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COVID-19 and UK higher education: Not too big to fail

Carly Schiff
08/06/2020

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United Kingdom

As the UK's higher education sector faces up to the prospect of a major crunch in student fees and maintenance income over the next academic year, Fieldfisher insolvency specialists Carly Schiff and Jean-Luc Esposito examine the financial prospects for British universities.

  On 4 May 2020, the UK government announced a range of measures to protect the higher education sector from the economic impacts of COVID-19.

The government made clear that it believed access to business support schemes (despite the restrictions on institutions receiving grants), re-profiling of public funding and controls on student numbers should be sufficient to protect higher education providers, in the first instance. 

Measures include the ability to recruit full-time undergraduate UK and EU students for the 2020/21 academic year up to a temporary set level, based on those institutions' forecasts for the next academic year, plus an additional 5%, controlled through the student finance system.

In addition the government will have discretion to allocate an additional 10,000 places, including 5,000 ring-fenced for nursing, midwifery or allied health courses to support the country’s vital public services (some of which will be likely need to be supported by bursaries offered by universities to students from poorer backgrounds).

A further £100 million of public funding will be brought forward to this academic year to help protect vital university research activities, as well as an estimated £2.6 billion of tuition fee payments to help universities better manage financial risks over the autumn of 2020.

This does not take into consideration the additional non-tuition fee income ordinarily generated by universities and colleges – such as accommodation, summer schools and conference facilities – which will be significantly depressed by COVID-19 infection control measures, while overheads for institutions with considerable property portfolios will continue to be incurred, with little or no income to support their maintenance.

A report commissioned by the University and College Union (UCU) published in April this year estimated total tuition fee income (excluding education contracts relating to further education courses, transnational education and continuing professional development etc.) accrued by UK higher education institutions stood at £17.67 billion in 2018-19.

This equates to an average of approximately £141 million in tuition fee income per higher education institution (although there is significant variation between providers).

Initial indicative figures calculated by the UCU estimate that around 14% of UK domestic students plan to defer their places at higher education institutions in the coming academic year, shooting up to 47% for international students.

Prior to the COVID-19 pandemic, UK universities were facing a gaping pensions black hole, which currently stands at around £15 billion, according to the Higher Educations Statistics Authority (HESA), with 164 universities' pension schemes now in deficit, 64 of which have shortfalls north of £100 million.

This has added to concerns over the future of the most precarious universities, as hopes fade of attracting valuable foreign students for at least the next academic year, due to the combined effects of COVID-19 and potentially Brexit on travel to the UK.

On top of this, many students whose courses were interrupted first by two bouts of industrial action over pensions by university staff and then by the COVID-19 lockdown since March have demanded refunds on student accommodation and tuition fees for all or the remainder of the 2019/2020 academic year.

There have also been calls from those who are due to start or return to courses in September for fee reductions, where teaching has moved partly or entirely online.

Finally, depending on the outcome of the UK's Brexit negotiations, British universities may see a significant drop in research funding from the EU from the end of 2020.

It therefore seems likely that, despite the additional funding being provided by the government, there will still be a considerable deficit in higher education finances over the course of at least the next academic year, and likely into the future.

Further intervention will follow only where the government finds there is a case to do so, where it believes intervention is possible and appropriate, and as a last resort. Any action will also come with attached conditions.

Higher education insolvencies

It has been suggested that the government is considering a formal insolvency regime for higher education.

While this is perhaps unsurprising, given the further education regime which came into force in 2019 under the Technical and Further Education Act 2017, it may still come as a shock to many given higher education's only relatively recently revised status as a business sector, rather than a public service.

The Technical and Further Education Act introduced the role of education administrators, with powers to:
  • Rescue a further education institution as a going concern;
  • Transfer some or all of its undertakings to another body;
  • Keep the institution running until existing students have completed their studies; and
  • Make arrangements for existing students to complete their studies at another institution.
The extent to which any higher education insolvency regime introduced in response to COVID-19 would mirror existing legislation is not yet clear. 

While some higher education institutions may operate as limited companies under the Further and Higher Education Act 1992, to which existing insolvency provisions will apply, others have complex structures and are governed by Royal Charter, are trusts or charities or a combination of such structures. 

In the absence of further government intervention, institutions governed by Royal Charter may look to merge with other bodies to protect their market position. 

The mention of attached conditions for bailouts may lead to the conclusion that any financial intervention will accompany a broader sector restructuring, regardless of how these bodies tackle their financial difficulties.

This article was authored by Fieldfisher insolvency specialists Carly Schiff and Jean-Luc Esposito. For more information on Fieldfisher's restructuring and insolvency expertise and our experience in the education sector, please contact one of the authors or visit the relevant pages on the Fieldfisher website.
 

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