University finances generally in good shape, but risks include over-reliance on international recruitment

The OfS has today written to 23 higher education providers with high levels of recruitment of students from China, to ensure they have contingency plans in case recruitment patterns change and there is a sudden drop in income from overseas students.

Today’s report finds that many universities and colleges are continuing to protect their financial position by strengthening cash reserves to support investment, despite early indications of further cost pressures. The sector’s financial performance shows resilience, with income and expenditure surplus significantly better in 2021-22 than had been forecast in the previous year. Many universities and colleges are expecting their financial performance to improve in the medium and long-term.

Despite this positive news there remains a wide spread of financial performance across the sector. For some providers, there are real and increasing risks to financial sustainability in the long-term, particularly if multiple risks materialise at the same time.

OfS analysis concludes that a range of risks may affect individual higher education providers to a varying extent, but the likelihood of a large number of providers closing due to financial failure remains low in the short-term.

Key risks identified in the report include the:

• impact of inflation on costs and challenges in growing income to meet increasing costs
• increasing reliance on fees from overseas students in some higher education provider’s business plans, especially students from China or any individual country
• challenges in meeting investment needs for facilities and environmental policies.

The analysis is based on data returned to the OfS from the annual financial return for 2021-22. The return includes five-year forecasts from 2023-27 for higher education providers, and the report shows trends in financial performance for the whole sector.

The report finds, in aggregate for the sector as a whole:

• The sector is expecting to report growth in income across the next three years, rising from £40.8 billion reported in 2021-22 to a forecast £50.1 billion in 2025-26.
• The sector’s cash flow and surplus for 2021-22 have improved compared to 2020-21. However, the sector is forecasting a decline in financial performance and strength in 2022-23, with costs increasing at a faster rate than income and a significant dip in the income and expenditure surplus.
• In 2021-22 total higher education course fees and education contracts were reported at £22.5 billion, an increase of 8.8 per cent compared with 2020-21 (£20.6 billion). Fee income is forecast to increase to £29.3 billion by 2025-26, with a 17.5 per cent forecast rise in student numbers between 2021-22 and 2025-26 across all levels of study. However, this trend varies significantly between different universities and colleges.
• Total Non-EU (overseas) tuition fee income was reported at £7.8 billion in 2021-22, an increase of 25 per cent compared with 2020-21 (£6.3 billion). This is consistent with strong growth in overseas fees in recent years. At an aggregate level, non-EU fee income as a proportion of total income is forecast to increase from 19.3 per cent in 2021-22 to 24.0 per cent in 2025-26, highlighting the sector’s increasing reliance on fees income from non-EU students to sustain their activities.  
• Overall cash flow and short-term investments are reported to be £16.6 billion for 2021-22, improving by 10 per cent since 2020-21.

Beneath the sector-level picture, there continues to be significant variation in the financial performance of different universities and colleges.

The OfS recently held a series of roundtable events with finance directors from higher education providers to discuss financial risks and test its understanding of how these were affecting different providers. It has also recently published case studies that demonstrate how the OfS works with and supports higher education providers facing financial challenges.

Susan Lapworth, OfS chief executive, said:

‘Universities and colleges have weathered storms over recent years, and most remain in good financial health. This new analysis shows that they are confident that income and student numbers will continue to grow. However, cost pressures are having a substantial impact, with an expected reduction in financial performance across the sector in the short-term.

‘For a small number of institutions the financial picture is of particular concern and we will continue to focus our attention on those cases. But all institutions will continue to face financial challenges, with a number of risks present at the same time for many.

‘International students bring enormous economic, cultural and educational benefits to higher education in England. But we continue to have concerns that some universities have become too reliant on fee income from international students, with students from one country sometimes a significant part of the financial model. Universities must know what they would do if international recruitment fails to meet expectations. We have written to a number of institutions today to ensure they are alert to this risk, and have credible contingency plans in place to protect them from the consequences of a sudden reduction in their income.

‘All universities and other higher education providers registered with the OfS need to demonstrate they are financially viable and sustainable on an ongoing basis. The OfS will work constructively with any institution in financial difficulties, with a clear priority to protect the interests of students.’

Notes 

1. The Office for Students is the independent regulator for higher education in England. Our aim is to ensure that every student, whatever their background, has a fulfilling experience of higher education that enriches their lives and careers.
2. Data for the report was collected from all registered higher education providers in England, excluding further education colleges which submit financial data directly to the ESFA.
3. The OfS cannot comment on the financial position of individual providers, and this report does not provide information about individual providers. All registered providers are required to publish audited financial statements.
4. From 2023-24, cash flow and surplus levels are expected to gradually recover but not to the level reported in 2020-21 and 2021-22. The sector forecasts cash flow and short-term investments to slowly reduce from 2022-23 onwards, to an average of 111 days of net liquidity in 2025-26, on the assumption that financial performance is delivered as forecast.
5. The OfS has a statutory duty to monitor the financial sustainability of registered providers and has published the approach it takes. Read the case studies showing how the OfS has responded to higher education providers at financial risk.