Dear Vice-Chancellor or Principal
Annual accountability return requirements: Financial forecasts submission
1. This letter clarifies our requirements for the submission of financial forecasts and commentary as part of our annual accountability return requirements.
2. A response is required from all higher education institutions by noon on Monday 31 July 2017. We will send guidance on how to access, complete and submit the financial forecast tables directly to heads of finance.
3. Institutions are asked to submit the projected outturn for 2016-17 and forecasts for 2017-18, 2018-19 and 2019-20, supported by financial commentary.
4. The financial forecast submission, including the commentary, must be approved by the governing body.
5. Twice a year, HEFCE publishes an assessment of the financial health of the sector, based on financial submissions. Our latest assessment, ‘Financial health of the higher education sector: 2015-16 financial results’ (HEFCE 2017/02), published in March 2017, highlighted increasing variability in the financial performances of individual institutions across the sector, and concerns, in the absence of explanations, of what appears to be overambitious projected student number growth in some of the financial forecasts submitted in July 2016. We also note that where institutions are forecasting growth, their commentary does not always explain the assumptions that underpin this growth, or explain the impact if this growth is not achieved.
6. To address this, we have clarified the guidance institutions should follow when preparing their forecasts, and we have updated the questions that institutions must answer in their financial commentary.
Basis of preparation
7. The forecasts should present the institution’s strategic plan in financial terms and reflect the most likely and realistic outcome.
8. We recognise that the sector faces some significant uncertainties and that institutions may produce a number of different scenarios relating to their future financial position, including stretch targets or break-even scenarios. Institutions should be conscious of where ambitious or prudent assumptions are reflected in their forecast tables. The forecasts submitted to HEFCE should represent a complete and balanced picture.
9. Institutions should consider the accuracy of their past forecasting and the basis of its preparation as part of their review and challenge process.
Financial forecast commentary
10. Institutions must answer the following questions in their financial forecast commentary.
Explain the institution’s financial forecasts and how the institution will ensure its financial sustainability, including specific details on:
a. Key risks to the institution and significant areas of growth, change and assumptions.
b. Annual movements in student numbers and fee income, commenting on the assumptions relating to European Union (EU), international and home recruitment.
c. How the institution has reflected the forecasted impact of the UK’s exit from the EU.
d. Any transnational education arrangements in place.
11. The following provides suggestions of topics for inclusion in part a. of the financial commentary. Institutions are asked to review this checklist and, where applicable, explain any key risks, significant growth, changes and assumptions relating to:
- strategy, including areas targeted for improvement and new initiatives
- fee levels
- cash flow management and going concern
- financial commitments
- estates or capital developments
- pension, restructuring and staff costs
- partnership arrangements
- any other significant assumptions or movements in value (±10 per cent in one year).
12. Where institutions are forecasting growth, they must ensure that the assumptions underpinning the growth are explained in their commentary, including growth in student numbers in part b., and explain the impact if this growth is not achieved and what contingencies would be put in place.
13. Following the outcome of the referendum on the UK’s membership of the EU, we asked institutions to provide additional EU-related information in their July 2016 forecast submission. This has now been incorporated into the forecast template as a new table (Table 7).
14. In the revised commentary questions, part c. is now focused on EU-related information. Institutions should explain the information in Table 7 and how their forecasts reflect the UK’s forthcoming exit from the EU. This enables institutions to provide insight into their dependency on EU-related income and the risks faced. Please also comment on any other types of significant EU-related income, such as European Structural and Investment Funds.
Transnational education arrangements
15. We are seeking to better understand the risk and opportunities faced by the sector in relation to transnational education. (These types of activity are defined on the Higher Education Statistics Agency website.) Part d. of the commentary should include both EU and non-EU arrangements, and seek to cover significant risks, opportunities, student numbers, staffing, income and surplus.
16. In May 2017 the HEFCE Board approved a new approach to calculating financial commitment thresholds for institutions. This will be formally published in a revised Memorandum of Assurance and Accountability, with the new approach becoming effective from 1 August 2017.
17. The new threshold will be based on adjusted net operating cash flow (ANOC), a measure developed by the British Universities Finance Directors Group Financial Metrics working group. The threshold will be set at six times average ANOC, calculated over six years (two actual plus four forecast). The forecast tables have been updated to calculate the new threshold for institutions. Where institutions’ existing financial commitments are above this threshold at 1 August 2017, this will be automatically accommodated under a higher financial commitment level.
18. If an institution wishes to increase its financial commitments beyond its threshold then it must seek approval from HEFCE in accordance with Annex C of the ‘Memorandum of assurance and accountability between HEFCE and institutions’ (HEFCE 2016/12). The existing basis for calculating financial commitment thresholds based on the July 2015 forecasts will remain in place until 31 July 2017.
19. Financial commitments include:
- bank loans, overdrafts and revolving credit facilities, drawn or undrawn
- finance leases and service concession arrangements
- Private Finance Initiative arrangements which are accounted for as loans or finance leases in accordance with the requirements of Financial Reporting Standard 102
- repayable grants, such as from the HEFCE Catalyst Fund.
20. In calculating the threshold for financial commitments, pension fund liabilities, interest rate hedges (such as swaps) and all provisions should be excluded.
21. If issues are raised that materially affect an individual institution’s financial sustainability, in its forecasts or at any other time in the year, this may lead to a review of the institution’s risk status and a revised risk letter.
Professor Madeleine Atkins