In the days approaching the national lockdown the University pivoted from business as usual to supporting the health and wellbeing of all those associated with the University and to providing the best possible student experience under quite exceptional circumstances. The financial performance in the first half of the year was good and the expectation was for a surplus slightly above target, consistent with results in recent years. This outlook changed quickly in March. Our response to the financial challenge, described in financial sustainability case study, was rapid and ultimately successful in mitigating the worst of the impact of COVID19. That said our main measure of financial operating performance the Historic Cost Operating Surplus (HCOS) was below target (3%) for the first time in more than ten years at 1.7%.
The impact however, will be more noticeable in 2020/21. The budget was set recognising the potential impact of COVID19 on income, the need to meet our borrowing requirements, the priority placed on delivering the new strategy and the need to deliver high quality teaching and research in a very different environment. Expectations during the summer were for a reduction in income of £48.0m in response to which Council approved a £31.0m cost saving plan resulting in a budget deficit being approved by Council. In approving the budget Council recognised the exceptional circumstances and the rapidly changing situation and anticipated revising income and expenditure allocations as the year progressed.
We are grateful for the various support packages that have been made available by the Government. Our strategy to maintain a high level of liquidity has meant that we have not needed to access any of the corporate funding schemes. However, we have utilised the Coronavirus Job Retention Scheme (CJRS) and this has played an important part in supporting the University through the crisis. Similarly, we await further details of the scheme announced in July and would expect to access the benefit it offers.
Whilst COVID19 has dominated activity in the spring and summer we also progressed the development of our new strategy and the financial strategy to support it. COVID19 aside, we along with many others in the sector face a financial sustainability challenge from the lack of increase in regulated tuition fees and cost inflation, most notably from increasing pension costs. In developing the financial strategy, we are anticipating a modest rise in student numbers and an increase of around 75% in research income. Reducing our dependence on regulated fee income and cost management will be key elements in the successful delivery of the new strategy. The cost saving programme approved by Council in July is intended to address the underlying financial sustainability issue for the strategy period as well as the immediate shortfall caused by COVID19. In acting quickly Council has enabled us to deliver some of the cost savings in 2019-20 through, amongst others, a voluntary exit scheme and the closure of our London office. These have resulted in additional expense in 2019-20 but will help secure our financial position for the future.
The financial strategy is based on generating enough operating cashflow to fund the investment in people and infrastructure described in the Strategy. We have for some years maintained a high level of liquidity and this combined with a sound system of cost control has proved very valuable in addressing the financial strain caused by the pandemic.
This review describes the 7 Key Performance Indicators that we use to measure our financial performance and sustainability before going on to describe the Income, Expenditure and Balance Sheet data that the Key Performance Indicators (KPIs) are drawn from. These KPIs were approved by Council in May 2019. The report concludes with a summary of risks and opportunities.
Key Performance Indicators
A key financial measure that we refer to is our HCOS. This is described below and is an internal measure of our operating performance. The ratio of HCOS to income is one of our KPIs and the budget process aims to ensure that the budget surplus achieves a target of 3%.
The Statement of Comprehensive Income (SOCI) shows a surplus before gains and losses of £21.0m (2018-19 £44.4m deficit) on page 70.
The table below shows a reconciliation between this figure and the HCOS.
|Surplus/(deficit) before gains and losses||21.0||(44.4)|
|Valuation adjustment for pension schemes||(26.8)||55.7|
|Valuation adjustment for land & buildings||-||(1.0)|
|Valuation adjustment for HC depreciation||12.8||10.7|
|Loss on sale of fixed assets||(0.5)||-|
|Valuation adjustment for derivatives||1.2||1.1|
KPI1. HC Operating Surplus/Total Income
We aim to achieve a HCOS of at least 3% of income and this is the basis on which we prepare our annual budget. We focus on this as the best measure of our ability to generate cash. It is less susceptible than our surplus reported in the SOCI to movements in property and investment valuations and changes in discount rates which impact pension scheme provisions. This metric represents the level of surplus required to provide sufficient cash to fund our capital expenditure programme and meet loan payments.
