One of possibly many anomalies in the financing of UK universities is that, unlike Further Education (FE) colleges, they have no access to a formal insolvency framework as outlined in the Technical and Further Education Act 2017. Since the Office for Students is on track to be correct in its forecast that three-quarters UK institutions would in deficit by 2025-26, this matters.
Several factors behind this dire situation are common to a very high proportion of the UK’s 160 or so other universities: the modest recent increase in fees charged (3.1%) to £9,535 for a domestic university student is still well shy of the estimated £14,000 cost of their place; vital overseas students are staying away after visa rule changes; and higher National Insurance costs are making all staff more expensive.
These reasons, and many others including poor governance and unwise investments, have left some (mainly, but by no means exclusively post-1992 ‘new’ universities and former polytechnics) nursing deficits of tens of millions according to 2024 figures: Coventry £60m, Middlesex £24m, Sheffield Hallam £16m – the list is long and scary.
The head of Universities UK is not keen on the creation of an “emergency administration process for universities at risk of closure”, arguing that such a framework might accelerate closures rather than help to avoid them. There are fears that there may be no way back. Others say that an insolvency framework in line with the 2017 model might at least provide protection for students, while teaching staff and management could right-size operations more effectively if they had clearer parameters within which to work.
There is also a version of the “too big to fail” argument: insolvency for universities is not palatable because of the potential effect in regional economies.
This is not the place to debate whether the UK needs so many universities, not least against a background of possibly structural decline in graduate employment and the role of artificial intelligence (AI) in performing graduate trainee-level tasks. Nonetheless, the huge growth in degree-level apprenticeships, including directly into the top professions, supports the view that universities may not necessarily be providing a critical public service.
Very broadly, the ‘original’ pre-1992 universities dominate the top 50 in rankings, followed by former polytechnics and others in HE. Even so, virtually all charge domestic students the full capped fee. Lower status universities face a significant drop in applications, resulting in job cuts and strikes; by contrast, some of the more prestigious names are overrecruiting, increasing class sizes and stretching accommodation.
A number of universities are close to breaking their banking covenants. Several already need to restructuring their borrowings to get on a more sustainable footing. Of course, universities aren’t necessarily limited companies. They may be charities, trusts or other entities. The legal clarity of a ‘special administration’ route might provide welcome guidance and protection for lenders, trustees, students and trade creditors, but these are very different – and possibly conflicting – stakeholders from those in other service businesses which may be somewhat more transactional. A university’s obligation to a student, complicated by his or her expectations and subjective view of possibilities further down the line, has little in common with its duty to a major lending bank.
University managers and finance leaders face a list of serious financial issues to address immediately:
- Identifying a realistic timetable to an ultimate covenant breach
- Urgent talks with lenders, agreeing new financial targets
- Legal liabilities (including broader contract exposure) triggered by breaches
- Pension liabilities, especially for post-1992 universities
- HMRC issues
University leaders should waste no time in seeking professional advice to help address the list above, as well as other challenges unique to their own situation. Buchler Phillips is available for a no-obligation consultation to assess priorities and suitable courses of action.
Written by Runita Kholia, Senior Analyst at Buchler Phillips, a UK based independent boutique firm with an impeccable Mayfair heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.