Universities have managed finances well during pandemic but risks remain

Despite a positive picture across the sector as a whole, the regulator has warned that an overreliance on income from overseas students represents one of a number of financial risks to individual universities.

The report – Financial sustainability of higher education providers in England – 2022 update – also highlights increasing pension costs, fluctuation of student numbers and rising costs as key risks to be managed by universities in the short and medium term.

The report shows that, across the sector as a whole, universities and other higher education providers project:

• Total income to grow from £37.31 billion recorded in 2020-21 to a forecast £45.72 billion in 2024-25.
• A reduction in borrowing, both in cash terms and as a percentage of total income. Providers forecast £13.78 billion of external borrowing in 2024-25 (compared to £14.10 billion in 2020-21).
• A reduction in the aggregate surplus in the sector (adjusted to exclude pension provision adjustments) in the coming years. A surplus of £1.74 billion (4.7% of total income) was recorded in 2020-21. This is forecast is to fall to £896 million (2.2% of total income) in 2021-22 before recovering to £1.67 billion (3.7% of total income) in 2024-25.
• Cash flow from operating activities to decline in the short term before picking up to approximately pre-coronavirus levels over the longer term.
• Expenditure to increase at an overall higher rate than income during the period, with a warning that inflationary pressures are likely to be more significant than universities have forecast.

On overseas students, the report says:

 'The sector, and some providers in particular, continue to be reliant on recruitment of students from China. Any event that reduces the flow of such students to the UK is likely to have a significant impact. The number of Chinese students studying at English higher education providers showed no growth in 2020-21, whereas the number of Indian students studying at English providers was almost 50 per cent higher than the previous year.'

Commenting on the report, Susan Lapworth, interim chief executive of the OfS, said:

'Looking at the aggregate picture for the sector, universities and other higher education providers have continued to weather the financial impact of the pandemic and are in good shape for sustainability in the longer term. But we continue to see significant variability in the financial position for individual institutions.

'As we set out in the report, universities need to carefully consider whether they can deliver the growth they have forecast and whether they are becoming too reliant on income from overseas students, particularly if these students come from a small number of countries.

'There are several other challenges to financial performance, which include the potential for fluctuations in student numbers, rising pension costs for staff, and growing inflationary pressure on costs. Our analysis suggests that recent inflation figures are higher than the levels that institutions have applied in their forecasts.

'Individual institutions are responsible for managing their own financial position and making good judgments about any action they need to take in response to changes in their operating environment. The OfS continues to monitor their financial health. As well as collecting and analysing detailed data on the finances of individual universities, we continue to draw on information from other sources, including our engagement with individual universities and other stakeholders, including the sector’s lenders.

'We have a range of tools at our disposal should an institution encounter financial difficulties and will always take steps to protect the interests of students.

'This is an area which has rightly attracted scrutiny in recent months, and we are continuing to respond to the points made in reports from the National Audit Office and the Public Accounts Committee.'