A commentary on income and expenditure is included later in this review.
KPI2. Adjusted EBITDA
Adjusted Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) is widely used by the sector. This metric is earnings before interest, tax, depreciation and amortisation, it is also adjusted to remove pension provision movements. The University has this as a KPI to provide a sector comparison of operating performance. EBITDA is reported at 12.4% of income (15.6% 2018-19). The reduction is less than that for the HCOS as the investment in recent years has increased the depreciation cost which is excluded from this metric.
KPI3. Ratio of Loan Interest Payable to Income
Loan Interest payable to income is the metric used to show how much of our income is spent on paying the interest on our loans. This measure is also used by some of our lenders to assess our financial performance. For 2019/20 we achieved an actual metric of 2.5% (2.4% 2018/19) with the majority of our borrowing on fixed rates and no large repayments this measure is consistent with recent years.
KPI4. Net Debt to Net Assets – Gearing
Our gearing has increased to 11.3% (7.8% 2018/19). Net Debt to Net Assets is a measure to show the extent to which our assets are financed by debt. Whilst low compared to many sectors we have a high value relative to the HE sector, where many have no net debt. This reflects our financial strategy to borrow to fund investment in our strategy whilst maintaining a high level of liquidity. Gearing is also a metric monitored by lenders and whilst the definition varies slightly between lender the threshold of 40% to 50% is well above our current level. In 2019/20 our Net Debt increased by £18.8m to £63.9m (2018/19 £45.1m) as a result of our capital investments and this resulted in the increase in our gearing.
KPI5. Ratio of current assets to current liabilities
The ratio of current assets to current liabilities, known as the current ratio. This shows our ability to cover our short-term liabilities, such as payroll, loan repayments and other creditors through our short-term assets. Our financial strategy is to maintain high levels of liquidity however the ratio has been higher than we would ordinarily expect in recent years as we have drawn down loans in advance of capital expenditure. The reduction in the ratio to 2.2:1 (2018/19 3.5:1) is a result of the progress in the capital expenditure programme.
KPI6. Net cash inflow from operating activities as % of income
This measure shows the cash flow from our ongoing regular activities as a proportion of total income. It does not include long-term capital expenditure or investment returns. It can be used to determine our ability to self-finance new investments or reduce debt. Operating cash inflow of £22.6m is 7.6% of income (£37.8m and 12.2% 2018/19). COVID19 has significantly reduced the operating cash generated and is below the desired long-term level.
KPI7. Net Liquidity days
This metric indicates the time that we can operate without generating any cash inflows by showing the ratio of expenditure to income expressed in days. Our strategy is to retain high levels of liquidity and as a result our ratio is 272 days (2018/19 288 days). As with the current ratio this is higher than is considered desirable in the long term due to the additional funds held for capital investment.
Total income decreased by 3.9% (7.6% increase in 2018/19) to £297.7m, the key income streams are summarised below;
Tuition fee income has grown by 2.8% to £174.6m and is 59% (2018/19 55%) of total income.
Total Funding body grants at £36.3m (2018-19 £34.9m) showed an increase for both Scale Up Programme (SUP) and from Institute of Coding (IoC) activity with the OfS recurrent grant increasing by £1m and capital grants reducing by £0.4m.
Research of £37.1m (2018/19 £39.6m) has decreased by 6.4%. During COVID19 there was a reduction in research activity for existing projects furloughed and the start of new grants were delayed. Other income £46.1m has decreased by 12.9% (2018/19 £53.0m). Many students left their accommodation prior to the lockdown and the final rent instalment was not collected from these students. With little activity on campus hospitality and retail income was also reduced.
Donations and endowments at £2.2m (2018/19 £9.2m) reflect donations recognised in the year. The reduction is due to £6.3m being recognised in 2018/19 following the completion of the Milner Centre for Evolution.
Tuition Fee income
Tuition Fee income rose by 2.8% to £174.6m for the year.
Fees from Home & EU students rose by £2.4m (2.9%). With the undergraduate fee remaining at £9,250 most of this increase came from student number growth. EU student numbers remained relatively static despite the political uncertainty with a modest reduction of 0.8% (£0.1m).
