Thirteen UK universities are at risk of bankruptcy as a result of Covid-19, a report from the Institute for Fiscal Studies (IFS) has warned today unless government steps in with a targeted bailout package.
The new IFS report – Will universities need a bailout to survive the COVID-19 crisis? – predicts a challenging year for the UK higher education sector, which faces losing the equivalent of half its yearly income. The devastation wrought by a drop in international students and increasing pension liabilities could put as many as 13 universities at risk of insolvency, researchers concluded.
Predicting the impact of Covid-19 on UK universities at this stage, however, is “highly uncertain”, the report said. The researchers point to a range of possible outcomes that could see the sector lose between £3bn and £19bn next year, which represents between 7.5% and nearly 50% of annual income. In its “central scenario”, the research institute predicted the Covid-19 crisis could cost the sector £11bn – or just shy of a quarter of one year’s income.
Researchers said there were risks to several income streams next year. Losses will likely stem from falls in international student enrolments and increases in the deficits of university-sponsored pension schemes. Higher education providers (HEPs) will also lose income from long-term investments, student accommodation, and conference and catering operations. These operating and financial losses will not be spread evenly across the sector, the report warned.
Postgraduate-only institutions and elite, high-ranked providers (those in the top quartile of university league tables) will lose the most income next year. The risk to these providers is two-fold; they are more reliant on international students, and they employ more staff, meaning they therefore have the costliest pension obligations.
Universities in the second, third and fourth quartiles are less exposed because their income is less reliant on international students and they employ less staff. However, those universities in the bottom half of the league table could face ruin as competition between providers for UK-domiciled students increases. Small, specialist institutions, like music and art course providers, are also at risk because of their size and reliance on face-to-face teaching.
There are too many reports around at the moment that take old opinion polls of how students might behave as the gospel truth. We know from when tuition fees in England went to £9k that polls which ask students how they might behave are a woeful guide to the future
– Nick Hillman, Hepi
According to the IFS’s analysis, more than a dozen universities are at risk of insolvency under its ‘central scenario’. These institutions educate around 5% of students and tend to be in the bottom half of the university league table; they are all universities who faced financial challenges before the crisis. Using analysis of data from the Higher Education Statistics Agency (Hesa), IFS researchers identified a few universities that have generated net losses on average since 2015/16, with some posting losses every year for the last five years. One of these institutions is a large provider with around 24,000 students in 2019. The report warns these universities are not prepared for economic turbulence and cannot weather the coming storm.
The crisis could worsen after Brexit, the researchers added. The number of EU undergraduates is likely to fall because the government has recently announced that EU fees will be allowed to rise from 2021 and government-sponsored loans will no longer be made available for EU students. The loss of these students would intensify competition for domestic students, which “is likely to hit the least selective universities hardest, as higher-ranked universities will likely lower entry standards to make up for the shortfall”.
The IFS recommended a “tightly targeted bailout” to save the 13 most at-risk universities, which would cost the Treasury around £140m. The researchers modelled the impact of several types of rescue package; they concluded that none of the published bailout plans (including the one suggested by Universities UK) would be enough to stave off disaster for those unlucky 13. The Department for Education is expected to announce a new package of support for teaching-intensive universities in the coming months. The IFS report strongly urged the government to focus its resources on the teaching-intensive universities, who were most vulnerable.
This report warns of the damage redundancies can do to teaching quality and universities’ reputations. Universities are already seeking to sack staff, with casual staff and those from BAME backgrounds suffering the most. We need a comprehensive support package that protects jobs, preserves our academic capacity and guarantees all universities’ survival
– Jo Grady, UCU
The report suggests sweeping government reform could save some of the at-risk universities. Debt restructuring might help make these HEPs viable long-term but would mean job and course losses. Changes to the current student finance model, as suggested in the Augar Review, “to encourage enrolment in higher education courses below degree level, including by those who already have a higher education qualification”, could help those 13 teaching-intensive universities change their business models.
Offsetting losses will prove difficult without a significant number of redundancies, the researchers warn. In its central scenario, the IFS estimated that universities could only save around £600 million. These savings would come from the government’s furlough scheme (£200 million), cuts to temporary teaching staff (£200 million) and cuts to other temporary staff (£300 million). The sector could save £1bn with a significant reduction in temporary staff numbers, the researchers add.
Report ‘meaningless in terms of planning ahead’
Nick Hillman, director of the Higher Education Policy Institute, commended the work of the IFS, but disagreed with some of its arguments and conclusions. He said the projected losses of between £3bn and £19bn were “meaningless in terms of planning ahead” because the range offered “a huge fan of uncertainty”.
“There are too many reports around at the moment that take old opinion polls of how students might behave as the gospel truth. We know from when tuition fees in England went to £9k that polls which ask students how they might behave are a woeful guide to the future, and the IFS’s figures on student numbers should therefore be taken with a lorry load of salt,” Mr Hillman continued.
“For example, the IFS are assuming there will be 10% fewer UK students, yet the latest Ucas figures show the opposite trend. Who would choose to have a gap year at the moment, when travel and job opportunities are so limited? The IFS are also predicting a 50% drop in EU students as a result of the pandemic, even though 2020 is the last year when they will be treated like home students. Unless there is a major second wave of Covid-19, the IFS’s ‘central’ estimate for the short-term financial losses would be better labelled ‘pessimistic’ and their ‘pessimistic’ estimate would be better labelled ‘extreme’.”
Mr Hillman also criticised the report for omitting any consideration of university research.
“When universities have less income and face big deficits, they can opt to stem the financial losses by doing less research as research generally loses money. Less research would be terrible for the UK as it would hamper the post-pandemic recovery. So, the quantity of research that institutions can afford must be a bigger part of the wider conversation about university financing,” he explained.
Jeremy Harris, partner at Fieldfisher and an HE pensions expert, said: “Whenever an organisations goes through period of financial stress an often overlooked but significant component is pensions and the liabilities that comes with that debt.
“The financial difficulties currently faced by the higher education sector raise the need to review pensions costs and risks again, to ensure that pension provision is sustainable and able to weather the various storms that hit the sector over the years.
University and College Union general secretary Jo Grady said: “This report is more bad news for higher education. It’s been months since our own research laid bare the likely devastating impact of the pandemic on universities and the Office for Budget Responsibility singled the sector out as one most likely to suffer. The government has to now step in and guarantee lost funding for universities so they can weather this crisis and lead our recovery on the other side.
“This report warns of the damage redundancies can do to teaching quality and universities’ reputations. Universities are already seeking to sack staff, with casual staff and those from BAME backgrounds suffering the most. We need a comprehensive support package that protects jobs, preserves our academic capacity and guarantees all universities’ survival.”