COVID-19 poses ‘serious financial threat’ to HE sector

The ongoing COVID-19 crisis poses a “significant financial threat” to the United Kingdom higher education sector, with some institutions at risk of severe financial problems or even insolvency in the long term, according to new analysis by the Institute for Fiscal Studies (IFS).

Universities are expected to suffer “large income losses” from falls in student enrolment, especially of international students, as well as lockdown-related losses of income from student accommodation and conference and catering operations.

In addition, the sector faces financial losses on long-term investments and from increases in the deficits of university-sponsored pension schemes, IFS says.

Ben Waltmann, a research economist at IFS, said: “With around £45 billion [US$57 billion] in reserves and an annual surplus of around £2 billion before the crisis, the university sector as a whole should be able to cope with substantial COVID-related losses.

“However, some universities were already in a weak financial position before the crisis hit. For around a dozen of these institutions, insolvency is likely to become a very real prospect without a government bailout.”

The new analysis, funded by the Nuffield Foundation, shows that the university sector’s losses from the COVID-19 pandemic are hard to predict, with researchers giving a very wide range of potential long-run losses – estimating anywhere between £3 billion and £19 billion, or between 7.5% and nearly half of the sector’s overall income in one year.

Their central estimate of the total long-run losses for the university sector is £11 billion, or more than a quarter of income in one year. More than half of these losses come from a combination of falls in international student enrolments this year and an increase in balance sheet provisions relating to pension deficits.

Variations between institutions

Large sector-level losses mask substantial variations expected between institutions, however. In general, institutions with a large share of international students and those with substantial pension obligations will face the biggest falls in income or increases in costs, IFS says.

These tend to be higher-ranking universities, postgraduate-only institutions or prestigious arts schools. While these institutions are relatively well placed to attract more UK students in response to falls in international enrolments, they will be constrained by recently introduced student number caps.

But it is not the institutions with the largest COVID-related losses that are at the greatest risk of insolvency. “Rather it is those, generally less prestigious, institutions that entered the crisis in a weak financial position and with little in the way of net assets which are at greatest risk,” the IFS analysis says.

Many of the institutions with the largest predicted losses from COVID-19 were highly profitable before the crisis and have substantial financial reserves.

In the researchers’ central scenario, 13 universities educating around 5% of students would end up with negative reserves and thus may not be viable in the long run without a government bailout or debt restructuring. A targeted bailout aimed at keeping these institutions afloat could cost just £140 million, IFS says.

By contrast, more widespread and less targeted packages as proposed by some in the university sector could cost billions of pounds without providing much support to those institutions most at risk of going under.

But a targeted approach also risks undermining attempts to ensure financial prudence more generally among all institutions, IFS researchers say.

Elaine Drayton, a research economist at IFS, said if the government wants to avoid university insolvencies, by far the cheapest option would be a targeted bailout, which may cost just £140 million. But rescuing failing institutions may weaken incentives for others to manage their finances prudently in the future.

“General increases in research funding avoid this problem. But are unlikely to help the institutions that are most at risk, as few of them are research-active,” Drayton said.

Role of reforms

Josh Hillman, director of education at the Nuffield Foundation, said: “In addition to showing the risk of insolvency for some higher education institutions, this report highlights the role that more general reforms could play to help alleviate the financial pressures faced by the higher education sector.”

He cited as an example that implementing the recommendation from the Augar Review to introduce a lifelong learning loan allowance for tuition fees would encourage enrolment in higher education courses below degree level, which would “help less selective universities that offer such courses and may also enable people who have lost their jobs as a result of COVID-19 to reskill”.

However, Universities UK Chief Executive Alistair Jarvis said that while the IFS rightly highlights that the pandemic is creating financial challenges for the higher education sector, Universities UK is working closely with government to develop measures to “address the scale and diversity of pressures facing the sector and the communities that rely on it”.

“We have seen significant progress with a package of positive interventions to support university research and innovation,” he said.

“Our proposals to government include a transformation fund for those universities that require support to achieve longer-term sustainability and financial support to help students who wish to study shorter higher education courses. Introducing these further measures should be a priority for government,” Jarvis said.

Range of losses ‘meaningless’

However, Nick Hillman, director of the Higher Education Policy Institute, criticised the IFS report for the wide range of losses calculated, which renders it “pretty meaningless” for planning ahead.

He also said IFS figures on student numbers should be taken with a pinch of salt, since while IFS assumes a 10% drop in UK students, latest UCAS (Universities and Colleges Admissions Service) figures show an opposite trend.

In addition, Hillman said the report says very little about 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.”