Fees from overseas students grew by 3.4% to £57.5m and represent 32.9% (2018/19 32.7%) of total fee income.
Short Course and apprenticeship fees decreased by 16.7% to £2.4m. Face to face courses planned for the summer have been delayed or cancelled during the pandemic.
The table to the left summarises student numbers at 1 December 2018 and 2019 respectively, this is the census date for Higher Education Statistics Agency (HESA).
Analysis of fee paying students as at 1st December
|1 Dec 2018||1 Dec 2019|
|Full-time Home and EU students|
|Postgraduate Taught (excl apprenticeships)||521||605|
|Full-time Overseas and Channel Island Undergraduate||1,710||1,729|
Research income was £37.1m (2018/19 £39.6m) for the year.
Research Councils continue to be the largest source of research income but has reduced by 6.3% to £19.3m (2018/19 £20.6m).
Our research portfolio at the year-end is £157.5m (£145.0m 2018/19).
Expenditure reported in the SOCI decreased by £77.5m, 21.8% (25.3% increase 2018/19) to £276.7m (2018/19 £354.2m) during the year. This includes a £33.7m credit (2018/19 £50.7m charge) for the decrease in the Universities Superannuation Scheme (USS) pension provision as a result of the 2018 valuation now being adopted.
Expenditure without the USS pension movement increased by 2.3% (2018/19 6.8%). Underlying staff costs increased by 6.8% (2018/19 6.3%) to £177.9m (2018/19 166.6m).
Our staff costs at £177.9m represent 60.0% (53.8% 2018/19) of our income, this includes recurrent employer pension contributions and reflects an increase of 6.8% on the previous year as we continued to invest in our staff to support growth in teaching and research. This is consistent with the growth in our staff numbers of 1.6% and pay increases including pay progression of 2.6%. Other operating expenses were £86.8m (2018/19 £97.3m), a decrease of £10.6m, or 10.9% less than 2018/19. In response to the COVID19 pandemic restrictions were placed on other operating expenses with only essential purchases being allowed.
In the analysis of expenditure by activity (note 9), Academic Department expenditure increased by £4.7m to £113.8m and represents 36.6% of expenditure before the USS credit, a slight increase on previous years (2018/19 35.9%). When combined with Academic Services this rises to 46.5% of all expenditure. Costs incurred as part of the savings plan are £5.0m and this includes supporting the transition to on-line teaching, the Voluntary Exit scheme (VES), surrendering the lease on our London property and the move to remote working.
Central Administration expenditure decreased by 7.6% to £18.4m, reflecting savings made in response to COVID19.
Other expenses includes a credit of £33.7m (£50.7m charge in 2018/19) for the decrease in the USS pension provision.
Total Depreciation increased by £5.0m or 17.1% to £34.3m (2018/19 £29.3m), of this £1.5m is accelerated depreciation in anticipation of the refurbishment of the older parts of the Estate.
Other Comprehensive Income/Expense
The total comprehensive income in the year as disclosed in the SOCI is a deficit of £16.1m (2018/19 surplus £20.0m). Within this deficit is an actuarial loss on the Local Government Pension Scheme (LGPS) scheme of £22.3m (2018/19 £22.5m) and results from the increase in liabilities of the scheme members compared to the assets held to fund the liability.
There was a reduction in the fair value of land and buildings of £15.4m (2018/19 gain £84.5m) this was a result of the fall in market value of student residences exceeding the gain on campus academic and support buildings.
The fair value of derivatives held to mitigate currency rate variation (foreign exchange options) and future interest rate (swaps) charges are £0.5m (2018/19 (£2.7m).
Our capital additions in 2019/20 were £66.3m. Included within this was £31.7m investment towards the completion of Institute for Advanced Automotive Propulsion Systems (IAAPS). A further £16.8m has been invested in the new building for use by the School of Management, this prestigious building will be open for September 2022. Both investments have seen delays in their completion due to the impact of COVID19 on the construction industry with IAAPS now due to open in June 2021.
