Strategic Report
Queen Ƶt University, Edinburgh is an autonomous Scottish higher education institution. The University’s governing instruments and arrangements are set out under the Queen Ƶt University, Edinburgh (Scotland) Order of Council 2007, amended from 1 October 2019 through the Queen Ƶt University, Edinburgh (Scotland) Amendment Order of Council 2019. The 2007 Order is made under section 45 of the Further and Higher Education (Scotland) Act 1992.
The University is registered under the Companies Acts as a company limited by guarantee, with its registered office at Queen Ƶt University Drive, Musselburgh, East Lothian, EH21 6UU. The University
has been entered into the Scottish Charity Register and is entitled, in accordance with section 13(1) of the Charities and Trustee Investment (Scotland) Act 2005, to refer to itself as a Charity registered in Scotland.
Scope of the financial statements
The financial statements presented on pages 18 to 42 comprise the consolidated results of the University and its subsidiary company, Ƶ Enterprises Limited. Ƶ Enterprises Limited undertakes commercial consultancy work, utilising the expertise of the University’s academic and technical staff, and also deals with vacation letting of the University’s student accommodation.
The financial statements have been prepared on a going concern basis in accordance with Financial Reporting Standard 102 (FRS 102) and the Statement of Recommended Practice – Accounting for Further and Higher Education 2015 (SORP 2015), with the Accounts Direction issued by the Scottish Funding Council (SFC) and with the United Kingdom Companies Acts. Information on the process which has been undertaken to inform the decision to prepare the financial statements on a going concern basis is set out in section (A) in the statement of principal accounting policies.
Development of strategic plan
Following the appointment of a new Principal in October 2019, an exercise was undertaken to review and refresh the existing strategic plan. This resulted in the publication, in summer 2020, of a revised strategic plan covering the period from 2020 to 2025. The revised plan remains rooted in the University’s core values, and sets out a number of strategic goals, along with targets to be achieved by the end of the plan period in 2025.
The strategic plan is supported by a more detailed delivery plan, which sets out specific actions, along with timescales and owners, which will enable the achievement of the strategic plan goals and targets. A key element of the plan remains the inclusion of key performance indicators which the University Court uses to monitor progress towards the achievement of the goals set out in the plan (both financial and non-financial). The University also has processes in place to manage the risks which might inhibit this achievement.
Results for the year
The Group’s consolidated results for the year to 31 July 2020 are summarised as follows:-
| 2019/20 (£ million) | 2018/19 (£ million) | |
|---|---|---|
| Total income | 40.4 | 39.5 |
| Total Expenditure | (40.9) | (45.5) |
| (Deficit) for the year | (0.5) | (6.0) |
| Actuarial (loss) in respect of pension schemes | (14.4) | (7.4) |
| Unrealised surplus on revaluation of land and building | 5.2 | 30.6 |
| Total comprehensive (expenditure)/ income for the year | (9.7) | 17.2 |
The main changes in the underlying outturn position compared to 2018/19 were:-
- An increase in SFC grant of £1.0 million, including additional funding for the first year of the new initial teacher education programme;
- A reduction in other income of £0.3 million, which includes a one-off receipt of £1.4 million in respect of reimbursement of previously incurred infrastructure costs, offset by a reduction in income of £1.7 million, largely as a result of cancellation of summer school business in 2020 and accommodation fee refunds as a result of the COVID-19 pandemic;
- Staff costs remained constant. The annual pay inflation and incremental drift was offset by savings made by the transformation exercise and turnover savings;
- An decrease in depreciation of £0.4 million due mainly to the revaluation of the main campus and residences in 2019/20;
Additional information on the adjustments relating to actuarial losses on pension schemes and to the revaluation of land and buildings is provided in notes 21 and 12 respectively.
Ƶ Enterprises Ltd generated a profit of £220,000 (2018/19: £347,000), which was passed to the University under deed of covenant.
