The ongoing COVID-19 crisis poses a real threat to the UK higher education sector. As lectures, seminars and exams have moved online, universities have had to make significant financial investments to ensure that they can meet their current commitments. Alongside this, universities are facing significant falls in income due to a lower 2020/2021 student intake, especially of international students, as well as lockdown-related losses of income from student accommodation and conference and catering operations.
Universities were already in financial trouble before the COVID-19 pandemic. Long-term investments and increases in the deficits of university-sponsored pension schemes have already had a bite, while most universities have struggled to make the structural changes necessary to improve their financial health. Over the past few years, there have been several bankruptcy scares in the sector.
While the higher education sector as a whole is well placed to shoulder these cumulative losses, there is a significant risk that some institutions face insolvency. Recent IFS research suggests that 13 universities may face insolvency in the wake of this crisis.
The study found that the total size of the university sector’s losses from the COVID-19 pandemic is highly uncertain, and the IFS estimates 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. Their central estimate of long-run losses for the sector is £11 billion, or more than a quarter of income in one year.
These 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.
Given the long term funding crisis in the sector, 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. The IFS's central scenario found that 13 of these 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, providing funds only to those universities most at risk, could cost just £140 million. Of course, bailout packages may be aimed at doing a lot more than simply preventing insolvency. 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.’
Josh Hillman, Director of Education at the Nuffield Foundation said:
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'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.'