We continue with our policy of revaluing our land and buildings, the valuation of campus academic and support buildings increased by £8.9m whilst the value of on-campus student residences fell by £24.3m at 31 July 2020, resulting in a net expense movement of £15.4m in Other Comprehensive Income/Expense.
Current assets reduced by £22.5m to £221.7m, of this £24.1m was a reduction in investments and cash as these were used to fund the capital investments made in the year. Our current asset investments at the year-end were £191.1m, our investments are segmented based on our predicted cash flows with approximately 50% held for use within one year (short-term), 25% held for investment of between one and three years (medium-term) and the remaining held for in excess of three years (long term). These durations reflect our intention to hold these investments however they all have liquidity of considerably shorter duration.
Creditors, amounts falling due in less than one year
Creditors due in less than one year increased by £29.6m to £99.7m. Deferred income includes £36.9m of capital grant income received from United Kingdom Research and Innovations (UKRI) and the West of England Combined Authority (WECA) towards the construction of IAAPS. Total grants due are £38.9m and we will recognise these as income when the IAAPS facility commences operation in June 2021. Other creditors have fallen by £5.3m as we settled our liabilities more promptly to support our suppliers and our cash position in the current year.
Creditors, amounts falling due in more than one year
Creditors of more than one year have reduced by £19.3m to £253.9m. Bank loans and finance leases have reduced by £5.1m as we make regular repayments for those held by Clerical Medical, Barclays and the European Investment Bank (EIB). Deferred income has reduced by £15.9m as capital grant income received has now been reclassified as due in less than one year. Interest rate swap liabilities have increased by £1.6m to £17.5m, these financial instruments are used to manage our loan costs and reflect the prospect of an extended period of lower interest rates than estimated last year.
Pension provisions have reduced by £4.0m to £143.8m.
The USS is a multi-employer scheme. With no basis to accurately identify our share of the assets and liabilities we are unable to report our deficit. We are required to estimate a provision for our obligation to make deficit recovery payments under the 2018 valuation plan. This liability reduced by £32.2m during the year to £44.3m. It is based on the deficit recovery plan approved by the USS trustees following the completion of the March 2018 valuation. The USS trustees have worked with stakeholders to agree a deficit recovery plan and we are expecting a further valuation at March 2020 and the result of this is anticipated to be reported in the year ending 31 July 2021.
LGPS is also a multi-employer scheme but its assets and liabilities can be established for individual employers and we saw our pension deficit increase by £28.2m to £99.5m. Asset values fell by £3.1m and this reflects the impact of COVID19 on markets in the year, liabilities grew by £25.8m as the discount rate for liabilities reduced from 2.1% to 1.6%. Contribution rates are determined as a result of a triennial valuation which uses a different set of assumptions. The scheme undertook a triennial valuation on 31 March 2019 and our new contribution rates effective for April 2020 is 16.3%.
Council confirms that it has reasonable expectation that we have adequate resources to continue in operation for the foreseeable future. For this reason, it continues to adopt a going concern basis for preparing the Annual Report and Accounts. In reaching this conclusion, it has reviewed our sustainability and is satisfied that the strategies, plans and policies in place will help ensure this financial sustainability is maintained. Council regularly reviews performance using the key performance indicators included in this review in areas that are relevant to financial sustainability. Council, through Audit and Risk Assurance Committee (ARAC) regularly reviews strategic and operational risks and any financial assessment of these as determined by management. Council, through Finance Committee, reviews the compliance with financial covenants in our loan documentation.
Risks and future prospects
This year there is a greater immediacy to the risks faced in comparison with any recent year. Clearly this is dominated by concerns around COVID19 and principally the health and wellbeing of our staff, students and all those connected with the University. We have transitioned very quickly to new working practices and approaches in both research and education. Our courses have switched to a blended learning model offering a mixture of on-line and face to face experience for the current academic year with the option of an entirely on-line experience for those who desire it. The delivery risk associated with such a rapid change has been mitigated by the efforts of academic and professional service staff to re-imagine the student experience for the changed environment. Substantial investment in facilities, equipment and software have been made to enable a successful transition. Similarly processes and working practices have been, and continue to be, adapted to support a high quality and safe experience.
