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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 The information on this website is historical and is no longer maintained.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 financial health of the HEFCE-funded higher education sector in England. The analysis covers the financial results for 2015-16. 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 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 results for 2015-16 are consistent with the new standard and are presented alongside 2014-15 financial data restated under FRS102. The new reporting framework poses some difficulties in comparing financial results between institutions and against historical trends. Transitional changes reflected in the restated 2014-15 results also make this an atypical year.

Financial results

4. The financial results for the higher education sector in 2015-16 show a financially sound position overall. However, as reported last year, significant variations continue to increase in the financial performances of individual institutions across the sector, with the main financial strength remaining in a small number of institutions.

5. The sector reported a surplus of £1,519 million (5.2 per cent of total income), compared with £833 million (3.0 per cent) in 2014-15.

6. Although the increase in 2015-16 appears high, it should be noted that some significant transitional accounting changes were introduced as a result of FRS102, such as the increase in pension provisions for the sector’s multi-employer pension schemes that reduced sector surpluses in 2014-15. If these transitional changes were excluded, the underlying increase in 2015-16 surpluses would be much lower.

7. At an institutional level, results range from a deficit of 7.2 per cent to a surplus of 32.1 per cent. This gap, between the lowest- and highest-performing institutions, grew by 26.0 per cent in 2015-16.

8. Three institutions reported surpluses of over 20 per cent in 2015-16, compared with one institution in 2014-15. The high surpluses recorded by two of these institutions were due to one-off income injections from donations and royalties.

9. Cash flow from operating activities increased from 9.2 per cent in 2014-15 to 10.3 per cent of total income in 2015-16. But unrestricted reserves fell from £24.1 billion (86.1 per cent of income) to £23.9 billion (82.2 per cent of total income).

10. While income increased overall between 2014-15 and 2015-16, 27 higher education institutions (HEIs) recorded real-terms reductions in income in 2015-16. The reasons for these income reductions were varied, but were primarily falls in funding body grants, overseas fee income and other income.

11. Sector income from research grants and contracts fell 1.6 per cent in 2015-16 compared with 2014-15. However, 2014-15 income was boosted by an estimated £431 million from Research and Development Expenditure Credits from HM Revenue and Customs, which fell to £82 million in 2015-16. Excluding this, the data shows that overall research income increased by £272 million in 2015-16 (a rise of 6.1 per cent).

12. The sector reported total fee income from overseas (non-European Union (EU)) students of £3.8 billion in 2015-16; this was 6.3 per cent higher than the level reported in 2014-15.

13. Forecast data from July 2016 shows that the sector is projecting a significant rise in overseas income, to reach £4.8 billion by 2018-19, although 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 surplus projections and ability to borrow.

Student recruitment 2016-17 and 2017-18

14. Data from the Higher Education Students Early Statistics Survey (HESES) for the 2016-17 academic year indicates a 0.6 per cent decrease in the number of undergraduate entrants (Home, EU and non-EU). However, this masks considerable variation across the sector, with an average decline of 7 per cent for those 58 institutions where recruitment has reduced compared with the previous year. 2016-17 HESES data also indicates a continuing decline in part-time undergraduate entrants.

15. For the 2017-18 cycle, the latest UCAS application data highlights a 5 per cent decline in UK applications and a 7 per cent decline in EU applications, relative to the same point in the previous year.

16. In terms of overseas recruitment data, early student numbers for 2016-17 show no increase in overseas undergraduate entrants compared with 2015-16. Although this pattern only relates to a small proportion of overseas applications, it is echoed by UCAS application data for 2017-18 entry, which indicates that overseas applications remain at the same level as at the same point in the previous year’s cycle.

17. In July 2016 the sector forecast an increase in overseas students (expressed as full-time equivalents (FTEs)) of 3.1 per cent between 2015-16 and 2016-17. However, the data and indicators taken together suggest an overconfidence by the sector in student number forecasts.

Capital investment

18. Capital investment in 2015-16 totalled £3.8 billion, an increase of 14.5 per cent compared with 2014-15. However, it should be noted that this level of investment is being driven by a small number of institutions, with 18 higher education institutions (HEIs) contributing 50 per cent of the sector’s capital expenditure total in 2015-16. A total of 53 institutions reported a decline in capital expenditure over the period.

19. Capital expenditure as a percentage of total income varied considerably at an institutional level, ranging from 0 to 70.3 per cent.

20. While there was significant capital investment overall, the sector’s latest estimate is that it still needs to invest £3.6 billion in its non-residential estate to restore it to a sound baseline condition. Inflationary pressures on the cost of construction are likely to push this figure higher. This estimate does not reflect the cost of improving the estate to a standard required to meet rising student expectations and enable HEIs fully to compete in the increasingly competitive global market.

