As the Covid-19 crisis progresses, the consequences for the UK’s higher education sector are gradually becoming clearer. All universities face a hit to their finances, but it is mostly institutions with weak pre-crisis finances that are at risk of insolvency.
The Covid-19 crisis has caused major disruption to the UK higher education sector. Universities are facing big losses across a wide range of income sources and investments; more than half of the total loss is likely to stem from a fall in international student enrolments and the higher deficits of university-sponsored pension schemes. These losses will leave universities with less money to spend on research and teaching, and less well placed to cope with future shocks. Some institutions may even become insolvent.
The overall size of these losses is still highly uncertain, and will depend on the trajectory of the crisis in the coming months. What we do know is that losses are likely to be concentrated among the most prestigious institutions, which tend to have a large share of international students, high pension obligations and substantial long-term financial investments. Yet it is not the universities with the biggest losses that are at the greatest risk of insolvency; rather, it is the mostly lower-ranked institutions that were in the weakest financial positions before the crisis.
The government has so far focused on supporting universities’ cash flows through a combination of early payment of funding and access to loans. It has also announced a new higher education restructuring regime that would support struggling institutions in return for meeting specific conditions. But depending on how the scheme is implemented, a number of institutions at risk of insolvency may fail to qualify for support.
Why are university finances likely to be hit?
The most important threat to university incomes is a fall in international student enrolments. Surveys suggest that far fewer international students may start university in the UK in the new academic year (for example, British Council, 2020).
Reasons for the fall in numbers include health concerns, travel restrictions and disruption to administrative services such as visa offices and language testing centres. As international students typically pay higher tuition fees, a fall in international students would cause disproportionate losses for universities, as emphasised in an earlier Economics Observatory article on the impact of the Covid-19 crisis on university finances (Dolton, 2020).
One recent study estimates that by 2024, the higher education sector will lose between £1.4 and £4.3 billion from lower international enrolments – or between 3.5% and 11% of one year’s income (Drayton and Waltmann, 2020).
In contrast, domestic student enrolments may hold up better, as there are fewer barriers to attendance, and previous experience suggests that enrolments usually rise during economic downturns (for example, Rice, 1999). Indeed, recent data on university applications show that more UK students applied to start undergraduate degrees this year (UCAS, 2020a), and more had accepted an offer by 18 June (UCAS, 2020b). Of these, more than usual are likely to have met their offer conditions, as A-level grades for this year’s school leavers will now be far better than for any previous cohort.
That said, it is still up in the air how many UK students will end up starting their courses this year. Some top universities will encourage offer holders to defer their places, as more than expected have met their offers as a result of higher A-level grades. Many may agree to this in order to avoid a socially distanced university experience – especially if teaching remains mostly or entirely online.
Related Question: Why should students pay university fees if all lectures are online?
But even if domestic enrolments hold up or even grow overall, some lower-ranked universities are likely to lose students to higher-ranked ones. This is partly because higher-ranked universities will have made more offers than usual to fill the gaps left by fewer international students, and partly because more applicants will have met the conditions of those offers as a result of high A-level grades.
While the government reintroduced student number caps to prevent higher-ranked institutions from scooping up many more UK students this year, these caps were always too ‘loose’ to stop completely the reallocation of students from lower-ranked to higher-ranked institutions. In any case, they have now been scrapped.
In addition to losses on tuition fee income, universities will have lost rent on student accommodation, as many released students from their contracts during lockdown. Income from conferences and catering operations will also have been almost entirely lost in the past few months. These losses are likely to come in at somewhere between £1 and £2 billion (Drayton and Waltmann, 2020).
Just as important as income losses might be losses related to defined-benefit pension schemes for university employees. As sponsors of these schemes, universities are ultimately on the hook for their losses. For the largest of these pension schemes – the University Superannuation Scheme (USS) – the deficit increased from £5.4 billion at the end of March 2019 to £12.9 billion at the end of March 2020 (USS, 2020a). Preliminary figures suggest that it may have been as high as £20 billion at the end of June this year (USS, 2020b).
These higher deficits are largely driven by record low interest rates, which have pushed up the cost of paying for future pensions measured in today’s money. To what extent these deficits will translate into actual losses for universities is extremely uncertain, but one recent study estimates that universities could be liable for an additional £7.6 billion in a pessimistic scenario (Drayton and Waltmann, 2020).
A final source of concern for some wealthier universities is the losses on their long-term investments. As financial markets have continued to recover in recent weeks, this now seems like a comparatively small concern for most institutions. But given the level of uncertainty about the economic outlook, it remains a possibility that losses on long-term investments will be bigger after all.
Figure 1. Projected losses of the higher education sector by source
Note: Authors’ calculations based on HESA finance records. For details on assumptions, see Drayton and Waltmann (2020).
Figure 1 summarises estimated sector losses from a recent study under three scenarios – a pessimistic scenario, a central scenario and an optimistic scenario (Drayton and Waltmann, 2020).
With total projected losses of between £3 billion and £19 billion by 2024, these scenarios represent the range of uncertainty at the beginning of July. Since then, Covid-19 case numbers have been roughly stable in the UK despite a substantial easing of lockdown restrictions, the stock market has recovered further, and new data have shown a rise in applications for undergraduate courses compared with last year.
All these are reasons for cautious optimism that total losses may turn out smaller than projected in the study’s central scenario (although on pensions the news has been bad, with recent data suggesting that Covid-19-related losses may well be larger than projected). But the recent surge in Covid-19 cases observed in many countries – as well as some parts of England – serves as a reminder that the situation can change quite rapidly, and that a more adverse outcome is still possible too.
Which universities will be most affected?
