You need cookies enabled

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 The information on this website is historical and is no longer maintained.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.

The HEFCE domain - - will continue to function until September 2018. At this point we will close the site entirely and all its information will only be available from the National Web Archive.


You need cookies enabled

Executive summary

1. This report analyses the financial health of the higher education (HE) sector in England for the period 2016-17 to 2019-20, based on forecast information from higher education institutions (HEIs) submitted to HEFCE in July 2017. It covers HEFCE-funded HEIs, and references to ‘the HE sector’ should be read in this context. Other providers of HE – further education and sixth-form colleges, and alternative providers – are not included in the analysis.

Key points

2. The forecasts submitted by HE institutions would have been prepared in May and June 2017 and approved by governing bodies for submission to HEFCE in July 2017. At the time there was no certainty over the cap on home and European Union (EU) tuition fees and institutions therefore needed to make assumptions around the fee they might be able to set in future years. Some institutions made an assumption that fees would be fixed at current rates, but a majority assumed that the fees would be allowed to inflate over time.

3. The Government has since confirmed that fees would be fixed at £9,250 for 2018-19 and so this change to the fee policy will inevitably change institutional forecasts, although we know that HEIs have contingency plans in place to mitigate the full impact of no inflationary increase in fees.

4. In the light of this, we have attempted to model the impact of the fee cap on institutional forecasts for the years 2018-19 and 2019-20, assuming no inflationary increase in the fee cap. We have estimated that, while the impact is variable across institutions, the cap on fees would reduce the sector’s projected income by £113 million in 2018-19 and £333 million in 2019-20. If there were no changes to cost projections, this would reduce sector surpluses from 2.1 per cent of income in 2018-19 to 1.8 per cent of income and from 3.4 per cent of income in 2019-20 to 2.4 per cent of income.

5. The findings below are based on the financial results for 2015-16 and institutional forecasts submitted to HEFCE in July 2017.

6. Our analysis of the sector’s financial results for 2015-16 showed a sound financial position overall. However, there was an increasingly significant variation in the financial performance of individual HEIs, and a widening gap between the lowest- and highest-performing institutions. Reducing surpluses and cash levels, and a rise in borrowing, signalled a general weakening of financial performance and a trajectory that was not sustainable in the long term.

7. The projections discussed in this report show a continuation of these trends. Overall, total sector income is projected to rise by 7.5 per cent in real terms, from £29 billion in 2015-16 to £33 billion in 2019-20. However, total expenditure is expected to increase at a greater rate over the same period (9.6 per cent per cent in real terms). This will cause surpluses to fall from the level reported in 2015-16 (5.2 per cent of total income).

8. Sector surpluses are projected to be between 1.3 per cent and 3.4 per cent of total income in the forecast period, relatively small margins in which to operate, although at an institutional level, these range significantly.

9. Cash flow from operating activities as a percentage of total income is expected to fall from 10.2 per cent in 2015-16 to 7.3 per cent in 2017-18, before rising to 9.1 per cent in 2019-20. At institutional level, this ranges from a negative cash flow projection of 6.7 per cent to a positive cash flow of 28.6 per cent in 2016-17. Cash flow from operating activities is an important source of funding for non-operating expenditure such as capital investment.

10. At 31 July 2016, the sector had net liquidity of £9,581 million, equivalent to 135 days’ expenditure (that is, the number of days’ expenditure that the liquidity covers). This is projected to fall to 81 days by the end of 2019-20. While liquidity is forecast to reduce, the sector expects to hold higher levels of liquidity for the periods ending 31 July 2017 to 31 July 2018 compared with last year’s projections.

11. Sector borrowing is projected to rise from £8.9 billion at the end of 2015-16 to £11.7 billion by the end of 2019-20. Relative to total income, sector borrowing levels are projected to reach 36.8 per cent by the end of 2018-19, before falling to 35.1 per cent by the end of 2019-20.

12. Borrowing levels are expected to exceed liquidity levels in all forecast years, by £577 million at 31 July 2017, increasing significantly to £5 billion at 31 July 2020. While this does not raise an immediate viability concern, the current trajectory of increasing borrowing and reducing liquidity is unsustainable in the long term.

Student recruitment

13. The market for higher education has become increasingly competitive, both at home and globally.

14. While there tends to be considerable variation in HEI student recruitment forecasts accompanying financial projections, our analysis of forecasts from last year (July 2016), suggested that, overall, the sector may have been optimistic in the numbers of students that it was projecting to recruit from 2016-17.

15. These latest forecasts show that the sector is projecting growth of 6.0 per cent in full-time undergraduate home and EU students between 2016-17 and 2019-20, with numbers expected to grow by 4.0 per cent between 2016-17 and 2018-19. This is lower than the level of growth projected in July 2016, which was 4.9 per cent over the period 2016-17 to 2018-19.

16. UCAS placed applicants data published in September 2017 show a 1.9 per cent decline in home and EU placed applicants to English HEIs for the 2017-18 entry year compared with 2016‑17. However the sector has projected growth of 2.1 per cent in this group of students over the same period.

