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HEFCE closed at the end of March 2018. The information on this website is historical and is no longer maintained.

Many of HEFCE's functions will be continued by the Office for Students, the new regulator of higher education in England, and Research England, the new council within UK Research and Innovation.

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Executive summary


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 2014-15, as submitted to HEFCE in December 2015, as well as the outcomes from the sector’s Transparent Approach to Costing (TRAC) reporting for 2014-15, as submitted to HEFCE in January 2016.

2. The report is being published to provide universities and higher education colleges with feedback on their financial performance in 2014-15. It also provides other stakeholders with information about the current financial health of the HEFCE-funded sector. This report focuses on the financial results for 2014-15. For a more detailed assessment of the future financial sustainability of the sector, please see our November 2015 report ‘Financial health of the higher education sector: 2014-15 to 2017-18 forecasts’ (HEFCE 2015/29).

Key points

Financial results

3. The sector’s financial results for 2014-15 show a sound financial position overall. At sector level, the financial outturn improved on the results reported in 2013-14 and those projected by HEIs in July 2015. However, there is an increasingly significant variation in the financial performance of individual institutions across the sector.

4. In 2014-15, the sector reported operating surpluses of £1.6 billion, equivalent to 5.8 per cent of income. These were £608 million higher than surpluses reported in 2013-14 (which were equivalent to 3.9 per cent of income), and 50.7 per cent higher than the levels projected by the sector in July 2015. This improvement is largely attributable to a number of HEIs recognising one-off Research and Development Expenditure Credits (RDEC) from HM Revenue and Customs (HMRC) in their financial accounts increasing their surpluses for this year.

5. The RDEC scheme was established by Government in 2013 to offer tax incentives to large companies to encourage greater investment in research and development. While this measure has since been amended so that universities and charities are unable to claim RDEC in respect of expenditure incurred on or after 1 August 2015, a number of institutions have made claims to HMRC for eligible expenditure incurred in the period 2012-13 to 2014-15.

6. Following an analysis of the latest financial accounts, submitted as part of the annual accountability process, we estimate that £436 million of the increased operating surpluses reported in 2014-15 is attributable to RDEC claims. Additional claims for eligible expenditure in the qualifying period are also likely in 2015-16 and we expect to see these reflected in the next set of financial forecasts due to be submitted to us in July 2016. This scheme is not likely to be recurring in future years so this is a one-off financial benefit to the sector reflecting its significant investment in research and development.

7. Excluding RDEC, operating surpluses were £172 million higher than reported in 2013-14. The improvement in the underlying financial outturn was partially attributable to higher levels of fee income from overseas students, which at £3,583 million were £267 million higher than reported in the previous year and £79 million more than forecast in July 2015. There was also a higher level of income from the sector’s other income streams, such as residences, catering and other operating income.

Transparent Approach to Costing (TRAC)

8. Although the sector reported higher surpluses in 2014-15, the latest TRAC submissions from higher education institutions (HEIs) show that, in the medium to long term, the sector needs to generate larger surpluses to make progress towards covering the full economic costs of all its activities and remain financially sustainable. This includes the replacement of buildings and equipment as necessary to sustain high-quality provision.

9. Our analysis of provisional TRAC data for 2014-15 shows that the sector’s surpluses on non-publicly funded teaching and other activities are insufficient to support the shortfall in the recovery of the full economic costs of the sector’s research activity. Excluding exceptional RDEC income, this shortfall came to £2.8 billion. Across all activities, the sector reported a sustainability gap (the difference between the level of surplus achieved by the sector and the level required to cover its full economic costs) of £522 million. This is an improvement on the previous year when the gap was £883 million (3.5 per cent of income), but has been assisted by the injection of RDEC income. Without RDEC, the gap is £860 million, equivalent to 3.2 per cent of income.

10. 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 rising student expectations, build capacity for growth and ensure that the sector can remain internationally competitive. Government support also fosters confidence among others to continue to invest in the sector, including banks’ willingness 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.

Value for money

11. We continue to assess how the sector is securing value for money from public funds, and for the benefit of students from tuition fees, through our analysis of the value for money reports submitted to us by institutions. Our analysis of these reports indicates that the sector made an estimated saving of £1.4 billion over the period 2011 to 2015. However, under the current system of reporting, the volume of savings is likely to be understated. HEFCE is developing the mechanisms by which the sector collects and reports value for money information in a more systematic way, to demonstrate and report the scale of sector efficiency. It will be important for the sector to maintain this efficiency drive, to support long-term sustainability in the future.

Capital investment

12. With rising student expectations comes the need for the sector to invest more in its infrastructure (buildings, equipment, and digital technology), and in 2014-15, the sector reported capital expenditure of £3,564 million, an increase of 9.4 per cent compared with 2013-14. While this is a significant investment overall, financial results show that a large proportion of HEIs (nearly 40 per cent of the sector) actually reduced their expenditure on capital projects in the period 2012-13 to 2014-15 compared with the period 2011-12 to 2013-14.

