1. This report provides an overview of the forecast financial health of the HEFCE-funded higher education (HE) sector in England. The analysis covers the financial forecasts for the period 2015-16 to 2018-19, based on information submitted by higher education institutions (HEIs) to HEFCE in July 2016. This does not include further education or sixth-form colleges, or alternative providers of higher education.
2. Financial Reporting Standard (FRS) 102 is the new financial reporting framework for higher and further education (FE) providers for reporting periods starting on or after 1 January 2015, and introduces some significant changes in the way financial performance is reported.
3. Financial forecasts for the period 2015-16 to 2018-19 are consistent with the new standard and are presented alongside 2014-15 financial data restated under FRS102. The new reporting framework makes comparison difficult between forecast performance and historical trends.
4. The accuracy and reliability of the sector’s forecasts depends on the assumptions made by HEIs in response to the latest higher education reforms and prevailing market conditions.
5. Most HEIs indicated that their forecasts were prepared ahead of the European Union (EU) referendum vote. While they knew the outcome at the time they submitted their forecasts to HEFCE, HEIs did not adjust them to reflect potential impacts of Brexit, because of the level of uncertainty existing at the time. As a result, the projected financial performance summarised in this report does not reflect a sector-wide view of the potential impacts following the UK’s exit from the EU.
6. Overall, the forecasts demonstrate a continuation of the themes raised in previous analysis. The main outcomes are as follows:
- The latest forecasts, for the period 2015-16 to 2018-19, show a widening gap between the lowest- and highest-performing institutions and increasing volatility of forecasts in the sector.
- Sector surpluses are projected to be between 2.3 per cent and 4.3 per cent of total income in the forecast period; these are relatively small margins in which to operate. However, at institutional level, these range from a deficit of 28.6 per cent to a surplus of 21.5 per cent in 2017-18, equivalent to a range of 50.1 per cent (compared with 30.4 per cent in 2014-15).
- The trend of falling liquidity (cash) and increasing sector borrowing continues in this forecast period. Borrowing levels are expected to exceed liquidity levels in all forecast years, by £49 million at 31 July 2016, increasing to £3.9 billion at 31 July 2019. This trend of increasing borrowing and reducing liquidity is unsustainable in the long term.
- The sector is projecting fee income from non-EU students to rise from £3.7 billion in 2015-16 to £4.8 billion in 2018-19 (equivalent to 14.9 per cent of total income). Increasing competition from other countries and proposed changes to student immigration rules suggest these projections may be difficult to achieve. This would have a significant adverse impact on the sector’s financial projections. However, the weaker pound may assist the recruitment of overseas students.
- The sector is projecting high levels of growth in numbers of total home and EU students (10.3 per cent over the forecast period). This level of growth may be a challenge given the decline in the 18 year-old English population, uncertainties over the impacts of Brexit and increases in alternatives to undergraduate courses, such as degree apprenticeships.
- Significant increases in capital investment are projected. At over £17.8 billion, this represents an average annual investment of £4.5 billion (2015-16 to 2018-19), 51 per cent higher than the previous four-year average. Despite this, nearly a quarter of HEIs in the sector are planning to reduce capital expenditure over the forecast period.
- Investment in infrastructure is particularly important given that, in July 2015, the sector estimated that it still needed to invest £3.6 billion into its non-residential estate to upgrade it to a sound baseline condition.
- The uncertainties faced by the sector as a result of the UK’s decision to leave the EU, coinciding with increasing competition in the global HE market, will lead to a greater focus from investors on the underlying financial strength of HEIs. Consequently, any fall in confidence levels could restrict the availability of finance in the sector and put significant elements of the investment programme at risk. Falling confidence levels are also likely to lead to a rise in the cost of borrowing.
- Aside from the challenges associated with income generation, the sector will face inflationary pressures on costs, particularly staff costs, operating costs and capital investment costs.
- Pension liabilities are expected to increase from £4.9 billion at 31 July 15 to £7.2 billion at 31 July 2016; an increase of 45.8 per cent. This is due to FRS102 which requires liabilities relating to the deficit recovery plans for multi-employer pension schemes to be reflected in institutional balance sheets. However, the latest estimated valuation of the sector’s largest pension scheme, the Universities Superannuation Scheme (USS), indicates a significant worsening of the deficit, implying further increases in liabilities are likely.
7. No action is required: this report is for information.