The ongoing COVID-19 crisis poses a significant financial threat to
the UK higher education sector. Universities will experience 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. While the higher...Request free trial
The ongoing COVID-19 crisis poses a significant financial threat to
the UK higher education sector. Universities will experience 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. While the higher education
sector as a whole is well placed to shoulder these losses, they
could cause serious financial problems for individual institutions,
including – in the extreme – insolvency.
New analysis, from researchers at the Institute for Fiscal
Studies and funded by the Nuffield Foundation, shows
that:
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The total size of the university sector’s losses
from the COVID-19 pandemic is highly uncertain: we estimate
that long-run losses could come in anywhere between £3 billion
and £19 billion, or between 7.5% and nearly half of the
sector’s overall income in one year.
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Our 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.
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Large sector-level losses mask substantial
differences between institutions. 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. 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.
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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. Many of the institutions with the largest
predicted losses from COVID-19 were highly profitable before
the crisis and have substantial financial
reserves.
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In our 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.
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Of course, bailout packages may be aimed at doing a
lot more than simply preventing insolvency. But government will
certainly need to be clear about the aims of any such package.
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.
Ben Waltmann, a Research Economist at
IFS, said:
‘With around £45 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.’
Elaine Drayton, a Research Economist at IFS, said:
‘If the government wanted to avoid university insolvencies, by far
the cheapest option would be a targeted bailout, which may cost
just £140 million. However, 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.’
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. For example, by
implementing the recommendation from the Augur Review to introduce
a lifelong learning loan allowance for tuition fees that 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.'
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