Finances – there may be trouble ahead

Financial uncertainty is approaching higher education institutions from multiple directions. Robert Morrison scouts out the invading parties

With Brexit looming and uncertainty the buzzword of the moment, higher and further education institutions are already feeling the pressure of financial insecurity.

A number of signs point towards struggles facing the higher and further education sector in the last 14 months: a no-deal Brexit may be one of the biggest threats institutions have ever faced; according to the Russell Group there is already a downturn in European students wanting to study in the UK; if EU research funding is put at risk, UK institutions may lose top-class researchers to jurisdictions where funding is certain; there have been reports of several unnamed universities in serious financial difficulty and one institution receiving an emergency loan of almost £1m in autumn 2018.

Add to this the recent decision to account for student loans in the budget, there is a growing concern about the long-term impact this, coupled with the existing challenges could have on the sector.

In 2018 there was expected to be around £17bn worth of loans made to students with a repayment in the region of £3bn, leaving a deficit of approximately £14bn. The debt will now be reclassified – a portion as public spending and a portion as genuine government loans (although it is estimated that about 45% of student loans will not be repaid). The overall impact increases the deficit by £12bn or so. This will inevitably lead to pressure on ministers to examine other ways to reduce the deficit. We may see fees cut – indeed this idea has already been floated, but they will need to be replaced with something else, such as an increase in the use of grant funding, additional cost cutting at universities and, in Scotland, potentially reducing the number of ‘free spaces’ provided for prospective Scottish students (these spaces are currently ‘capped’ as many institutions rely on the fee-paying students for a significant portion of their income). Increased financial pressures may also even play a role in encouraging universities to artificially boost grades.

You can’t help but draw comparisons between students and customers of financial institutions pre-2008

As pressure mounts some institutions may feel pressure for students to attain high grades in order to attract more students via ranking boosts. Additionally, there have been reports of universities making unconditional offers seemingly based on prospective students making that university their ‘first choice’, essentially lowering entry grade requirements. While this is not in itself conclusive of financial trouble, it’s arguably indicative of some of the factors in play.

In what is already a difficult period, Nick Gibb, the minister of schools reform, has announced there will be an increase in employer contributions to the Teachers’ Pension Scheme to ensure teachers’ pensions remain generous and attractive to the profession. In response to a query on the estimated costs of this increase to higher and further education Mr Gibb stated that, in 2019/20 the increased pension contributions will cost affected further education colleges and higher education institutions around £80m each. For the year 2020/21 this is expected to rise to £142m each and this change is due to come into effect from September 2019.

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Former government adviser Nick Hillman, now director of the higher Education Policy Institute (HEPI), has said several universities are in such financial difficulties that they are “close to the wall”. HEPI recently published a survey asking over one thousand students what should happen if a university provider could no longer stay open due to financial difficulties. While 83% of respondents had faith that their own institution is in a strong financial position, 77% also believed that the government should step in (to bail out) and 97% said that they would want to know if their university was in financial difficulty. When considering these statistics one cannot help but draw comparisons to the customers of financial institutions pre-2008. While such comparisons might appear extreme, it is unlikely students will have easy access to the necessary information and they may not have the knowledge required to fully understand their chosen institution’s financial wellbeing. It is crucial that prospective students are fully informed to allow them to make educated decisions when preparing to spend and/or borrow thousands of pounds.

A no-deal Brexit may be one of the biggest threats institutions have ever faced

In April 2019, the Department for Education published the College Oversight: Support and Intervention policy document (applicable to England). This follows the introduction of a new insolvency scheme for colleges (introduced through the Technical and Further Education Act 2017, the Further Education Bodies (Insolvency) Regulations 2019 and the Education Administration Rules 2018). It applies a number of existing insolvency procedures to further education (e.g. voluntary arrangements, administration and fixed charge receivership) and introduces a new special administration regime called ‘education administration’. Anne Milton, minister for skills and apprenticeships wrote in the foreword to the new policy document that “where colleges get into very serious difficulty and run out of money, we can use insolvency as a last resort to prioritise the protection of current learners”. Such a statement shows student protection is the priority, but fails to acknowledge any protection for further education bodies or their lenders. One thing is clearly promoted – action at the earliest opportunity. Independent business reviews and structure and prospects appraisals are among the tools available to help clarify the financial position and to identify potential efficiency gains. 

With Brexit looming imminently, a slump in the number of EU students attending (a 3% decrease according to the Russell Group) or indeed even showing an interest in attending a UK university, an increased focus on getting school leavers straight into the workplace (apprenticeship schemes), increased pension contributions and the introduction of the education administration procedure (the timing of which is arguably not coincidental), it is time for lenders and borrowers to consider the suitability of their current financing arrangements. Are the current lending arrangements flexible enough? Have forecasts been carried out to identify what would happen if student numbers drop? Will there be sufficient headroom in the facilities if there is a fall in research funding? Are there any cost-saving programmes that could be implemented? A contingency planning exercise would always be recommended to prepare for what is most certainly a difficult time ahead for higher and further education. 

Robert Morrison is an associate in business support and restructuring for Addleshaw Goddard

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