To accompany its report on the sector’s financial position, the Office for Students (OfS) has written to the Chair of each registered provider stressing the need for rigorous and independent scenario and contingency planning.
The OfS has issued its report on the Financial sustainability of higher education providers in England. The OfS report continues the practice introduced by the Higher Education Funding Council for England (HEFCE), of issuing aggregate forecasts for the sector based upon information submitted by providers.
In its report, OfS states it has written to the governing bodies of registered providers ‘inviting them to consider our findings as they test and approve financial plans and risk management strategies.’ (OfS, p.6)
Considerable variations in financial performance
The analysis contained in the OfS’ report indicates that while overall the sector ‘is currently in reasonable financial health’, the ‘general picture masks considerable variations in financial performance between individual providers and tariff groups. Furthermore, providers’ forecasts indicate a general weakening in financial performance over the next year, with improvements thereafter’ (OfS, p.3). For example, the sector’s surplus to income ratio is forecast to fall to 0.9% in 2018-19 (from 3.1% in 2017-18), before recovering to 2.8% in 2019-20 (see OfS Table 1). A similar pattern is observed in terms of the pattern of cash generation, an indicator OfS sees as particularly important, especially due to the expected impact on provider surpluses from the accounting treatment of likely pension changes (OfS, p.8 and p.10). Thus while almost 30% of providers are forecasting a deficit in 2018-19; aggregate cash generation for the sector is expected to reach 6.2% of income.
The OfS notes that most providers are assuming a growth in student numbers, with two thirds projecting increases in total student numbers of more than five per cent over the next four years. Set against a backdrop that the number of 18 year olds in England is continuing to decline until 2020, OfS believe the aggregate growth forecasts and associated fee income over the forecast period is ‘likely to be unachievable’ (OfS, p.18).
The OfS suggests that the majority of providers are not reliant on achieving the projected growth to ensure financial viability and sustainability, but may need to reduce projected costs if their growth ambitions are not met. OfS states it is closely monitoring those providers that are reliant on a growth in student numbers (OfS, p.3).
Rigorous and independent scenario and contingency planning
In concluding its report, the OfS states ‘we have written to the chair of the governing body for each registered provider to emphasise the need for rigorous and independent scenario and contingency planning, throughout the period of this report, to ensure that sustainable levels of cash flow and investment are maintained’ (OfS, p.20).
The OfS emphasises that it will continue to monitor the financial health of individual providers and that it will intervene if the provider is unable to evidence it is taking appropriate action to mitigate growing risks. The OfS also asks providers with financial concerns to approach OfS at an early stage, so they can understand the emerging risks, and ensure students are protected.
In summary, the OfS report suggests that the financial position of the English HE sector will decline further in 2018-19, but will recover from 2019-20 onwards. However, there are considerable uncertainties as to the policy environment and a situation where aggregate forecasts for student recruitment are at variance with the numbers of young people likely to be entering HE. OfS is therefore asking governing bodies to assure themselves as to the financial viability and sustainability of the provider for which they are responsible.
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