Regulating the financial sustainability of higher education providers in England: Department for Education and Office for Students

The report, the National Audit Office's (NAO) first on the Office for Student (OfS) since it was established in 2018, looks at the financial sustainability of higher education providers and the impact of the pandemic on finances. It is based on analysis of data from the Department for Education (DfE), the OfS and other bodies, interviews with staff from the DfE, the OfS and the Department for Business, Energy & Industrial Strategy (BEIS), consultation with sector representative bodies and stakeholders and interviews with vice-chancellors and senior staff. The report focuses on the OfS’s responsibilities to protect students’ interests from the consequences of financial risk in higher education providers and identifies areas where the regulator should focus as it continues to mature.

The full report can be found here.

At-a-glance:

• As of December 2021, the OfS had made 10 providers subject to ‘enhanced monitoring’ because of concerns about increased risk to their financial viability. It was also engaging with a further 13 providers to understand their level of risk (p8)

• The proportion of providers with an in-year deficit, even after adjusting for the impact of pension deficits, increased from 5 per cent in 2015/16 to 32 per cent in 2019/20 (p6)

• The number with an in-year deficit of 5 per cent or more of income has also grown each year, from 1 per cent in 2015/16 to 15 per cent in 2019/20. Of the 80 providers with an in-year deficit in 2019/20, some 20 had been in deficit for at least three years. The OfS reported in July 2021 that 133 higher education providers in England, and two in Northern Ireland, had an aggregate in-year deficit of £2.8 billion for 2019/20 – double the deficit of £1.4 billion reported in 2018/19 (p6)

• Short-term financial risks are dominated by COVID-19 eg loss of international student fees and conference fees, but medium- and long-term risks are systemic, eg pension schemes, research funding,  assumed continued growth in overseas as well as domestic student numbers (p7)

• Some providers would likely have faced financial difficulty had they been required to refund tuition fees. The proportion of students viewing their course as good value for money fell during the pandemic. The government’s position was not to support tuition fee refunds. A smaller provider told the NAO that, had government applied more pressure for fee refunds, this would have caused it, and likely some similar providers, to fail (p11, p48)

• A-level grade inflation in 2020 and 2021 distorted the higher education market and increased financial risk for some providers. Some high-tariff universities were oversubscribed, and lower-tariff universities undersubscribed. This has increased financial risk for some providers in the medium as well as the short term. The Department did not model or draw insights from the OfS to understand in advance the potential financial consequences on undersubscribed providers, despite the potential impacts being foreseeable (p12, p49)

• Despite the issues noted above, higher education providers proved more resilient during the pandemic than government had feared. The DfE scheme for time-limited, last-resort access to support and emergency funding received 18 enquiries from providers, of which three had applied. BEIS established a package of loans and grants to make up for losses in international student numbers. Demand was lower than forecast, with funding to five applicants, totalling £21.4 million in loans and £298,000 grant funding (p11, p47)

• The DfE should review, improve and agree with the OfS key performance measures. It should make clear what tolerance the government has for provider failure, and the circumstances under which it would or would not intervene. Together with the OfS, it should assess how the distribution of student numbers has affected students’ experiences and providers’ finances to understand the likely consequences of A-level grades in 2022 (p13)

• The OfS relies heavily, although not exclusively, on financial metrics to identify risks to providers’ financial sustainability and has designed a regulatory approach that does not involve routine discussion with individual providers. Providers doubt whether the OfS has all the information needed to put financial data into context (p9)

• The OfS should communicate more effectively with the sector to build trust in its approach as a regulator; improve providers’ understanding of its attitude to risk and how it defines risk-based, proportionate, regulation. It should review, improve where necessary and then re-authorise student protection plans for all providers to ensure they remain adequate and can respond to new risks. It should also prioritise finalising KPIs on how it assesses value for money for students and set out how its work will reverse students’ declining satisfaction rates (p13)

Implications for governance:

Financial sustainability is at the core of governance and a major concern for university governors. The NAO report, which shows an increase in the number of providers at risk and in deficit, is sobering but unlikely to be a surprise, coming on the back of one of the most challenging periods for HE in recent history. OfS’s regulatory approach has not witnessed any provider failures, but rising numbers of providers in deficit indicate increased financial pressure. This pressure is felt across the sector, whatever the size of a provider, its entry requirements or whether it is a specialist institution. The 20 providers that have had an in-year deficit for at least three years range in size from 200 students to more than 30,000.

Unsurprisingly, the NAO found that short-term financial risks were dominated by COVID-19. One of these was the impact of teacher assessed A-level grades and the increased number of candidates entering high-tariff institutions, leaving some lower-tariff universities undersubscribed and suffering. The NAO recommends that this year, the DfE and OfS assess the likely impact of the distribution of student numbers. If Ofqual holds to its stated aim of reigning in the grade inflation of the previous two years, it could mean a different picture this year and potentially less oversubscription at selective institutions.

Medium- and long-term risks to provider finances were found to be systemic. A major concern is the increased cost of pension schemes, currently the subject of an industrial dispute which is creating its own challenges for universities.

Governors will also want to note the cautionary tone of the report on the issue of international student numbers. Providers’ medium- and long-term financial forecasts often depend on continued growth in overseas as well as domestic student numbers. The NAO cites OfS concerns about whether it is realistic for all providers to be making similar assumptions in such a competitive market.

The NAO report recommends that the OfS and the DfE provide more clarity to providers in areas such as government tolerance for provider failure will be welcomed.  It also suggests that the OfS should “review, improve where necessary and then reauthorize” student protection plans for all providers, which may require internal scrutiny of current plans.

Universities may complain that the OfS approach to assessing financial risk is unduly burdensome but the NAO finds that the regulator makes good use of the financial data it collects, analysing it in a systematic and structured way to identify providers for closer scrutiny.

One area where the NAO expects more progress is on OfS’s capacity to carry out financial analysis and scenario modelling of key risks. OfS said it is planning to develop such a model, which could, presumably, lead to more contact and monitoring of institutions deemed at potential risk.

The OfS has been urged to do more to help the sector and other stakeholders understand its regulatory approach, improve its communications and to speak to providers more to put financial data into context.

One positive note in the report is that the sector proved more resilient during the pandemic than government had feared. Demand for various DfE and BEIS schemes to provide short-term financial support was lower than forecast, with providers drawing on their reserves, using commercial credit facilities and deferred capital spending plans to maintain cash flow.

However, it is clear that universities face ongoing financial pressures, exacerbated by the government’s announcement last week of a three-year tuition fee freeze and potentially other policy proposals, such as student number controls, made in response to the Augar review.