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Executive summary

Background and purpose

1. This report provides an overview of the financial health of the HEFCE-funded higher education sector in England. The analysis covers the financial results of these higher education institutions (HEIs) for 2016-17. This does not include further education or sixth form colleges, or alternative providers of higher education.

2. The report is being published to provide feedback on the sector’s financial performance in 2016-17. The analysis also provides information to other stakeholders about the current financial health of the sector.

Key points

3. The financial results for the sector as a whole in 2016-17 are sound overall, and are more favourable than projected in July 2017. However there continues to be a wide variation in the financial performance and position of individual HEIs.

4. The main outcomes from the analysis of the 2016-17 results are as follows:

  1. The sector reported a rise in income of 2.9 per cent to £29.9 billion in 2016-17. However, a greater rise in expenditure caused surpluses to fall from £1.5 billion (5.2 per cent of total income) in 2015-16 to £1.1 billion (3.6 per cent of total income) in 2016-17.
  2.  At institutional level, a wide range of results were reported. In total, 24 institutions reported deficits in 2016-17 compared with 11 institutions in 2015-16. The majority (19 HEIs) had already projected deficits in their July 2017 forecasts, some due to the costs associated with restructuring activity.
  3. In contrast, 15 institutions reported surpluses of over 10 per cent in 2016-17 compared with 17 in 2015-16. The high surpluses reported by some HEIs have been boosted by large one-off income receipts from donations and endowments, while others are due to strong operating performance.
  4. Cash flow from operating activities remained at similar levels to the previous year: 10.0 per cent of total income in 2016-17 compared with 10.1 per cent in 2015-16.
  5. Home and EU tuition fee income increased by 5.7 per cent: from £11.0 billion in 2015-16 to £11.7 billion in 2016-17. Fee income from non-EU students increased by 5.0 per cent, from £3.8 billion in 2015-16 to £3.9 billion in 2016-17 (equivalent to 13.2 per cent of total income).
  6. Liquidity increased by 8.2 per cent, from £9.6 billion (135 days of expenditure) at 31 July 2016 to £10.4 billion (140 days) at 31 July 2017. This was also higher (by 9.7 per cent) than the level forecast by the sector in July 2017. The reasons why liquidity levels were higher than forecast varied across the sector, but were mainly due to lower capital expenditure, higher surpluses, or higher current investment values compared with earlier projections.
  7. Borrowing increased by 6.9 per cent: from £8.9 billion at 31 July 2016 (equivalent to 30.7 per cent of income) to £9.9 billion at 31 July 2017 (33.1 per cent of income).
  8. Capital investment, to maintain and enhance academic and student facilities, totalled £4.2 billion in 2016-17, an increase of 8.6 per cent compared with 2015-16; but, due to a number of HEIs reporting delays in capital expenditure, this was 12.4 per cent lower than forecast in July 2017.
  9. There is significant variation in the level of capital spend between institutions. 57 reported a decline in capital expenditure in 2016-17 compared with the previous three-year average (2013-14 to 2015-16).
  10. As in previous years, this investment was driven by a small number of institutions, with 15 HEIs contributing 50 per cent of the sector’s capital expenditure total in 2016-17.
  11. Pension provisions decreased by 9.1 per cent – from £9.4 billion at 31 July 2016 to £8.6 billion at 31 July 2017 – due to a number of HEIs reporting lower than expected deficits in their Local Government Pension Scheme as a result of the latest actuarial valuations on these schemes.
  12. In contrast, the 2017 actuarial valuation for the Universities Superannuation Scheme (USS) shows an increase in the funding deficit: from £5.3 billion in 2014 to approximately £7.5 billion as at 31 March 2017 (see, and a significant rise in the cost of future defined benefits (up by over a third since the last valuation).
  13. The implications of this deficit increase have not yet been reflected in the sector’s accounts, and discussions on how these might be addressed by USS employers and members are ongoing. Proposals for USS benefit reform have been set out by the Joint Negotiating Committee, and are the subject of a statutory consultation with representative groups.
  14. The movements in deficit levels and change in the costs of future defined benefits demonstrates the inherent volatility in the valuation outcomes of the sector’s pension schemes. This poses potentially significant uncertainty and risk to the ongoing financial sustainability of HEIs. It is expected that this will be reflected in the sector’s 2017-18 published financial accounts.

Financial outlook

5. In our report on the sector’s financial projections to 2019-20, published in October 2017 (HEFCE 2017/28), we highlighted a trend of reducing surpluses and cash levels, and a rise in borrowing. All of which signals a general weakening of financial performance and a trajectory that is not sustainable in the long term.

6. We also highlighted some significant uncertainties and risks facing the sector arising from the UK’s forthcoming withdrawal from the European Union (Brexit), increasing global competition, the changing policy agenda, as well as upward pressure on costs. This, along with increased competition in the domestic market, will pose challenges to the sector in the years ahead.

7. The sector has a track record of meeting such challenges, showing itself to be adaptable to a more competitive and uncertain environment. However, these risks will need careful monitoring and mitigation if institutions are to ensure their long-term sustainability.

8. The outcome of the latest USS valuation also exposes member institutions to significant financial and operational risks as pressure mounts on both employers and scheme members to agree a plan to ensure the scheme’s sustainability.

9. The Government’s review of post-18 education and funding announced in February 2018 could potentially have an impact on HEIs in the future. HEIs will need to re-assess their financial strategies and future financial prospects once the outcomes of the review are known and any potential implications become clear.

10. The various elements of uncertainty that currently exist within the sector are likely to lead to greater focus from investors on the financial strength of individual HEIs, with any fall in confidence levels likely to either restrict the availability of finance or result in a rise in the cost of borrowing for those able to secure such funding. This would inevitably put significant elements of the sector’s investment programme at risk and could harm the long-term financial sustainability of some HEIs.

Date: 20 March 2018

Ref: 2018/04

To: Heads of HEFCE-funded higher education institutions

Of interest to those
responsible for:

Audit, Estates, Finance, Governance, Management, Planning

Enquiries should be directed to:

Will Dent, tel 0117 931 7437, email

Annette Wynne, tel 0117 931 7377, email

Sophie Osborne, tel 0117 931 7383, email