Cash flows and liquidity
The result for the year, adjusted for the effect of non-cash items and interest, was a net cash inflow of £4.3 million
on operating activities (2018/19, £3.7 million inflow). Overall cash balances increased by £0.690 million (2018/19;
£0.002 million increase). Cash balances at 31 July 2020 of £8.8 million (2019: £8.1 million) represented 90 days’
expenditure (2019: 74 days).
Management of principal risks and uncertainties
In common with other universities, Queen Ƶt University has to manage its activities whilst facing significant
pressures on its funding as well as on its cost base. Significant risks facing the University include:-
The impact of the COVID-19 pandemic on the University’s operations and financial position.
The full implications of the UK’s exit from European Union are still unclear. However, it is likely that this will
have an adverse impact on access for both students and staff from EU member states, and will introduce additional hurdles in accessing certain funding for research and other activities.
Funding from government through the Scottish Funding Council (SFC), the University’s main source of income, is likely to suffer from further real-terms reductions over the next few years as a consequence of spending cuts throughout the public sector.
Recruitment of international students continues to be challenging, largely as a result of difficulties faced by international students in obtaining visas to study in the UK, although this may be mitigated to some extent by the reinstatement of the post-study work visa.
Pressure on staff costs will continues to build, both in terms of pay awards (where the University continues to
participate in the UK-wide national negotiating framework) and also in terms of the cost of employers’ pension
contributions. The identification and management of risks is firmly embedded within the University’s structure and processes. The institutional corporate risk register, which includes a description of actions undertaken to mitigate risks, is formally reviewed by the Senior Leadership Team and the Audit & Risk Committee as well as being discussed by the University Court. The Court also undertakes, from time to time, an exercise to agree its appetite for risk, and to ensure that residual risks, after the application of mitigating actions, sit within the agreed tolerance.
Financial sustainability and going concern
The University Court has assessed the financial position of the University for the year ended 31 July 2020. The
assessment period considered is at least 12 months from the date of signing the accounts, that is, 10 February
2021. The University Court has assessed a number of factors as set out below and has concluded that there is an expectation that the University has adequate financial resources to continue to operate for the foreseeable future.
In reaching its conclusion, the University Court has considered the following factors:
At the balance sheet date the University had net current assets of £4.022 million.
Cash balances at 31 July 2020 amounted to £8.772 million. The University had liquid reserves (cash and
investments) as at 31 July 2020 equivalent to approximately three months’ operating cash requirements.
In the year to 31 July 2020 the University made an underlying deficit of £1.040 million, but generated positive
net cash from operating activities of £4.283 million. The University cash flow forecast shows an increasing cash trajectory, and no additional financing will be required to meet its liabilities.
At the balance sheet date the University had external financing liabilities of £29.087 million which are payable
to Barclays Bank plc.All bank loan covenants were complied with for the year ended 31 July 2020.
In relation to future years, we have considered headroom against covenants across a number of scenarios. We
consider that, on the basis of current forecasts, there is sufficient headroom on the Debt Servicing and Minimum
Cash Balance covenants. In relation to the potential impacts on income levels arising from the COVID-19
pandemic, a number of the scenarios, if they were to happen, would result in a breach of the Operational
Leverage covenant for the year to 31 July 2021. The University has therefore obtained a relaxation of the ratio
used to calculate this covenant from Barclays Bank plc, which will allow sufficient headroom to ensure that this
covenant can be met.
Confirmation has been provided by the Scottish Funding Council that it intends to continue to provide grant
funding for at least the next twelve months following approval of the financial statements.
Taking account of the business risks facing the University, we believe that the University and the group are well placed to continue to manage their business risks successfully.
We have considered the impacts of COVID-19, in particular focussing on the threats to current and future
income streams. Particular risks have been identified as a threat to income from international and EU student
tuition fees, and to summer school income. A further risk relates to the possibility of reduced term-time income from student accommodation resulting from a delay in the start of face-to-face teaching for some programme for semester two of 2020/21. The impact of these risks will be informed largely by the length of time for which COVID restrictions remain in place, and in particular whether there are still significant restrictions in place by the start of the 2021/22 academic session.