In recent years we have budgeted to achieve an HCOS of 3% of income and have usually exceeded this level. The financial strategy has also been to maintain a high level of liquidity to provide flexibility to respond to adverse events or opportunities that may arise. The quick response to implement further cost control measures and to reduce costs has mitigated the impact of lost income in 2019/20 such that the HCOS is only £4m below budget. The impact of COVID19 in 2020/21 will be more profound and the budget anticipated a significant reduction in tuition fee income as well as smaller reductions in income from research, accommodation, retail and sports facilities. In July, Council approved a budget for 2020/21 which did not meet the 3% operating surplus target for 2020/21. The five- year plan included a recovery to the 3% target. The budget for 2020/21 was set to ensure that we maintained our education and research capacity protecting the quality and quantity of services whilst being compliant with our financial obligations. To support this a savings programme was started in May with some savings delivered in 2019/20 and further savings planned for the current year. Early indications are that overseas student recruitment will be lower than in previous years but above the level anticipated in the budget. This is encouraging but we remain cautious knowing that the COVID19 situation can deteriorate quickly and that this may well impact our income. This uncertainty has led us to carry out scenario planning to confirm our going concern status. We have taken our future financial plans and assessed them against a range of adverse scenarios in respect of the level of future recruitment and fees. Using this approach, even with a substantial reduction in income and no additional cost reduction, our forecast shows sufficient net operating cash headroom to maintain our compliance with our banking covenants and therefore the accounts are presented on the going concern basis.
In previous years we have highlighted some of the systemic issues that face the sector. These have been overshadowed by the current crisis but remain a major concern. Foremost amongst these concerns is the impact of freezing or reducing the home undergraduate fee cap currently set at £9,250. It is not clear the extent to which the recommendations in the 2019 Augar Report on post 18 education and funding will be implemented. For us this regulated fee income is our largest source of income and the lack of increase in the fee cap means that we need to reduce costs or find alternative income each year in order to continue to provide the same services and facilities. The savings plan described above includes recurrent savings largely to address this concern.
The growing deficit on defined benefit pension schemes has been highlighted in previous reports and the situation appears to be worsening with the size of our LGPS deficit increasing to £100m and the latest valuation on the USS scheme indicating that further contributions will be necessary to maintain the level of benefits provided. We are committed to providing our employees with good quality affordable pensions. Further increases in contributions to the USS will make this scheme unaffordable for universities and for many of their employees. Whilst our options are limited for USS we have more control over the LGPS scheme. The increasing cost of this scheme and the substantial growth in the deficit have resulted in the decision to introduce a high-quality defined contribution scheme for new entrants. Existing members will continue to participate in LGPS. Over time it is expected that this measure will limit the increasing cost of the LGPS.
The importance of overseas tuition fee income has been highlighted by the impact of COVID19 and remains a key source of alternative income to address the stagnation in the home undergraduate fee cap. It is reassuring to note that the governments strategy is for a substantial increase in the number of overseas students in the coming decade. There are several headwinds in achieving this. The pandemic, Brexit and wider international relations are all a cause for concern in meeting this goal. The UK higher education sector has an excellent reputation internationally and it is as important that the policy environment supports this as it is for universities to continue to maintain their standards and international reputation.
As I mentioned last year, we are currently part the way through the two largest construction projects that we have undertaken. The IAAPS and School of Management building projects are major investments that will transform their respective activities. Some delay has been inevitable as a consequence of the current restrictions but this has been limited and the high level of liquidity has meant that we are able to continue to fund these projects which will be important sources of future income as well as excellent teaching and research facilities. The impact of COVID19 on the future income streams is a concern in the short to medium term however, the long-term case for both facilities is largely unchanged. These risks continue to be closely managed by the executive and Council.
Our focus is on the health and wellbeing of students and staff. Whilst the impact of COVID19 will be with us for many years we anticipate that its impact will be greatest this year and our plans are aimed at navigating the current crisis to protect staff and students and to leave us in the best position to prosper in the coming years.