Most universities feel prepared to withstand future policy shocks, but a small proportion are at breaking point. These institutions are describing themselves as a “single policy change away from collapse”.

This is the picture painted by new research commissioned by the Guardian and HSBC and executed by Shift Learning, published on Wednesday. Through anonymised interviews and an online survey, university leaders cited changes in government policy, potential cuts to tuition fees and a rise in staff and pension costs as their main areas of concern.

Confidence is waning, too: 63 per cent of the survey respondents said they felt less optimistic than 12 months ago.

Respondents felt that government and public discussion of universities misleadingly casts the sector as homogenous, when in fact institutions are very different. They argued that while elite universities are benefiting from recent legislative reforms – notably a lifted cap on student numbers – others are struggling.

The squeezed middle

Students who once might have attended former polytechnics are plumping for more prestigious options, especially in the same city. This is because elite institutions are lowering their tariffs and increasing unconditional offers to widen their recruitment pool.

The trend is exacerbated by a demographic dip in domestic 18-year-olds, flatlining international numbers, and a downturn in EU applicants. Many post-92 universities are also suffering from the shift of teacher training towards schools and the removal of nursing bursaries, while others worry that apprenticeships run by large companies such as KPMG could lure students away.

Universities face other financial woes. Rising staff costs, including pensions and the apprenticeship levy, are the number one area of concern for university leaders, according to the survey. They worry that the upcoming negotiations on the USS pension scheme might result in higher contributions. Leaders warn that this may impact on future staff salary increases, which they say would be detrimental to morale. “Everyone is going to face the pressure of pension valuations,” said one leader.

This malaise would be deepened by a reduction in student fees, which may be a potential outcome from the government’s forthcoming review of university funding. These barely cover course delivery at present. For less research-focused universities, fees make up to 80% of their income. Many respondents felt this isn’t properly understood by the government or public, while 92% thought that university funding and finance is unfairly portrayed in the media.

Leaders considered it unlikely that the government would reduce fees without plugging the gap with extra funding. But they warned that if this were to happen, many universities would be looking at restructuring and redundancies, as well as cutting pastoral services and extracurricular opportunities. Some said mergers or even closures could be on the horizon. One university leader warned of “insolvency on a large scale”.

Leaders are worried that closures would affect universities’ future access to credit. While the sector is currently perceived as a “reasonable bet for those who wish to lend money”, as one respondent said, the assurance that universities are underwritten by the government could weaken quickly. Already, debt financing – such as bonds – are seen as only available to larger, elite institutions.

Political back-and-forth over student finance is affecting universities’ ability to plan for the future. The freeze on fees is already a considerable cut: “It might seem a minor change, but all of our modelling and our numbers give it a big impact,” said one leader. Then we need to look at how we are managing our cost base in order to be able to live with reduction in income.”

The Brexit effect

This financial uncertainty is compounded by Brexit. There remains no government confirmation of the fee status for EU students in 2019, but institutions are already experiencing a decline in numbers – and they expect it to continue. One respondent at a university with 890 EU undergraduates said they expect “the majority of those – 80 to 90 per cent – would no longer be coming”.

Even universities that recruit relatively few EU students are worried. Low-ranked institutions said that in the event of EU numbers dropping off, their elite rivals would target home students even more aggressively. 

Leaders also expected that access to EU research and regional development funding would be shut off after Brexit. They doubted that the government would prioritise the interests of universities – particularly around research. “I think there is a fundamental lack of understanding in government of the potential impact that this can have over the next generations for these institutions,” said one.

Post-92 universities in particular worried how they will plug the gap, since UK research funding is typically channelled towards research-intensive institutions such as the Russell Group.

Those universities, meanwhile, worried that European universities will lose interest in collaborating with the UK. “Other countries would say ‘oh well, it’s too hard to do with the UK now, it’s not worth the effort’,” warned one respondent.

Universities are also experiencing the impact of Brexit on staff recruitment, with 81% citing it as a concern. As one respondent put it: “[Academics] are choosing not to come to this country and those who are here are looking at opportunities outside.”

While no mass exodus has happened yet, one respondent suggested academics are only biding their time before more vacancies open at European universities.

Assessment overload

University leaders described how the pace of policy changes is influencing how they run their institutions. Where previously institutions opted for 10-year strategies, instead they are now combining longer-term horizons with shorter-term plans that can adapt to market and policy shocks.

Leaders reported feeling overwhelmed by the number of assessment exercises that have been introduced in recent years, including the Teaching Excellence Framework and the National Student Survey. “We have probably seen the fastest-moving period of time for university policy in pretty much working history,” said one. “Many plans we made over the previous period are increasingly outmoded.”

Many disapproved of the metrics used in the Tef, viewing their selection as driven by ideology rather than evidence in teaching and learning. Others worried that gold ratings might mislead students.

But leaders said they still viewed strong performance in these areas as important: 63% considered improving their Tef and NSS scores as priorities, compared with just 39% who prioritised university rankings.

As for the government’s proposed new knowledge exchange framework, universities want to be better at commercialising their research, while most are looking to strengthen their links with local businesses. However, it’s thought that only most research-intensive universities, or those specialising in Stem subjects, stand a chance of increasing revenues substantially.

Concerns were also raised that the focus on competition fostered by assessment exercises has a negative impact on academic collaboration. “[It] doesn’t happen as easily in the UK as it does for us Africa,” noted one respondent.

Meanwhile, leaders at universities in Scotland, Wales and Northern Ireland complained of disjointed policy and funding across the UK, which they see as hindering collaboration. Some universities, especially in Wales, added that they are struggling to compete with English universities since they’re unable to charge higher fees.

A distinctive brand

To survive in the marketplace, universities are finding ways to differentiate themselves through branding exercises and building a distinctive offer for students, focusing on student experience and course development.

Investment in these areas is typically channelled into estates, according to the report. One respondent said they had spent £250 million upgrading their campus.

Some universities say they are looking to build a more nurturing environment for students – for instance by introducing a large centre for student life, or buildings which facilitate more interactive, technology-driven style of teaching. Students’ expectations have risen significantly, noted one respondent.

Other universities are seeking to make themselves more efficient by modernising estates or to give areas, such as research and innovation, increased prominence on campus.

Overwhelmingly, the university leaders surveyed felt that the greatest threat to the sector is damage to its credibility and reputation caused by last year’s negative media coverage. A fixation on the monetary value of degrees is changing cultural attitudes towards the sector, they said.

To solve this, they called upon universities to start shaping the narrative themselves.