the end of March 2011, demonstrating the significant level of volatility and uncertainty in these valuations.

30. The March 2014 actuarial deficit is equivalent to 43 per cent of the sector’s discretionary reserves (including pension deficits already recognised in the accounts) as at 31 July 2014 and, if fully reflected in the sector’s 2013-14 accounts, would reduce reserve levels from 48 per cent to 27 per cent of total income.

Financial stability

31. Overall, while projections indicate a general weakening of financial performance, the sector is expected to remain financially stable in the forecast period. Evidence attained as part of our annual accountability process indicates that short-term viability of institutions is not a concern presently, and no institutions are forecast to be 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 – though these are reliant on institutions achieving home and overseas student recruitment targets, and on the level of public funding not deteriorating.

32. Although currently financially stable, reducing surpluses and cash levels and a rise in borrowing, all signal a trajectory that is not sustainable in the long term. Significant challenges including increased uncertainty over future government funding and overseas student recruitment, as well as the need to sustain a higher level of capital investment to respond to growing competition, will require institutions to aim for higher surpluses in future.

33. This uncertainty is likely to lead to continued volatility and growing variability in the financial performance of institutions, together with a widening gap between the lowest and highest performing institutions.

Action required

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

Date: 10 November 2015

Ref: HEFCE 2015/29

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:

Nolan Smith, tel 0117 931 7376, email, or Annette Wynne, tel 0117 931 7377, email