Universities UK (UUK) - UK Higher Education Financial Sustainability Report

PwC was commissioned by UUK to consider the current financial sustainability of the UK Higher Education sector and its future outlook. It analysed current and historical Higher Education Statistics Agency (HESA) data of 255 Higher Education (HE) providers. The report also analyses the 2022/23 regulatory forecasts (Annual Financial Return 2022 for England and Northern Ireland, and Strategic Plan Forecast 2023 for Scotland) of 84 participating UUK members. It assesses how those forecasts would be impacted by factors such as inflationary pressures, the domestic fee freeze and the reliance on cross-subsidisation from international students. The report uses the Office for Students (OfS) categorisation of English providers into six distinct segments – larger research intensive, larger teaching intensive, medium, smaller, specialist creative and specialist.

The full report can be found here

At-a-glance:

• The UK Higher Education sector has strong market fundamentals that have driven sustained and resilient growth. Total income amounted to £46bn in 2021/22, growing at 5 per cent between 2017/18 to 2021/22 (p7)
• In 2021/22, the sector supported 2.9m students, up from 2.4m in 2017/18. However, domestic participation declined in the last full academic year, reverting to pre-pandemic levels and, from 2030, the 18–25-year-old population is expected to decline. Larger members are expecting slower growth in, or even a plateauing of, domestic undergraduates; whilst Medium, Smaller and Specialists are forecasting stronger growth than the historical sector average of 2.4 per cent (p7)
• Higher education is facing constraints on income generation. Funding per student, in tuition fees and teaching grants, has been falling over the last decade. In England domestic fees are now worth only £5,990 in 2012 prices. Funding per student is at its lowest level in over 25 years and, without any additional investment, is expected to fall to £5,590 in England by 2025/26 (2012 prices). Grant funding has remained flat and research contracts are competitive (p8)
• The UK is the second most popular destination for international students (hosting 700k - 9 per cent of international students worldwide). Providers have sought to increase their international student base in order to compensate for the real-term decline in margin for domestic students and the low cost recovery of research activities (p9)
• Strong growth in international fee income (a 12 per cent rise since 2017/18) has enabled a short-term contraction in the percentage of providers realising a deficit in providers, decreasing from more than a third prior to COVID-19 to about a quarter in 2021/22 (p11). All university groups within the study are assuming increased reliance on international fee income. It will account for between 33-66 per cent of all course fee income by 2026/27 (compared to a range of 24-64 per cent in 2021/22) (p8, p13)
• However, the sector is now becoming increasingly aware of the risk of overreliance on international students – particularly if student demand is concentrated from a smaller number of origin countries (eg China). The overseas market is highly dependent on changes in immigration policy (eg student and post-study work visas and limiting dependents). Relative affordability of studying in the UK is down, driven by the sharp increase in living costs (p9)
• There continues to be a strong need for investment in capital, as an increasing number of university estates require updating, and retrofitting to meet net zero targets. Many digital and physical capital works were postponed during the pandemic to preserve liquidity, meaning significant capital expenditure is now required alongside rising maintenance costs and tightening operating margins (p8)
• Operating costs have been rising significantly across staff pay, pensions, compliance and energy. Staff costs are significant (accounting for more than half of total expenditure) and inflation has led to higher-than expected annual settlements (p8)
• Access to finance varies across the sector and in some cases is limited. Providers with scale, a strong financial standing, brand and reputation have had the choice of issuing public bonds, raising private placements and/or accessing the main clearing banks. For other providers, accessing the capital markets has not been possible and they have been more reliant on shorter term debt. As the financial pressures in the sector become greater, the ability for some providers to meet lending criteria will become more challenging (p8)
• Higher debt servicing costs presents a threat, particularly to providers whose debt is due to mature in the next five years, as the cost to refinance may be materially greater than existing fixed rates (p8)
• Research income grew at 2 per cent from 2018/19 to 2021/22, and now sits at £7bn. Full economic cost recovery in research continues to decline (down to 68.1 per cent in 2021/22) due to limited and competitive funding, that is further eroded by inflation. Providers may now be less able to absorb this net loss on research, given the increasing need to cross-subsidise domestic provision (p9)
• 40 per cent of members are forecasting a deficit in 2023/24, reducing to 13 per cent by 2026/27 as a result of the sectors more favourable longer-term assumptions on income and expenditure growth, as well as reduced capital expenditure, investment and finance costs (p13)
• Strategies universities are adopting to drive their top-line and reduce their cost base include back-office transformation, adopting modern digital solutions, estates rationalisation and strategic partnerships (p19)

Implications for governance:

According to the PWC analysis, despite its strong international brand and academic excellence, the UK HE sector is facing significant financial challenges that threaten to impact the quality of provision and student outcomes.

