British universities reeling from operational restrictions imposed by the coronavirus pandemic face “significant” financial risks from high dropout rates and rising pension costs, a respected economic think-tank has warned.

The Institute for Fiscal Studies’ (IFS) annual report on education spending states that the higher education sector will suffer funding shortfalls impacting colleges and universities, whose pension deficit has widened from £3.6 billion in March 2018 to around £21.5 billion in August.

IFS researchers say that the taxpayer will be hit with long-term bills, too, stemming from a predicted £12 billion shortfall in student loan repayments as graduates struggle to find employment in a labour market decimated by the pandemic.

Universities, meanwhile, are also likely to incur losses from accommodation, conferences and catering, the IFS has claimed.

Ben Waltmann, IFS research economist and co-author of the report, said that higher-than-expected domestic enrolments this autumn helped offset losses to an extent, but noted that no-shows and inflated dropout rates will deliver a fresh blow to universities’ balance sheets.

But he said the biggest financial risk at present is the pension deficit.

Waltmann said: “By far the biggest source of risk now appears to be the large deficit on the main university pension scheme which has increased from £3.6bn in March 2018 to a monumental £21.5bn in August 2020, according to the latest preliminary estimate.

“With contributions already at more than 30% of earnings, it is hard to see how a deficit on this scale, if confirmed, could be evened out without further cuts in the generosity of the scheme.”

The IFS’ report highlights financial strain in further education, a sector prioritised by education secretary Gavin Williamson amid efforts to galvanise young people into technical training to help patch the UK’s skills gap – which is expected to widen due to Brexit.

The IFS forecasts that colleges and sixth forms face falls in real-terms funding for each student, despite an additional £400 million in funding this year, because this summer’s enhanced GCSE scores will result in increased enrolments across the board.

Geoff Barton, general secretary of the Association of School and College Leaders, said: “The government talks about the importance of further education, but simply doesn’t put its money where its mouth is, as this report starkly shows.

“The additional investment of £400m into the sector this year hardly touches the sides following years of real-terms cuts and the likelihood of rising student numbers. Colleges and sixth forms urgently require a significant uplift in funding that matches the government’s rhetoric.”

Date published: 3 November 2020

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