This week's university strikes have once again put the spotlight on the financial pressures facing the UK's higher education sector. The latest report from the Office for Students (OfS) has revealed that 71 higher education institutions are now subject to enhanced monitoring requirements amid concerns around their financial viability and sustainability.
Specifically, the OfS has voiced concerns that some providers have based their financial viability and sustainability assurances on optimistic forecasts of growth in student numbers without convincing evidence of how that growth would be achieved. In a number of cases there was reliance on growth in international student numbers.
While the regulator concluded that the higher education sector overall is in reasonable financial health, it has warned about future financial risks from increased competition, rising pension costs, and uncertainty over international recruitment after Brexit.
Indeed, RSM recently carried out a benchmarking exercise, comparing the risk registers of 27 higher education institutions in the UK. This revealed growing concerns among UK institutions about the impact of Brexit, and the possibility of a resulting reduction in research income streams and international student recruitment.
Our report also highlighted concerns about the potential knock-on effects of a decline in financial health, including an inability to invest in capital infrastructure or to support the provision of quality teaching and research, or even the need for merger.
The OfS has been very clear that it will not bail out a financially failing university. Instead, it is hoped that its registration conditions and intervention regime will enable it to deal with problems at an early stage and ensure that universities remain financially healthy.
It is worth reflecting that in January 2019 a new special insolvency regime was introduced for the further education sector and to date two further education colleges have been placed into administration. It remains to be seen if a similar regime is introduced for the higher education sector. However, as we have seen in the further education sector, it is likely that there will be more merger activity in the higher education sector over coming years.
Those subject to enhanced monitoring may be required to notify the OfS if student recruitment targets are missed, and in certain circumstances may require financial backers to provide a deed of undertaking to ensure the financial viability of the provider it supports.
Higher education institutions are also warned about claiming VAT exemptions where the basis for claiming is not clear, which may result in a risk of future tax liabilities.
We can expect further guidance from the OfS on compliance with the financial viability and sustainability conditions later this year, so affected higher education institutions should pay close attention when this is published.