We have modelled a number of scenarios, including a severe downside case on our forecasts, including stress
testing our cash flow forecasts, and considered mitigating actions which could be put in place to reduce the
negative financial impact.
In accordance with the recommendations from the Higher Education Financial Sustainability Strategy Group
(FSSG), the University Court undertakes a formal annual assessment of the University’s financial sustainability. This process involves reviewing a common set of financial indicators, which have been applied to the University’s historical results and to the financial forecasts measured over a rolling five-year period, so as to reduce the impact of any one-off exceptional items arising in any year. The two key indicators which the University Court has agreed to focus upon to inform its considerations around financial sustainability are:-
1. Earnings before interest, taxation, depreciation and amortisation (EBITDA); and
2. Net cash flow from operating activities less interest payable as a percentage of turnover.
The second indicator has been adapted from the basket of financial indicators recommended by the FSSG as it is a more appropriate measure for the University, given its relatively high level of borrowings as a proportion of its turnover. The targets are also set at a level which will allow compliance with banking covenants. The results of the annual review undertaken in February 2021, based on a rolling five-year period, were as follows:-
Indicator Target Average
EBITDA 12% 10.5%
Net cash flow from operating activities less interest payable as a percentage of turnover 6% 7.6%
The EBITDA average percentage is below the target (and reduced from the 2018/19 figure of 11.2%), reflecting the financial disruption caused by COVID-19 over 2019/20 and 2020/21. The “Net cash flow from operating activities less interest payable as a percentage of turnover” indicator however remains above target, reflecting the University’s relatively strong cash position although reduced from the 2018/19 figure of 8.5%.
Borrowings
Borrowings at 31 July 2020 amounted to £29.1 million, (31 July 2019, £30.6 million) relating entirely to a secured loan facility with Barclays Bank plc taken out to fund the campus development at Musselburgh.
Pension arrangements
The University is involved in three pension schemes, as follows:-
The Lothian Pension Fund, which is part of the Local Government Pension Scheme (LGPS), is a multi-employer
defined benefit scheme. The scheme had a deficit at 31 July 2020. The Fund trustees have, in recent years, applied increases to the level of employers’ and employees’ contributions to the scheme in order to recover this deficit position. The University’s share of the fund deficit, as calculated by the scheme actuary, has been shown as a liability at 31 July 2020 of £31.0 million (2019 : £15.3 million).
The most recent actuarial review of the Scottish Teachers’ Pension Scheme (STPS) was undertaken as at 31 March 2016. As a result of this review, the level of employers’ contribution to this scheme was increased from 17.2% to 23.0% with effect from 1 September 2019. The valuation identified a notional shortfall of £1.3 billion, which is being repaid by a supplementary rate of 4.3% of employers’ pension contributions over a 15-year period from 1 April 2019.
This contribution is included in the 23.0% employers’ contribution rate.
The Universities Superannuation Scheme is a hybrid pension scheme, providing defined benefits (for all members), as well as defined contribution benefits. The assets of the scheme are held in a separate trustee-administered fund.
Because of the mutual nature of the scheme, the assets are not attributed to individual institutions and a schemewide contribution rate is set. The University is therefore exposed to actuarial risks associated with other institutions’ employees and is unable to identify its share of the underlying assets and liabilities of the scheme on a consistent and reasonable basis. As required by Section 28 of FRS 102 (Employee Benefits), the University therefore accounts for the scheme as if it were a wholly defined contribution scheme. As a result, the amount charged to the income and expenditure account represents the contributions payable to the scheme in respect of the accounting period.
Since the University has entered into an agreement (the Recovery Plan) that determines how each employer within the scheme will fund the overall deficit, the University recognises a liability for the contributions payable that arise from the agreement (to the extent that they relate to the deficit) and therefore an expense is recognised in the income and expenditure account.
Further details on pension arrangements are set out in note 21 to the financial statements.
