The Institute for Fiscal Studies report indicates in total universities are at risk of losing anywhere between £3 bn and £19 bn in the long run – between 7.5% and nearly half of the sector’s overall annual income – as a result of the coronavirus pandemic.
Total estimated losses are highly uncertain, the report added, but identified increases in the deficits of university-sponsored pension schemes as another area where institutions could lose up to £7.6bn.
“The institutions with the highest predicted losses all have large financial buffers and are therefore at little risk of insolvency”
Student accommodation and conference and catering operations, and financial losses on long-term investments could compound losses of income, the IFS noted.
Serious financial problems stemming from the losses could “in the extreme” cause insolvency, the research institute warned.
Institutions with large numbers of international students and those with substantial pension obligations – often higher-ranking institutions as well as postgraduate and music & arts institutions – are most affected, the IFS continued.
“Some of the least selective universities, which rely largely on domestic fee income, will also be badly hit if higher-ranked universities admit more UK students to make up for the shortfall in their international enrolments.”
While student caps for domestic students recently announced will constrain this behaviour, the least selective institutions are still likely to see falls in student numbers, it added.
Cost-saving via significant staff redundancies are necessary at ailing institutions, the IFS suggested.
“In our central scenario, we estimate that cost savings could reduce the overall bill by only £600 million or around 6% without redundancies.
“The potential for cost savings varies across universities: institutions with a larger proportion of temporary staff will likely be able to make larger savings, but this may impact teaching quality.”
Some 13 unnamed institutions educating around 5% of students in the UK could end up with “negative reserves and thus may not be viable in the long run without a government bailout or debt restructuring”.
A targeted £140 million bailout could help those institutions to keep afloat, the IFS indicated.
“Whether Covid-related losses put a given institution at risk of insolvency largely depends on its profitability and its balance sheet position before the crisis, rather than on its predicted losses from Covid-19,” the report stated.
“The institutions with the highest predicted losses all have large financial buffers and are therefore at little risk of insolvency. The institutions at the greatest risk tend to have smaller predicted losses, but had already entered the crisis in poor financial shape.”
‘Alternative Providers’ with large shares of international students are “at significant risk of insolvency, potentially leaving students unable to complete their degrees”, it added.
Unlike Universities UK’s £3.2 billion bailout, the targeted bailout proposed by the IFS could cost under £200 million and be more effective at supporting universities at most risk of insolvency.
However, Nick Hillman director of the Higher Education Policy Institute explained that the IFS’s figures on student numbers should be “taken with a lorry load of salt”, while the range of projected short-term financial losses for universities between £3 billion and £19 billion is “so enormous that it’s pretty meaningless in terms of planning ahead”.
“The IFS are assuming there will be 10% fewer UK students, yet the latest UCAS figures show the opposite trend. Who would choose to have a gap year at the moment, when travel and job opportunities are so limited?” he asked.
“Less research would be terrible for the UK as it would hamper the post-pandemic recovery”
While the IFS predicts a 50% drop in EU students as a result of the pandemic, 2020 is the last year when they will be treated like home students, Hillman highlighted.
“Unless there is a major second wave of Covid-19, the IFS’s ‘central’ estimate for the short-term financial losses would be better labelled ‘pessimistic’ and their ‘pessimistic’ estimate would be better labelled ‘extreme’.”
Universities could also opt to stem financial losses by doing less research as “research generally loses money”, Hillman added.
“Less research would be terrible for the UK as it would hamper the post-pandemic recovery. So the quantity of research that institutions can afford must be a bigger part of the wider conversation about university financing.”