On the domestic front, fee income in England has remained fixed at £9,250 since 2017 and home undergraduates are often taught at a net cost to the university. This is even more exacerbated for some devolved nations – Universities Scotland estimates that per student funding has been cut by 39 per cent in real terms since 2014/1515 (our recent news alert on financial sustainability of Scottish universities expands on this).

In the near term, the escalating cost of living and a growing sentiment that a conventional university degree might not always be the most suitable path could impact UK participation rates, although demand for HE is likely to remain strong, given the growth in the 18-year-old demographic and the need to fill skills shortages. In the longer term, however, the available pool of students will decline between 2030 and 2038 due to falling birth rates.

Constraints on income generation, alongside cost pressures – which all governors will be aware of - have driven universities to increasingly cross-subsidise domestic student teaching and research activities with higher levels of international students.

The report reiterates the warnings made in the 2023 OfS financial sustainability report – that an over-reliance on income from the overseas market leaves providers exposed to international demand or geopolitical shocks that they cannot control. Larger Research Intensive providers and Specialist providers in England are particularly dependent on income from international students and risk being exposed if forecast international student volumes do not materialise.

PWC analysis shows that if there were a gradual or sudden drop in international student numbers in coming years, up to 80 per cent of providers would be likely to fall into deficit.

Hopeful forecasts across the sector that cost inflation will fall to pre-pandemic levels, below their income growth assumptions, also come with a health warning.  PWC analysis shows that just a two percentage point increase per year in the cost growth assumptions could result in 65 per cent of universities falling into deficit (and this analysis is before the recent announcement of increased Teachers Pensions’ Scheme contributions has been taken into account).

Within a very diverse sector, financial pressures are not felt evenly. Some universities have delayed physical and digital infrastructure investment to protect cashflow. But there is a risk that cashflow and affordability will continue to drive investment and operating decisions, ultimately at the expense of maintaining quality. Governors will no doubt be abreast of the situation facing their own institution, but may wish to re-assess it in light of the PWC analysis.

Governors will also be aware that significant investment and transformation is needed to achieve universities’ sustainability ambitions and net zero targets. This includes retrofitting ageing estates. The potential negative impact on reputation and brand for universities that do not meet their stated net zero targets is highlighted in the report as a “red light” threat.

These various challenges may be made harder by the cost of borrowing. Future economic constraints and weaker financial performance could further limit the availability of affordable borrowing options, even to those providers that can currently access finance, according to the report.

The risks to and demands made on the sector by future UK Government policy and regulation also need to be kept in mind by governing boards when future scanning, particularly in an election year. As well as changes to the student finance or visa regime, interventions to integrate the tertiary sector could also have an impact.

For instance, the Lifelong Learning Entitlement, which comes into effect in 2027, will require providers to adapt their existing business models and to manage increased administration costs and potentially lower income certainty.  Changing business models provide an opportunity for diversification, although it also bears risk, for example uncertain demand for modular provision and challenges with degree apprenticeships. 

Reducing costs and maximising income is, of course, part of governing boards’ strategic thinking. Provision of short study online courses can be a profitable. Corporate and enterprise partnerships with local commercial organisations can give students valuable experiences and provide new income streams for universities. PWC also point out that philanthropic funds have increased by 93 per cent since 2012, with evidence that concerted campaigns, corporate collaborations and understanding of donors, can help providers more effectively access philanthropic funds.

Opportunities to lower the cost base, for example, by making back-office efficiencies through shared services or automation, adopting modern digital solutions and estates rationalisation are being explored. However, such measures can require significant upfront investment and time.

According to PWC, the future of UK HE will depend on how well it responds and adapts to the changes that lie ahead. Some universities may see these as opportunities; to others these changes will represent serious threats. Its analysis suggests that, without any mitigation, many institutions could face an extremely challenging period.