01 Oct 2020

The world of higher education is a varied place. Universities came into the COVID-19 crisis with varied levels of reserves on their balance sheets. Similarly, some generated substantial annual surpluses whilst others have had net losses for several consecutive years.

The legal status of universities is also varied. There is no one type of legal entity and some of the rules applying to higher education institutions (both generally and in the case of dealing with financial distress) therefore vary. 

The unifying thread running through them all, however, is that COVID-19 is having a detrimental impact on their finances.

As with most things COVID, there has been substantial uncertainty as to the level of that impact. With a second wave seemingly upon us, this weekend saw reports of 1,700 students being locked down at halls at Manchester Metropolitan University. As more students return and the level of community infections continues to rise, further such student lockdowns sadly seem inevitable.

It is hard to see how such lockdowns will not result in reduced student retention rates. People decide not to continue with their courses in a normal year. No one could argue that this is a normal year and I don't think many will be trying to sell that to students as an upside.

The likely drop in retention rates is against a backdrop of other challenges to tuition fee income which, according to the IFS, makes up c50% of the sector's income. International admissions are expected to be drastically reduced for the current academic year. Domestic admissions are also expected to be lower than usual as more students decide to defer in the hope of a more normal student experience. The impact of Brexit on admissions of European students has not yet been felt fully either.

Factors which impact admissions and retention this year don't just impact this year's fee income. As students would be expected to stay enrolled for 3-4 years, the impact will be felt for a number of years.

Other sources of income do not fare much better. Student accommodation (c5% of income) will be hit by lower admissions and more remote learning. Research grants (c17.5% of income) might become harder to come by going forwards as a result of Brexit. Other sources of income, such as conferences and catering, are likely to be reduced to minimal levels during periods of covid-related restrictions.

Some institutions will be able to weather the storm better than others. Reserves can provide a good buffer. Existing net income allows a hit to income without too much in the way of net losses. Stronger institutions might also be able to protect tuition fee income by relaxing admission criteria and recruiting a great number of domestic students than would usually be the case. This would, of course, be at the expense of the less selective universities who will be unable to do so and might suffer a disproportionately bigger drop in tuition fee income as a result.

Whilst the impact on income is likely to be the most pressing cause of financial distress, sight should not be lost of longer term balance sheet issues. COVID is likely to have substantially added to the deficits on defined salary pension schemes (such as the Universities Superannuation Scheme) and these deficits will need to be addressed going forwards.

It is clear that not all universities will be financially distressed as a result of COVID. However, for those that become financially distressed, it is important that action is taken quickly. When it becomes clear that a university is, or is likely to become, insolvent, its governors are at risk of personal liability if they don't take the right steps.

That insolvency (or likely insolvency) might be on the basis that the university cannot, or will not be able to, pay its debts as they fall due. However, it could also be insolvency in a balance sheet sense i.e. its liabilities exceed its assets. Governors should be aware in this context that a net asset position on the balance sheet in the accounts will not necessarily mean that the university is balance sheet solvent from a legal point of view as the relevant bases of assessment are different.

Governors who are concerned should check that they have robust procedures in place to ensure that they receive for review sufficient, timely financial information. They should also ensure that they have the requisite skills to properly interpret that information and that they are looking beyond the immediate term to also assess medium term viability.

As far back as 2018, it has been made clear by the Office for Students that universities which are not financially sustainable will not be bailed out. Governors should not, therefore, assume that public funding will be available to solve any problems which are identified.

Where financial difficulties are identified, governors should dust off their student protection plans and, as with any organisation facing financial distress, take the critical first step of seeking specialist advice as soon as possible.