21. To help fund capital expenditure during the year, the sector used £1.6 billion from its own cash reserves (equivalent to 5.6 per cent of total income) and committed to new borrowing of £1.1 billion. Capital grant receipts of £843 million were also reported in 2015-16.

22. Without increased surpluses and continued government support, there is a risk that the sector will be unable to maintain the scale of investment required to meet rising student expectations, build capacity for growth and ensure that it can remain internationally competitive. Government support also fosters confidence among other investors to continue to invest in the sector, including banks’ willingness to lend money. The sector’s capacity to lever in funding from other sources, including additional borrowing, is limited and may not be sufficient on its own to meet the sector’s long-term investment needs.

Liquidity and borrowing

23. Total sector borrowing increased by 8.8 per cent; from £8.3 billion at 31 July 2015 to £9.1 billion at 31 July 2016 (equivalent to 31.2 per cent of income). This was greater than the rise in liquidity, which was 7.7 per cent, from £8.9 billion (127 days of expenditure) to £9.6 billion (135 days) over the same period. This caused the sector’s net cash position (liquid funds less borrowing) to fall from £548 million at 31 July 2015 to £495 million at 31 July 2016.

24. The liquidity data is taken as a snapshot of bank and investment balances, as at 31 July. The main period of capital spending at most institutions happens during the summer months, after 31 July; therefore the available cash, not committed to future capital spending, is likely to be much lower.

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 for the overall value of an institution. 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).

26. Under the new financial reporting framework, reserves are categorised as either restricted or unrestricted. Unrestricted income and expenditure reserves represent the value of the institution’s accumulated funds through surpluses reported in an HEI’s income statement, where there are no restrictions on the use of funds.

27. After taking into account pension liabilities, the sector reported unrestricted reserves of £23.9 billion, equivalent to 82.2 per cent of total income. This represents a fall from the previous year, where reported reserves were £24.1 billion (86.1 per cent of total income). The aggregate sector position masks a significant spread of financial strength and a concentration of large unrestricted reserves in a small number of institutions, with just 10 institutions reporting half of the sector’s total reserves.

28. Under FRS102, reported pension deficits are much higher, with liabilities relating to the deficit recovery plans for the sector’s multi-employer pension schemes now reflected in institutional balance sheets. As a result of the transition to FRS102, pension liabilities reported by the sector rose from £4.9 billion (under the previous financial reporting standards) to £7.1 billion (under FRS102) at 31 July 2015.

29. Reported pension liabilities increased significantly again in 2015-16 to reach £9.5 billion at 31 July 2016 (equivalent to a rise of 33.1 per cent). These were also 31.5 per cent higher than pension liabilities forecast by the sector last year, indicating that earlier projections underestimated the scale of increased pension deficits.

30. The sector’s largest multi-employer pension scheme is the Universities Superannuation Scheme (USS), with the great majority of current staff working in HEIs that existed before 1992 being members of this scheme. Overall, 90 HEIs contribute to the USS with employer contributions representing approximately 60 per cent of total contributions to the sector’s pension schemes.

31. A complex mix of factors is contributing to the growing pension deficits across the sector, not least the prevailing economic conditions and the performance of asset investments. The latest interim valuation of the USS scheme shows that the scheme ended the year with a net deficit of £10.0 billion (as at March 2016), compared with the previous year, where the deficit was valued at £8.2 billion (as at March 2015), demonstrating the significant level of volatility in these valuations. The next full triennial valuation is due in 2017.

32. The results of the revaluation of Local Government Pension Schemes (LGPS) as at 31 March 2016, are also expected to show an increase in the LGPS deficit. With nearly 20 per cent of the sector’s employer contributions paid to these LGPS schemes, an increase in the deficit will inevitably lead to increases in employer costs, placing significant financial pressures on HEIs participating in these schemes too.

Financial outlook

33. The sector has shown itself to be adaptable to a more competitive and uncertain environment, but as we reported in November 2016, there are some significant challenges ahead.

34. The growing uncertainties faced by the sector will inevitably lead to a greater focus from investors on the underlying financial strength of individual 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 costs of borrowing.

35. HEIs are due to submit their next set of financial forecasts in July 2017, covering the period from 2016-17 to 2019‑20. We plan to publish an overview and analysis of these forecasts in autumn 2017, 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 sound overall but with increasing variability in the performance of individual HEIs.

36. However, risks are growing in relation to EU, international and home recruitment and in relation to inflationary cost pressures such as rising construction costs. Pension liabilities also look set to rise across the sector following outcomes of triennial reviews of two of the sector’s major pension schemes: USS and LGPS. The sector faces some significant uncertainties arising from Britain’s forthcoming exit from the European Union, the full impact of which is not yet known. In this context we regard the financial projections from some institutions in July 2016 as over-confident.

Action required

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

Date: 23 March 2017

Ref: HEFCE 2017/02

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:

Will Dent, tel 0117 931 7437, email or Annette Wynne, tel 0117 931 7377, email