At Amber: The financial position of UK universities

• HEPI Director Nick Hillman takes a look at PwC’s new assessment of the financial health of the UK’s higher education institutions.

On Christmas Day, my family gave me a lovely new fountain pen (made out of recycled plectrums by this master craftsman since you ask). There was one other thing at the top of my Christmas wish list too, although – unlike the pen – it has only just arrived.

I am referring to the long-awaited report that Universities UK (UUK) commissioned from PwC on the financial sustainability of higher education institutions. It is potentially of critical importance because:

• firms like PwC are well respected in Whitehall and you can bet your bottom dollar that the report will have been shared long ago with civil servants;
• people expect universities to plead poverty and so an independent assessment by a firm like PwC carries more weight that a report from the sector itself ever can (even if the report in question was commissioned and paid for by the sector); and
• 2024 is (almost certainly) an election year, when such reports can be especially influential – the Opposition, in particular, have to rely on well-respected independent sources of information because they operate on a shoestring.

The PwC report has just landed but the response to it has, so far, been muted (though the Times Higher Education and the Financial Times have run useful pieces).

So what does the report actually find? 

1. A balanced outlook: The report records both ‘a challenging financial outlook’ and ‘provider optimism around sustained international student growth’, noting that the impact of any disruptive shocks on individual institutions ‘will vary widely’. Overall, this is not the pessimistic report we were expecting. For example, while 40% of those 70 English and Northern Irish UUK member institutions considered closely in the report forecast a deficit for 2023/24, the same group also expected expenditure to grow more slowly than income, leaving just 13% in deficit by 2026/27. However, PwC accuse these institutions of ‘optimism bias’. Moreover, there is a big time lag in the hard data on which the report is based, as PwC focus on the pandemic-affected period when the proportion of providers with a deficit was falling (‘All provider types have realised an uptick in income slightly ahead of expenditure’). Plus, the picture looks very different for the 14 Scottish institutions included, which forecast costs rising faster than income.
2. Spend to save: PwC find institutions will need to cut costs but that this can take time and that long-term savings sometimes mean new short-term costs, while also noting that institutions are actually collectively expecting to reduce their restructuring costs very significantly in coming years. PwC make the usual nod that is always included in such reports about universities’ costs towards more ‘back-office efficiencies through shared services or automation’. Perhaps one day such changes really will happen at scale.
3. Less higher education: In the Foreword, two senior PwC executives (including Paul Kett, formerly Director General for Skills Group at the Department for Education) claim it is ‘inevitable that there is some loss of provision across the sector.’ Or rather they state it ‘may be inevitable’, which perhaps doesn’t move us forward very far given things are either inevitable or not.
4. Retrofitting to meet environmental targets is currently unaffordable: The report reminds us that BUFDG and others have found that decarbonising the built environment in higher education will cost close to £7,000,000,000. As I have written before, many of the net zero targets in our sector look entirely fanciful and there is a high risk of appearing rather silly and being kicked rather hard when those target dates approach. And so long as we pretend we are on track to reach such unachievable targets, we are unable to warn Ministers that one outcome of their underfunding of universities is a lack of progress towards responding to the climate emergency.
5. Capital spending needs have been rising: The report notes capital works were paused during the pandemic to bolster the cash position of universities and have not been resuscitated. But it also notes that big new increases are not expected, with ‘capital expenditure [forecasts] decreasing annually by between 4% and 20% every year after 2022/23’ at the 70 English and Northern Irish institutions considered closely.
6. Pay and pensions must be part of those cost-cutting conversations: PwC puts the figure for staff costs at 54% of total expenditure, though that is likely to have risen since the data they are using was collected. Without wishing to sound like a broken record, I worry it is implausible that any future government will fully accept pleas of poverty until the higher education sector looks somewhat more willing to reform its own pension arrangements.
7. Some blots on the horizon: PwC follow the generally accepted view that rising demand from home students will drop off from 2030, thanks to the decline in the birth rate in the 2010s. Perhaps it will. The past is not always a good guide to the future. But I am much less confident of this than others. Similar declines have not always meant a drop in demand because increases in the participation rate (the percentage of people who go to higher education) can counteract the impact of demographic drops. For that to happen of course, people need to be encouraged to enrol via levers like half-decent maintenance support but nonetheless I think we may come to regret it if we act as if we expect the higher education world to contract after 2030.
8. Cross-subsidies are here to stay: The intellectual case for cross-subsidies within universities is perhaps weaker than it once was, given – for example – the growing divisions between teaching and research in Whitehall and elsewhere in recent years. Moreover, the sector has recently been accused of not sufficiently making the case for such cross-subsidies. But PwC push in another direction, assuming higher education institutions might become (even) more reliant on cross-subsidies in the future: ‘optimising income sources that generate higher margins to cross-subsidise tuition and research will become increasingly important to remain viable.’
9. A premier league and the rest: The report fires a warning shot about borrowing costs and how some institutions look a better prospect than others for financial institutions, risking more division in the sector. It notes, for example, that ‘Medium, Smaller and Specialist Creative providers in England have a higher proportion of external borrowings that are due within one year.’ It also claims that, in 2021/22, 43 providers ‘may not have [had] sufficient funds to cover debts.’
10. More commuter students? One area where PwC do stick their neck out is where they predict ‘growth in commuter students in the near term’, though it is not altogether clear if this means a growth in the number or a growth in the proportion of all students who commute (nor is ‘commuter’ defined, even though there are different ways of doing this). Perhaps PwC are right and there will be a big increase in the percentage of young students who opt to live at home while studying, but this has been predicted before and has not come to pass.

Overall, the PwC report is undeniably a useful piece of work, even though it comes in at just 17 pages, but it does come with some important caveats.

• First, the bulk of the research occurred between July and September 2023, mainly using data submitted in 2022. So things might have changed since.
• Secondly, it may not be representative. When considering the outlook for the sector, the commentary is based on just 84 providers (with none from Wales) and those excluded appear to be in a below average position (83% of these 84 institutions had a surplus compared to 72% for the sector as a whole).
• Thirdly, as recognised at the very back of the report, the forecasts are very sensitive to the assumptions used. As the authors note, if costs rise by 2 percentage points more than predicted, two-thirds of institutions will be in deficit (even excluding the rising Teachers’ Pension Scheme costs).
• Finally, because it has been published immediately prior to a general election and at a time of global turmoil (which in my view is skated over a bit too quickly in the report), it is very hard for the authors to risk their reputations by providing definitive views on many issues.

So, in the end, the report pulls its punches. In its extensive list of opportunities and threats, which are measured by a traffic-light system, only one area (‘Cost base pressures’) is marked red for both the ‘Near term’ and the ‘Longer term’. In contrast, five are double amber – oddly, as consultants are paid to try and avoid such fence-sitting – while four score green for either the near or the longer term. Not one scores double green.

Perhaps this fuzzy outlook explains the muted response to the report in its early hours; many institutions in the sector feel closer to the edge than this assessment might imply, meaning the report might not be quite the lobbying opportunity it was initially thought it might prove to be.

Indeed, if a major provider falls over in the run up to a general election, then even though the authors of this report have doubtless faithfully recorded the evidence that was in front of them, then the exercise might come to seem a touch complacent. Hand-made fountain pens tend to be delicate instruments but, in this instance, there’s at least a chance that my new pen will prove to be the more resilient of the two presents.