UK university funding: targeted strategies for volatile times

In a challenging and volatile marketplace, how do UK universities’ funding sources compare, and how might this influence their potential strategies?
UK university funding: targeted strategies for volatile times
Apr 30th 2019

The context: challenging times

UK universities make a significant contribution to society and perform strongly internationally. However, they face a volatile Higher Education marketplace and are vulnerable to economic shock.

Universities contribute approximately £95 billion to the UK economy every year – more than the government’s annual budget for all education spending. They also support around 940,000 jobs.[1]

Our universities are globally renowned and respected for the quality of their work, producing 15.2% of the world’s most highly-cited articles and frequently ranking only behind the US with the greatest number of highly-rated institutions.[2]

However, the Higher Education sector faces a number of challenges in sustaining its growth and prestige. Universities operate in a currently unstable economic environment, with significant changes to their funding models over the last decade. While in 2010-11 around 70% of UK university income was sourced from funding councils, this has reduced to approximately 30% in 2018-19. A higher proportion of income is now sourced from tuition fees.[3]

While university income from tuition fees and education contracts increased by an average of 6.3% between 2016-17 and 2017-18, income from investment decreased by 2%. In particular, the increase in income from UK student fees (3.8%) was overshadowed by the increase in income from EU student fees (10.6%) and international student fees (11.4%). There is currently speculation about the future fees for EU students, which may result in increased fees levied as soon as 2020.[4]

This has left universities vulnerable to risks associated with fluctuations in demand from UK, EU and international students. There will also be unknown impacts when the Augar review of Post-18 Education and Funding is published shortly.

During such volatile times, institutions need sufficient surpluses to withstand potential change more than ever before. But although UK university incomes have been increasing in recent years, their surpluses have been decreasing, because costs have risen faster than incomes. Between 2015-16 and 2016-17 for example, the total UK university surplus decreased by over 31% (figure 1).

Figure 1: UK university surplus 2015/16 - 2017/18

Some universities are more vulnerable than others: income sources

Although UK universities are autonomous and independent of each other, we believe that there are certain trends in the challenges they face. When we consider universities by age and membership, key trends emerge in income source and student population structure. Identifying common challenges highlights certain groups of universities that are vulnerable to marketplace changes. Considering these challenges means we can identify potential for targeted strategies to negotiate this highly volatile environment.

From our research, we have found that:

  • The newer the university, the greater the proportion of tuition fees as a percentage of total income (figure 2). These universities are more vulnerable to fluctuations in student numbers and in tuition fee changes
  • The newer the university, the lower the proportion of research grants and contracts as a percentage of total income. These come from bodies such as The Medical Research Council, charities, EU government bodies and UK industry. This more diversified source of income is making a minimal contribution to the income of institutions established after 1992.
  • Specialist institutions have the most even balance of income sources, but  because they are smaller, they also have the lowest average income. Examples include the Royal Academy of Music, the Courtauld Institute of Art, St George’s and the Royal Veterinary College. Of these, the scientific and medical universities receive the majority of research grants.

Figure 2: Proportion of income from tuition fees according to university cluster

Some universities are more vulnerable than others: tuition fee income

Newer universities rely heavily on tuition fees as a high proportion of their annual income. Current key trends contribute to this reliance and the resulting vulnerability:

  • Newer universities rely heavily on tuition fees from UK students. This group represented 87.6% of all students at institutions founded after 1992 (figure 3).
  • However, newer universities also have a lower absolute value of total tuition fee income, indicating a rise of smaller institutions.
  • On average, newer universities charge international students lower fees – £11,278 per international student vs £16,589 for Russell Group institutions
  • Newer universities have a lower proportion of postgraduate students. Postgrads pay higher tuition fees than undergraduates and consist of a higher proportion of international students, who typically pay higher fees. Therefore, a smaller postgraduate intake limits potential income from tuition fees.

Figure 3: Total tuition fee income by University cluster (£000s)

Although there are many other ways that universities are similar or different, these groupings highlight some clear trends. We can see that universities with a greater reliance on tuition fees also typically have a lower total tuition fee income, attract fewer postgraduate and international students, and charge lower fees to international students, increasingly their economic vulnerability in an already challenging climate.

Potential strategies for secure growth

There are several routes that universities could pursue to build sustainable growth that supports their specific needs. These include:

  • Digitisation of university assets, including considering new delivery methods
  • Alignment with industry to support local clusters, which may require   amendment of research strategies. Industry partnerships can build university specialisms in priority sectors, increase industry research grants and attract more students
  • Expansion and diversification into allied educational sectors including Further Education, vocational qualifications or apprenticeships
  • Marketing to a wider range of targeted student cohorts, including international students from areas of particular growth in higher education demand. For example, first year students in the UK from China already exceed those from the EU, with numbers more than doubled since 2009/10.
  • Portfolio review and optimisation. This could include expansion in certain subjects, expansion of postgraduate offer, or consolidation of teaching
  • Fundraising and more efficient use of alumni networks
  • Optimisation of assets through commercial strategies

Summary

In this volatile environment, higher education institutions must consider how to mitigate against fluctuations in funding sources. In an environment where expenditure is rising faster than income, standing out in such a highly competitive marketplace is essential.

There are common trends for universities in the effects of current challenges that they face. We conclude that to mitigate the economic risks, universities with certain characteristics – such as a reliance on tuition fees – could adopt tailored strategic models, or even seek to collaborate.

Authors: Ellie Lane, Louis Jamart, Victoria Bew and Jonathan Chappell.

Sources:

  1. Universities UK (2018). How can the government ensure universities are best placed to maximise their contribution to a successful and global UK post-EU exit?
  2. Universities England (2016). University Funding Explained. See the Times Higher Education World University Ranking or QS World University Ranking
  3. All raw data here and in charts obtained from the Higher Education Statistics Agency, hesa.ac.uk/data-and-analysis/finances/income
  4. Guardian article (28 April 2019) reporting on speculation regarding EU student fees from 2020 onwards.

 

Cover image: Students in lecture, copyright Jiri Matousek, 2011. Attribution 2.0 Generic (CC BY 2.0).