13. Despite the overall increase in capital investment over recent years, the latest data available from the Estate Management Record shows that, at the end of July 2014, the cost to the sector of restoring its estate was £3.5 billion (compared with £3.3 billion in 2012-13). This cost reflects the investment required to restore the estate to a sound baseline condition and is not the same as the investment required to bring the estate up to the standard required to satisfy rising student expectations. A reduction in capital investment could lead to significant under-investment in the sector, with institutions that fail to invest sufficiently in infrastructure finding themselves in a weaker market position and at higher risk of financial instability.

Liquidity and borrowing

14. In the current climate of lower public capital funding, institutions are increasingly reliant on generating increased cash reserves or increasing borrowing to deliver their capital investment programmes. In 2014-15, the sector reported that it used £1.1 billion from its own cash reserves (equivalent to 3.9 per cent of total income) and borrowed an additional £1.4 billion to help fund capital expenditure during the year. This caused total sector borrowing to rise to £7.8 billion at the end of July 2015 (equivalent to 28.1 per cent of income).

15. While the sector’s liquid funds (cash) at 31 July 2015 were higher than the level reported at 31 July 2014 (£8.3 billion compared with £7.7 billion), when compared to the external borrowing level, the sector reported a net cash position of £0.5 billion at 31 July 2015. This is relatively small compared with an overall income of £27.7 billion, and represents a fall from the levels reported at 31 July 2014 and 31 July 2013, which were £1.0 billion and £1.1 billion respectively.

16. The level of financial commitments reported by the sector is expected to increase as a result of a new financial reporting standard (FRS102), which, from 2015-16, introduces new criteria for an institution to account for financial commitments relating to its service concession arrangements (such as contracts with private operators to maintain an institution’s student accommodation). Although not new borrowing, this may impact on the perceived indebtedness of the sector.

17. 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. As well as requiring institutions to recognise additional financial commitments, FRS102 requires HEIs to implement other significant financial reporting changes, including the recognition of additional pension liabilities and changes to revenue recognition and asset valuations. These changes may present comparability challenges when assessing the future financial health of the sector, and we are working with the sector on how to present financial information consistently in the future.

18. When reporting on liquidity levels it is important to take into account that liquidity data is taken as a snapshot of bank and investment balances at 31 July and that most institutions’ main period of capital spending happens in the months after the academic year ends. The available cash not committed to capital spend is thus likely to be much lower.

19. As charities, HEIs are obligated to ensure that they remain sustainable and do not expose themselves to undue risk. Strong liquidity is particularly important given the current levels of uncertainty and risk 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.

Reserves and pension deficits

20. 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. 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 and are not the same as cash, although an institution could dispose of an asset if it was surplus to operational requirements (thereby converting it to cash).

21. Discretionary reserves, after taking into account projections for pension deficits, increased by 10.7 per cent in 2014-15, to reach £13.6 billion at 31 July 2015, equivalent to 49.2 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.

22. While sector reserves appear strong overall, from 2015-16 reported reserve levels are likely to be substantially lower following the introduction of 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, this will increase the transparency of the underlying deficits in the relevant pension schemes, which may impact on confidence levels in the financial strength of the sector.

23. The USS is the largest multi-employer pension scheme operating in the sector. 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.

Financial outlook

24. The sector has shown itself to be adaptable to a more competitive and uncertain environment, but there are some significant challenges ahead. The financial outturn for 2014-15 may have been stronger overall than anticipated by the sector in July 2015, but the financial results for individual institutions show the gap between the lowest- and highest-performing institutions has widened in 2014-15, compared with the previous year.

25. One of the key challenges for the sector will be whether it can achieve plans for growth in the overseas student market, which is a significant source of income for many institutions. While income from this source grew in 2014-15, overseas student numbers were lower than forecast by the sector in July 2015, and data from the Higher Education Students Early Statistics Survey shows a 1.7 per cent drop in international new entrants in 2015-16. If this pattern were to continue, HEIs would find it difficult to achieve their income and surplus projections.

26. HEIs are due to submit their next set of financial forecasts in July 2016, covering the period from 2015-16 to 2018 19. We plan to publish an overview and analysis of these forecasts in autumn 2016, which will focus on the expected 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 2018 (submitted by HEIs in July 2015) indicated an expected general weakening of financial performance, with lower surpluses, a fall in cash levels and a rise in projected borrowing.

27. Evidence attained as part of our annual accountability process indicates that the 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 their home and overseas student recruitment targets, and on the level of public funding not deteriorating.

Action required

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

Date: 21 March 2016

Ref: HEFCE 2016/04

To: Heads of HEFCE-funded further education colleges

Of interest to those
responsible for:

Audit, Estates, Finance, Governance, Management, Planning

Enquiries should be directed to:

Will Dent, tel 0117 9317376, email, or Annette Wynne, tel 0117 9317377, email