17. Although recruitment projections are lower overall than forecast in July 2016, they are nonetheless significant. The declining population of 18-year-olds, the potential impact of Brexit on student recruitment, and the increasing availability of alternative post-18 educational options such as degree apprenticeships present challenges. Some HEIs may find it difficult to achieve their recruitment projections, and will therefore need to manage the financial risks of any negative variations in their growth ambitions.

18. In terms of non-EU student recruitment, the latest projections show that the sector is expecting numbers to grow by 14.0 per cent between 2016-17 and 2019-20, with growth in the period 2016-17 to 2018-19, expected to be 8.9 per cent. This again marks a downward projection compared with last year when the comparable figure was 11.1 per cent.

19. The sector is projecting fee income from non-EU students to rise from £4.0 billion in 2016-17 to £5.1 billion in 2019-20, an increase of 27.5 per cent over the period and by 2019-20, income generated through tuition fees from international students is expected to represent 27.7 per cent of all tuition fee and education contract income and 15.2 per cent of total income. However, at institutional level this ranges from 0 per cent to 40.7 per cent (of total income).

20. Some of this growth is due to higher fees as opposed to expansion in the international student population. Recent forecasts suggest income from international students in 2016-17 was very close to that forecast a year earlier, albeit approximately 1.5 per cent (£60 million) below expectations. However overseas student numbers in 2016-17 were reported as approximately 4.5 per cent below the target forecast a year earlier.

21. Although the weaker pound, relative to international currencies, may incentivise international student recruitment, it may be a challenge for some institutions to achieve their predicted growth levels. This would in turn have a significant adverse impact on the sector’s financial projections overall.

Capital investment

22. Significant increases in capital investment are projected over the forecast period. At over £19.4 billion, this represents an average annual investment of £4.8 billion, 48 per cent higher than the previous four-year average. However, there is much variation between HEI capital investment plans, with just over a quarter of HEIs in the sector planning to reduce capital expenditure over the forecast period compared with the previous four years (2012-13 to 2015-16).

23. While there has been significant capital investment in the last period, 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 to enable HEIs fully to compete in the increasingly competitive global market.

24. To help fund capital expenditure during 2015-16, 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 £860 million were also reported.

25. The sector is reliant on generating surpluses, continued government support and the availability of borrowing to maintain the scale of investment required to meet achieve their estate plans, build capacity for growth and to support its international competitiveness.

Reserves and pension deficits

26. 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 value of 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 its value to cash).

27. Unrestricted 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, as well as an HEI’s revaluation reserves. After taking into account pension liabilities, the sector reported unrestricted reserves of £28.5 billion, equivalent to 98.1 per cent of total income at the end of July 2016. These are expected to rise to £33.0 billion by the end of July 2020, although the aggregate sector position masks a significant spread of financial strength and a concentration of large unrestricted reserves in a very small number of institutions.

28. Institutions forecast pension liabilities to increase from £9.5 billion at 31 July 16 to £10.1 billion at 31 July 2020; an increase of 6.7 per cent, with the largest increase (£300 million) expected in 2017-18. This increase is largely due to a small number of institutions anticipating higher pension costs in response to the latest University Superannuation Scheme (USS) valuation, currently underway. However, it should be noted that the majority of HEIs have indicated that it is too early to make revised pension projections so have not reflected similar increases in their forecasts. This is potentially an additional cost pressure that will need to be managed by institutions over the forecast period.

Sector outlook

29. Following our assessment of the financial outturn for 2015-16, we concluded that the sector’s financial position is currently stable overall. This was also supported by the evidence obtained as part of our annual accountability process.

30. The sector is facing significant uncertainty arising from Brexit, increasing global competition, the changing policy agenda, and cost pressures. This, along with increased competition in the domestic market, will present challenges to some HEIs in achieving their financial projections.

31. This is likely to lead to greater focus from investors on the financial strength of individual HEIs. Any fall in overall levels of confidence in the sector could restrict the availability of finance and put significant elements of the sector’s investment programme at risk. Falling confidence levels would also be likely to lead to a rise in the cost of borrowing for those able to secure such funding.


Note: An updated version of this document was uploaded on 21 November 2017, incorporating the following corrections:

  • The caption to Figure 4 was corrected to reflect the figure's date range, from ‘2013-14 to 2018-19’ to ‘2014-15 to 2019-20’.
  • The projected income rise in paragraph 59 was corrected from ‘10.4 per cent’ to ‘3.2 per cent’, as the former figure reflected income in cash terms rather than real terms.
  • In paragraph 78, the value of a figure was clarified by the addition of ‘per cent’.
  • Figure 11 was updated to include students writing up, in line with the figures used elsewhere in the publication.
  • In paragraph 95, the word ‘ranges’ was corrected to ‘range’.
  • Paragraph 99 was changed to correct a misleading characterisation of Figure 18: the words ‘at 31 July 2016, compared to the number of projected liquidity days at 31 July 2020’ became ‘at 31 July 2020’.

Date: 26 October 2017

Ref: 2017/28

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