UK higher education sector is in sound financial health but institutions need to adapt to the changing environment
A sound sector performance
Sector surpluses (before exceptional items) of £1.85bn in 2014/15 are the highest for seven years at 5.6% of income - a 54% increase on the previous year.
Sector income is up by 8.1% to £33.1bn in 2014/15 - buoyed up by £0.4bn of research and development expenditure credits (RDEC) and increases in income from UK and EU tuition fees and contracts which rose by 16.2% to £11.5bn.
Income from overseas students has doubled in the last seven years to £4bn in 2014/15 with more than one in ten students in the sector domiciled outside the EU.
Staff costs continue to be the largest category of expenditure representing 51.6% of income in 2014/15.
Investment in capital infrastructure is up by 15.5% over 2013/14 levels to £4.3bn in 2014/15– the highest level for six years. This has been funded from cash and higher levels of debt which has increased by £4.1bn since 2008/09 and now represents 27% of income.
A widening gap
While the overall sector surplus figures show another solid year, Grant Thornton’s report found that these results mask a widening gap in the performance of individual institutions as exemplified in the forecasts in its previous year's report, 'Thrive or survive'.
One statistic alone demonstrates how some institutions have thrived - the five institutions which saw the largest absolute growth in income in the year to 31 July 2015 represent over a quarter of the sector growth - £558m excluding RDEC .
Furthermore, just 10 institutions represent 40% (£841m) of total income growth in the year and 34 institutions reported a surplus in excess of 8%.
The combination of their size, reputation and the ability to adapt and benefit from the removal of the student numbers control has driven this growth in income and surpluses for these institutions.
In contrast, 18 institutions experienced a decrease in income compared with 2013/14, and 15 reported a deficit for 2014/15.
A need to adapt to a changing environment
The recently released government White Paper “Success as a knowledge economy" sets out proposed reforms to the higher education sector. High up on the list of priorities is increasing competition and opening up the market to alternative providers.
Higher education institutions in the UK continue to be extremely successful at attracting international students, and more than one in ten undergraduates studying in the UK are from overseas (non-EU) countries. Tuition fees from overseas students represent over 12% of the sector's total income in 2014/15 (which compares to over 17% in Australia, which has a similar funding regime to the UK).
However institutions need to be cautious of this growing dependency on the premium afforded from international students. International recruitment is complex, competitive and highly sensitive to changing economic and political factors.
The market for EU students is equally sensitive to change: only now are the number of EU students attending UK universities at the levels which pre-date the £9,000 tuition fees.
In its report, Grant Thornton sets out how the sector can continue to tackle current issues, while planning for growth in the future.
The report highlights potential trends higher education institutions should consider, including:
- The higher demand for vocational qualifications, a decline in traditional university places, and the demand for institutions to be better aligned with employment markets;
- The rise of alternative providers with degree awarding powers;
- A potential split in the sector between those institutions conducting research, those that specialise in academic teaching, and those that offer vocational training;
- Education policy driven by the demands and expectations of students;
- Increased integration between the sector and commercial organisations for both research and to meet the skills requirements of employers;
- Continued expansion of UK universities overseas, and increased mobility of students in the future;
- Growing competition not only from alternative providers with degree awarding powers in the UK, but US, Asian and African institutions.
Commenting on the findings, Richard Shaw, Head of Education at Grant Thornton, said:
“Our research shows that the higher education sector in the UK is currently in sound financial health. With an increase in the average financial surplus, more capital investment and an 8.1% increase in income, there are encouraging signs about the financial robustness of the higher education sector. However, delving more deeply into the figures, we can see that there is an increasing divergence in the financial performance of individual institutions within the sector and we expect this trend to continue.
“Despite these positive figures, governing bodies and senior leadership teams in the sector must embrace what will be a time of considerable change. In addition to increased global competition for UK and overseas students, the recent government White Paper's proposed reform of Degree Awarding Powers will make it easier for new providers to enter the market. The prospect of an increasing number of providers entering the sector combined with the introduction of the Teaching Excellence Framework will lead to an even greater focus on both the sector's reputation and the importance of individual institutions enhancing their reputation to help secure future success."