Social inclusion Queen Ƶt University aims to promote entry to, and provide education at, undergraduate and postgraduate level to a diverse range of students, whatever their background. In assessing candidates for admission to the University, we are committed to the principles of fairness, transparency, and widening participation. Our Contextual Admissions Policy commits to making offers to identified groups where we recognise that a range of factors may have impacted on attainment. We offer a range of recruitment, outreach, pre and post entry activities to raise aspiration, encourage access and maximise retention from under-represented groups in line with our Student Experience strategy, Mainstreaming Report and Equality Outcomes, and underpinned by the University’s Outcome
Agreement with the Scottish Funding Council.
Strategic Report and Financial Statements 2020
Student satisfaction
The University participates in the National Student Survey (NSS). The 2020 institutional results show an overall satisfaction score of 82.6%, up from 82.3% in 2019. A particular highlight is the considerable increase in the proportion of students agreeing that the Students’ Union effectively represents students’ academic interests (up5%). This sees it move up to rank fifth in Scotland, an impressive gain of 6 places compared to the previous year.
Graduate employment
Our Employability Strategy brings together in a single document our approach to employability, with the primary objective of providing equitable employment and careers education to all students and graduates, and providing a public statement of our commitment to their success. We consider that our efforts are proving highly effective. Graduate level employment is at a similar level to the previous year, although a change in the methodology used to calculate this measure at national level means that the precise figures are not directly comparable.
Environmental issues
The University has one of the “greenest” campuses in the UK, which received a BREEAM “excellent” rating.
Sustainability remains at the heart of the University’s activities, which has been recognised through a number of green awards.
Future developments
In order to address the risks set out above, and also to take advantage of further opportunities as they arise, the University is continuing to focus on ensuring that its academic, infrastructure, digital, human resources and financial strategies are closely aligned. A review of the academic portfolio undertaken in 2018 has resulted in the introduction of a number of new programmes, and this, along with a continual review of the viability of existing programmes, will ensure that the University is able to achieve the objectives set out in its strategic plan. This will, in turn, allow the University to continue to generate an adequate level of cash in the short to medium term and to maintain an adequate level of reserves. The Court carries out regular monitoring of the University’s financial sustainability, as described above.
The impact of the UK’s exit from the European Union on the University’s operations and financial plans remains
uncertain. The University has identified a number of elements which may have a significant impact on its operations.
These include:-
· the impact on tuition fees from EU students (and any consequential impact on EU student numbers choosing
to study at Queen Ƶt University);
· the ability to access research and other funding from EU institutions;
· the status of staff from within the remaining EU (and the University’s ability to attract and retain such individuals);
and
· the attractiveness of the University as a partner institution for collaborative work with Universities based in the
remaining EU.
The funding environment for Scottish higher education institutions was challenging prior to the COVID-19 pandemic,
and those challenges have inevitably increased as a result of the pandemic, as the level of funds available to the
Scottish Government and the Scottish Funding Council (and therefore the amount available for distribution to
universities) continues to decline in real terms. The financial challenges facing the University are highlighted in the
financial sustainability indicators set out above, and in particular the EBITDA indicator, for which the five-year
average remains below the target level.
The COVID-19 pandemic has had a significant impact on the University’s operations throughout 2020. Whilst there
has been significant disruption to the University’s activities, the pandemic has also allowed the University to identify
a number of opportunities to contribute towards the rebuilding of society post-COVID. The importance of the subjects
in which Queen Ƶt University specialises, particularly in health care subjects, means that there will be
opportunities to develop teaching and research practices in these areas. Opportunities have been taken to develop
additional partnerships, both within the higher education sector and beyond, and these will allow the University to
move towards delivering its strategic goals, both locally and internationally.
The long term financial health of the University will continue to depend upon its ability to grow and diversify its income
base, and to control costs. The recent review and refresh of the University’s strategic plan has provided additional
focus for the University’s activities whilst at the same time creating an environment which will allow the development
of further new and increased sources of income to take place.
On behalf of the University Court
Linda McPherson
Acting Chair
26 February 2021
