Increased pressure on Higher Education finances – OfS

An independent analysis from the Office for Students (OfS) has found increased pressure on higher education sector finances, and cautioned universities against being too optimistic about future student growth. In its annual review of financial sustainability, the regulator has found a decline in financial performance in 2022-23, with declining surplus levels, cash flow and net liquidity. A significantly higher number of providers expect to fall into deficit in the coming years. While net liquidity has fallen, there is evidence of the sector adjusting to protect its cash flow in the face of financial challenges.   

While an improved outlook is predicted by providers from 2026-27, the OfS has warned that much of the projected additional income throughout the period comes from anticipated growth in both UK-based and international students. Uncertainty about the ability to recruit significant numbers of extra students means that there is significant risk that the actual financial challenges facing the sector in the short, medium and long term are greater than providers are forecasting.  

In response to its analysis, the OfS is calling on all universities and other higher education providers to look carefully at the credibility of their forecasts, and to identify the steps they will take if future growth is not achieved. 

Universities and other higher education providers submit detailed financial information to the OfS, alongside forecasts for future years on both finances and student numbers. This information helps the OfS to understand and report on the financial sustainability of the sector, and for individual providers. The OfS engages with providers where potential financial weaknesses are found. It can increase monitoring and reporting requirements for those in difficulty, and works to protect the interests of students in these cases.  

The report highlights five key risks affecting the sector. These are: 

• Continuing decline in the real-terms value of income from UK undergraduates combined with inflationary and economic pressures on operating costs.
• A recent, apparent reduction in applications from UK and international students after years of strong growth, especially from international students. 
• A higher education financial model that has become reliant on fee income from international students, with a particular vulnerability where recruitment is predominantly from a single country.
• The affordability of necessary estates maintenance and development and the significant cost of investment needed to reduce carbon emissions as part of providers’ commitments to achieve net zero. 
• Cost of living difficulties for students and staff, which challenge both student recruitment and the support needed by students during their time in higher education.

The report, and an accompanying Insight brief, ‘Navigating financial challenges in higher education’, set out some of the steps universities and other higher education providers are taking to address financial challenges.  

Commenting, Susan Lapworth, chief executive of the OfS, said:  

“Many universities continue to manage their finances well. Many have built a strong asset base to allow them to weather financial storms. But the picture across the sector is becoming increasingly challenging. 

“Financial performance and strength vary significantly for different institutions and our analysis shows that an increasing number will need to make significant changes to their funding model in the near future to avoid facing a material risk of closure. 

“Many universities have already started this important work to secure their long term sustainability. They are taking difficult, but necessary, decisions about the shape and size of their institution. They are working with others on mergers or centralised services. And they are doing all of this while protecting the quality of their courses and the interests of their students. 

“Today’s report is a signal to all institutions to re-test their assumptions about increases in UK and international students – the numbers reported to us for the sector as a whole are just not credible. Some institutions will certainly be able to grow. But in a competitive market – and with some evidence that applicant numbers are falling – others will struggle to expand. 

“Our modelling suggests that no growth across the sector could leave nearly two-thirds of institutions in deficit by 2026-27, with 40 per cent facing low liquidity at year end. For the reasonable worst case scenario we have modelled – which assumes a significant reduction in international student numbers and no cost cutting activity – over 80 per cent of institutions would be in deficit and nearly three quarters would face low levels of liquidity. 

“That is why universities should redouble their efforts to avoid optimism bias and identify now the actions they will take to ensure they remain on a sound financial footing. 

“This report sets out our impartial analysis of the current financial position of the higher education sector. We will continue to expand our work in this important area, seeking to understand sector trends and intervening in individual cases where there is the greatest risk to students. We continue to encourage any institution with financial concerns to come and talk to us at an early stage.”