No case for insolvency regime for universities, government says

The UK government has said it is “not currently persuaded” of the need to create a special administration regime for universities facing insolvency, also ruling out extra support for high pension costs and deferring vice-chancellors’ pay.

In its response to the wide-ranging House of Commons Education Select Committee inquiry into university finances, the government did leave open the possibility that the Office for Students (OfS) could facilitate high levels of borrowing by institutions.

Throughout its 37-page response published on 22 July, the government repeatedly stresses that state intervention should not be “the default response to providers facing financial difficulties” and its approach “is to allow orderly market exit where appropriate”.

The committee had recommended that ministers consider creating a special administration regime for universities, mirroring one that exists for the further education sector.

This could “include ensuring teach-out processes for current students, protecting the sufficiency of sector-critical courses and allowing for mitigations to avoid geographical cold-spots”, the committee said after it heard repeated concerns that it was not clear what would happen should an institution go bust.

But, while ministers agreed there was “some uncertainty” over what would happen should certain types of provider become insolvent, the response rejected this idea.

Legislating to introduce a new insolvency framework would be “highly complex, could have unintended consequences…and could not be delivered quickly”, the government response says, adding it “is not currently persuaded that the case for introducing a bespoke special administration regime (SAR) for higher education has been sufficiently demonstrated”.

Ministers reiterated the view expressed to the committee by skills minister Jacqui Smith that, in exceptional circumstances, an under-threat provider could “teach out” its current students, despite scepticism from experts that this would be the case.

The government did say that the OfS had been “considering potential levers for earlier intervention with higher education providers which are deliverable within the existing regulatory framework and designed to reduce financial risks in the sector”.

On a call to involve the regulator in university borrowing, following complaints from the sector that securing capital is becoming ever more difficult, the response says it was “keeping under review the feasibility and potential implications of any role for the Office for Students in agreeing high levels of borrowing”.

But ministers gave short shrift to a suggestion that they should intervene in vice-chancellors’ pay arrangements by introducing a mechanism that would see some of the remuneration deferred as a way of ensuring leaders take a longer-term view.

And it also rejected calls for extra help with high costs associated with the Teachers’ Pension Scheme – pointing out that contributions are set to fall next year anyway.

This drop will also mean “fewer providers should be considering measures such as subsidiary models in response to pension costs”, the response says, after the committee called for government intervention to prevent university staff being employed by a separate company so an institution can avoid having to offer them access to the TPS. 

Another suggestion – that the tuition fee payment schedule be revised to provide more money to universities upfront – was also rejected as “interest would accrue on larger amounts earlier in the academic year” and it would “increase overall government outlay and public sector net debt”.

Some of the most stinging criticism was reserved for governance arrangements in the sector.

“We have seen widespread overly optimistic planning across the sector, systemic over-reliance on international student income, insufficient long-term strategic planning, and weaknesses in financial forecasting,” the government says.

“These are not isolated or confined to a small number of institutions. They point to more systemic issues and an historic lack of sustained focus on board-level responsibility for addressing emerging and long-term risk.”

To address this the government said it was supporting the OfS in “strengthening its management and governance conditions of registration” including setting “clear and high expectations that all providers’ governance arrangements are robust, comprehensive, and can be relied upon to ensure sound financial management, high-quality provision, and the security of academic standards”.

tom.williams@timeshighereducation.com