Higher Education sector prepares for future financial challenges

These findings are part of a review of universities and college finances published today by HEFCE (note 1).

The sector recorded good cash balances and healthy reserve levels, and an operating surplus of 4.2 per cent in 2011-12 compared to a surplus of 4.6 per cent in 2010-11. This was an improvement on earlier projections, and indicates that the sector has maintained its track record of making year-on-year efficiency savings. The most significant savings related to staff costs, which fell in real terms for a second consecutive year.

These solid foundations are essential for future sustainability, because projected results for 2012-13 indicate that the sector will see a deterioration in financial performance.

Universities and colleges are funding a significantly higher proportion of capital expenditure from their own internal cash reserves following reductions in public capital funding since 2010-11. Some institutions will need to work hard to increase surpluses above projected levels to meet their borrowing obligations in order to maintain the quality of their infrastructure beyond 2012-13. If surpluses do not increase, there is a risk that the quality of higher education infrastructure will deteriorate, with consequent threats to the student experience and to long-term sustainability.

As in previous years, the HEFCE review found no institution to be currently at risk of insolvency, an assessment which is supported by independent institutional audits and the sector’s own projected continuation of positive cash in-flows and healthy cash-backed reserves. However, there is wide variation in financial performance and financial health across the sector, and some institutions will face challenges if they experience repeated falls in student recruitment.

There is clearly potential for increased income volatility as a result of pressures on student recruitment (including increasing competition for international students from other countries, and the significant fall in part-time undergraduate and postgraduate numbers). In this environment, it will be essential for institutions to be able to maintain strong cash balances.

Sir Alan Langlands, HEFCE’s Chief Executive, said:

‘Universities and colleges took a responsible approach to financial stewardship in the year before the new funding arrangements for higher education were introduced, reducing costs while maintaining excellence in learning, teaching and research. The sector continued to make efficiency savings, with record numbers of students being taught at the same time as income levels reduced. Staff costs fell in real terms for the second consecutive year. The latest projections for 2012-13, while not raising immediate concerns, indicate that most institutions will experience a downturn in financial performance in 2012-13. This is not unsurprising, as student recruitment in summer 2012 was lower than expected.

‘It is important to recognise that past performance does not guarantee future success, and recent talk of universities being “awash with cash” is ill-informed. Significant reductions in public funding through HEFCE, especially for capital investment (down 64 per cent), mean that institutions will need to deploy more of their own resources to maintain their estates. This will be required to support a high-quality student experience and to secure the long-term sustainability of education and research programmes that are vital to economic recovery and growth.

 ‘HEFCE will continue to monitor the financial position closely as part of our commitment to supporting students and institutions to achieve a smooth transition to the new funding arrangements.’