While the total size of the losses is still uncertain, it is already clear that different types of institutions will be affected differently. The highest-ranked universities, postgraduate-only institutions and some prestigious music and arts schools are likely to suffer the highest losses per student.
The main reasons are that these institutions admit more international students than other universities, and that many have substantial long-term investments that may have fallen in value.
Differences in pension arrangements also play a role: many of the institutions with the largest projected losses sponsor defined-benefit pensions for all staff, whereas many lower-ranked universities enrol their academic staff in teachers’ pension schemes (sponsored by the taxpayer) and do not offer defined-benefit pensions for other staff. In contrast, lower-ranked universities are likely to face larger losses on domestic fee income, as students move to more selective universities.
Figure 2 illustrates these differences. Projected losses per student and their composition are shown for seven different groups of institutions: first quartile (Q1); second quartile (Q2); third quartile (Q3); fourth quartile (Q4); postgraduate; music and arts; and other. The quartiles relate to institutions’ position in the 2020 Complete University Guide (CUG) league table, with the highest-ranked institutions grouped in the first quartile. The ‘other’ category contains institutions that do not appear in the CUG (mainly specialist institutions focusing on vocational subjects).
Figure 2. Projected losses per student by institution type
Note: Authors’ calculations based on HESA finance records. For details on assumptions, see Drayton and Waltmann (2020).
But there is a twist in the tale. Studies of the impact of the Covid-19 crisis on UK universities have invariably shown that it is not the institutions with the largest Covid-19-related losses that are at the greatest risk of insolvency. Rather it is mostly less prestigious institutions with moderate losses that are at the greatest risk (Brackley, 2020; Drayton and Waltmann, 2020). The reason is that most of the institutions with the largest losses have substantial financial buffers and were highly profitable before the crisis. In contrast, many less prestigious institutions had weak balance sheets and low surpluses even before the crisis.
One key measure of universities’ insolvency risk is net assets, which measures the value of everything a university owns relative to what it owes. High net assets implies that an institutions can generally sell off or borrow against what is owns, enabling it to absorb losses. For the highest-ranked universities and for music and arts schools, net assets per student stood at nearly £40,000 on average before the crisis. For postgraduate-only institutions, that figure was even higher at more than £60,000.
In contrast, institutions in the bottom half of the CUG ranking and unranked institutions had net assets per student of less than £10,000 on average. If an institution’s net assets are low or even negative, it may struggle to raise funds and could be legally obliged to start insolvency proceedings.
One recent study finds that around a dozen institutions educating around 5% of students may end up with negative assets in 2024 as a result of the Covid-19 crisis, up from two in 2019 (Drayton and Waltmann, 2020). All of these institutions are in the bottom half of the CUG ranking, not ranked at all, or music and arts institutions.
This prediction is illustrated in Figure 3. Projected net assets per student are shown under the three scenarios, focusing on the 20 most at-risk institutions. The large range between the optimistic and pessimistic scenarios, indicated by the whiskers, demonstrates that there is very large uncertainty around the central estimate: in the pessimistic scenario, all of the universities shown would end up with negative net assets, whereas in the optimistic scenario, only one would.
This reflects the fact that if there is a full-blown second wave of infections, losses could still be as severe as initially feared, and more than 30 institutions could be at risk (Dolton, 2020). In contrast, in an optimistic scenario, which some commentators now see as more likely (Hillman, 2020), most universities would actually increase their net assets in the next few years.
Figure 3. Projected net assets per student in 2024 for universities with the lowest projected net assets per student
Note: Authors’ calculations based on HESA university finance records. For details on assumptions, see Drayton and Waltmann (2020). Orange dots indicate predicted net assets per student in 2024 in a central scenario. The area of each dot is proportional to the size of the student body. Whiskers indicate predicted 2024 net assets in pessimistic and optimistic scenarios.
What is the government doing to help?
Early on in the Covid-19 crisis, the government moved to support universities’ cash flow, primarily by granting an advance on UK undergraduate tuition fee payments worth £2.6 billion (Department for Education, DfE, 2020a), and offering low-interest loans to institutions suffering losses on international enrolments (DfE, 2020b).
While this has helped cash-strapped institutions whose finances are fundamentally sound, it offers only fleeting relief to universities facing insolvency. The government has also promised a small amount of additional research funding (£280 million), and universities have been eligible for the general furlough and business loan schemes.
More recently, the government has introduced a new restructuring regime for the higher education sector (DfE, 2020c). This includes an offer of loans – presumably on favourable terms – for struggling institutions in return for meeting strict conditions. Although it is still unclear how the government will handle individual cases, the conditions attached to this support favour institutions that have strong links to local employers and offer courses with high earnings prospects. Looking at the institutions particularly at risk of insolvency, struggling music and arts schools stand out as providers that may be unable to meet these requirements.
Related question: What is the impact of the crisis on UK university finances?
Where can I find out more?
Covid-19 and universities: a crisis or not? Royal Economic Society webinar.
University applications rise during lockdown: UCAS report on the number of undergraduate university and college applications as of 30 June 2020.
Will universities need a bailout to survive the COVID-19 crisis? IFS researchers Elaine Drayton and Ben Waltmann examine the likely impact of the Covid-19 crisis on university finances.
The COVID-19 pandemic is causing a crisis in the UK universities: Peter Dolton discusses the issues facing UK universities and considers what steps the government might take to support institutions through the Covid-19 crisis.
The restructuring regime – money, but at a cost: Wonkhe examines the implications of the government restructuring regime for higher education providers that run into financial difficulties.
Individual COVID-19 fatality risk (and the consequences for universities): Andrew Oswald and Nattavudh Powdthavee look at the epidemiological evidence and consider its implications for re-opening universities.