Governance News Alert: Office for Students (OfS) Financial sustainability of higher education providers in England: November 2024 update

Advance HE Governor News Alert

Office for Students (OfS)

Financial sustainability of higher education providers in England: November 2024 update

The update to the OfS financial sustainability report published in May is based on data submitted to the OfS in late 2023 from providers in England. As a result, it cannot take account of any revisions providers have made since then to their recruitment projections, or steps they have taken to address financial risks this year. Universities in England will submit new data to the OfS later this year. Changes to UK undergraduate tuition fee levels for 2025-26, and the increase in national insurance contributions for employers announced in the Budget, have been included in the analysis. While the financial data used in the update applies to England only, student recruitment and visa figures are UK-wide, based on data from UCAS and the Home Office.

The below news alert refers specifically to providers in England, however the findings should be of interest to readers in Scotland, Wales and Northern Ireland in the context of financial sustainability of higher education providers.

The full report can be found here

At-a-glance:

• Acceptances of UK undergraduate students through UCAS appear to have increased slightly, by 1.3 per cent in 2024 compared with 2023. However, this is significantly below the sector’s forecast of a 5.8 per cent increase (p4)
• Indicators suggest that recruitment of international students has decreased significantly overall, with 16 per cent fewer applications for visas in 2024 than in 2023 (p5)
• In summary, the OfS estimates UK undergraduate entrants to be, in aggregate, 10 per cent lower than the sector’s forecasts for 2024-25, and non-UK entrants to be 23 per cent lower than those forecasts (p1)
• Recruitment of UK undergraduate students has mainly increased in larger, higher-tariff providers. It appears to have decreased across medium, smaller and specialist institutions, and has fallen by nearly a quarter in providers predominantly offering Level 4 and 5 qualifications (p4)
• The number of international students from certain countries that send significant numbers to study in the UK has plummeted: by more than 44 per cent from Nigeria, 41 per cent from Bangladesh and by more than 20 per cent from India (p5)
• Around 100 providers failed to achieve their UK undergraduate recruitment forecasts for 2024-25 and an estimated 150 providers may have failed to achieve forecast levels of international recruitment (p4)
• Modelling indicates that many more providers than forecast must overcome financial challenges in the coming years. By 2025-26, based on current trends and not taking into account significant mitigating action, a net income reduction for the sector of £3.4 billion is estimated. Without significant mitigating actions, a sector-level deficit of -£1.6 billion, with up to 72 per cent of providers being in deficit, and 40 per cent having low liquidity, is estimated  (p2)
• While these results are spread across all types of providers, the forecasts of larger, especially teaching-intensive, providers appear to be particularly at odds with the optimism in their previous forecasts (p9)
• OfS estimates that the increase to UK undergraduate tuition fees announced just after the Budget represents up to an additional £371 million of annual fee income for the sector. However, the increase to employer National Insurance contributions, based on the lower salary threshold of £5,000 at which employers must pay (NI) and the 1.2 percentage point increase to the contribution rate from April 2025, will result in additional costs for the sector of £133 million in 2024-25 and  around £430 million each year from 2025-26 (p7)
• Many institutions will need to take “increasingly bold action” to address the impact of these challenges on their financial position in the short, medium and long terms. This is likely to include working with other organisations to reduce costs or identifying potential merger partners or other structural changes (p2)

Implications for governance:

The OfS November update, intended to support leaders and governors as they try to ensure sound financial planning and forecasts, paints an even starker picture than a financial sustainability report published in May.

It confirms a tendency for “optimism-bias” in institutions financial modelling, although does not take into account the various actions taken by institutions this year to try to balance the books, including voluntary redundancies, recruitment freezes, department mergers, course closures and mothballing capital projects. Research by tertiary education experts has found that the majority of institutions are embarking on numerous steps to reduce forecast financial deficits. 

The OfS report warns that despite these measures and the recently announced raising of tuition fees in England in line with inflation, many providers will need to take “increasingly bold action” to address the combined impact that lower recruitment and increased national insurance contributions will have on their financial position in the short, medium and long terms. 

While the financial data in the November update relates to institutions in England, universities and colleges in Scotland, Wales and Northern Ireland face similar challenges. The drop off in recruitment has been felt by providers UK-wide and the financial challenge of meeting the increase in national insurance contributions impacts across the board. As Vivienne Stern, chief executive of Universities UK (UUK), makes clear in her response to the OfS report: “Universities in all four nations of the UK are in an extremely difficult position.” 

She also points out that a longer-term solution to the financial crisis will require action by universities themselves, and by governments in all nations of the UK.

While the OfS report avoids going into great detail about what measures providers should take to bring about the “transformation needed to address the challenges they face”, it does mention “looking externally for solutions”. Working with other organisations to reduce costs or identifying potential merger partners or “other structural changes” are suggested. 

Some of these approaches are recommended in the UUK Blueprint, published before the budget. However, governors reacting to the blueprint who spoke to Advance HE have pointed out that initiatives such as shared services often required investment upfront, a barrier to action when universities are in financial straits.

In the press release accompanying the November update, Susan Lapworth, chief executive of the OfS, states that the new modelling does not predict that significant numbers of universities will close in the short term.  But she also warns that institutions should not rely on student recruitment rebounding in the coming years. 

Elsewhere, experts have observed that attempts by institutions to rebuilding overseas student income through increased recruitment agent activity is leading to higher agent fees, eroding the real price of the courses on offer to the extent that a number of universities now no longer distinguish between home and international students in their postgraduate taught student fees.

The OfS message to leaders and governors is that institutions running into financial difficulties should be in contact with the regulator at “an early stage”. 

Where a provider is planning to deliver complex or extensive changes, the regulator “may take additional, more direct steps” to understand its plans, how well action is tailored to the issues the provider is facing, and “whether its governance and leadership capacity is sufficient for successful implementation”. 

This latter point echoes recent comments from OfS director of regulation Philippa Pickford. At an event she said that that she was keen to “start a conversation with the sector” about whether governance arrangements are in all cases up to the task of managing severe financial difficulties”.

Advance warning has been given by the regulator in the November update that to improve financial monitoring, it “will need to collect core financial information from providers on more of a real-time basis throughout the year”. It adds: “We consider this development essential in the current financial climate.”