Strategic Report 2021 | Finance | Queen ��Ƶt University

Strategic Report

Status

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 19 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 2019 (SORP 2019), 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

The University’s strategic 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 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 2021 are summarised as follows:-

Finance Income/Outcome	2020/2021	2019/2020
��	£��ǲ�	£��ǲ�
Total income	44.0	40.4
Total expenditure	(45.9)	(40.9)
(Deficit) for the year	(1.9)	(0.5)
Actuarial gain /(loss) in respect of pension schemes	12.7	(14.4)
Unrealised (deficit) /surplus on revaluation of land and buildings	(0.1)	5.2��
Total comprehensive income /(expenditure) for the year	10.7	(9.7)

The main changes in the underlying outturn position compared to 2019/20 were:-

An increase in SFC grants of £3.5 million. This included additional funding for the second year of the new initial teacher education programme and for the first year of the new paramedic science programme. The increase also included amounts totalling £1.8 million relating to COVID support and to additional funded places provided to address the additional student numbers resulting from the SQA exams issue in summer 2020;
An increase of £1.1 million in income from tuition fees and education contracts, including additional students on new programmes;
An increase in income from research grants and contracts, which was largely matched by additional costs;
A reduction in other income of £1.7 million, largely as a result of cancellation of summer school business in 2020 and 2021 and accommodation fee refunds as a result of the COVID-19 pandemic;
An increase of £3.8 million in staff costs, of which £2.4 million related to pension provision adjustments. The remaining £1.4 million increase related to additional staff costs on externally-funded research projects and costs related to COVID-19, as well as incremental drift;
An increase of £1.4 million in other operating expenses in relation to additional payments to research partners on externally funded grants and to additional COVID expenditure, the latter funded by additional SFC grants.

Additional information on the adjustments relating to actuarial losses on pension schemes and to the revaluation of land and buildings is provided in notes 20 and 11 respectively.

��Ƶ Enterprises Ltd generated a profit of £28,000 (2019/20: £220,000), 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 £9.5 million on operating activities (2019/20, £4.3 million inflow).�� Overall cash balances increased by £6.835 million (2019/20; £0.690 million increase). Unrestricted cash balances at 31 July 2021 of £15.3 million (2020: £8.8 million) represented 136 days’ expenditure (2020: 90 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 continue 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.

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The identification and management of risks is firmly embedded within the University’s structure and processes. An updated risk management strategy has recently been adopted by the University Court. 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 2021. The assessment period considered is the period to 31 July 2023 and further details of this assessment can be found on page 23. 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 £7.046 million.
Cash balances at 31 July 2021 amounted to £15.28 million. The University had liquid reserves (cash and investments) as at 31 July 2021 equivalent to approximately four and a half months’ operating cash requirements.
In the year to 31 July 2021 the University made an underlying surplus of £0.975 million before pension provision adjustments, and generated positive net cash from operating activities of £9.165 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 £27.724 million, of which £24.836 million is payable to Barclays Bank plc with the remainder being payable to the Scottish Funding Council. As set out in Note 14, the University intends to enter into discussions around refinancing the element of the Barclays loan which will remain outstanding at the scheduled repayment date of 17 December 2024.
All bank loan covenants were complied with for the year ended 31 July 2021.
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 under each of the scenarios considered. In relation to the potential impacts on income levels arising from the COVID-19 pandemic, a number of the downside scenarios, if they were to happen, would result in a breach of the Operational Leverage covenant for the years to 31 July 2022 and 2023. The University has considered mitigating actions which it would take in the event of such a loss in income, and is confident that it would be able to reduce discretionary expenditure by an amount which would allow all bank covenants to be met.
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 student tuition fees, and to summer school income. The impact of these risks will be informed largely by the length of time for which COVID restrictions remain in place.
We have modelled three scenarios, including a severe downside case on our forecasts and have 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:-

Earnings before interest, taxation, depreciation and amortisation (EBITDA); and
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 November 2021, based on a rolling five-year period, were as follows:-

Indicator	Target	Average
EBITDA	12%	12.5%
Net cash flow from operating activities less interest payable as a percentage of turnover	6%	10.9%

The EBITDA average percentage has moved above the five-year average target, reflecting the positive result for 2020/21. The figure for the year to 31 July 2021 was 14.9%. The “Net cash flow from operating activities less interest payable as a percentage of turnover” indicator�� remains well above target, reflecting the University’s relatively strong cash position, having increased from the 2019/20 figure of 7.6%.

Borrowings

Borrowings at 31 July 2021 amounted to £27.7 million (31 July 2020, £29.1 million). Of this amount, £24.9 million related to a secured loan facility with Barclays Bank plc taken out to fund the campus development at Musselburgh, and £2.8 million related to an unsecured loan from the Scottish Funding Council under the Financial Transactions scheme.

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 2021. 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 2021 of £21.0 million (2020 : £31.0 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 scheme-wide 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 20 to the financial statements. Information on the ��impact of the 2020 valuation of the USS, which was finalised after the balance sheet date, are set out in note 21.

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.

Student satisfaction

The University participates in the National Student Survey (NSS). The 2021 institutional results show an overall satisfaction score of 79.0%, Along with most other universities, this score has fallen, from 82.6% in 2020, as a result of the disruption to the student experience caused by COVID-19. However, the score remains 4% above the UK average score of 75.4%, which has fallen by 7.2% since 2020. This has contributed towards an improvement in “league table” positions, including a rise of 23 places, from 89 to 66, in the Sunday Times Good University Guide.

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 strategic plan was undertaken in early 2020, and whilst operations have been affected by the COVID-19 pandemic, the University continues to make good progress in a number of areas which will ensure that it is able to achieve the objectives set out in its strategic plan during the period through to 2025. 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 has become slightly clearer, but the long-term impact 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 the likely consequential reduction in EU student numbers choosing to study at Queen ��Ƶt University);
the ability to access research and other funding from EU institutions;
the ability of the University to attract and retain staff from within the remaining EU; 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. Whilst additional funding has been made available from the Scottish Funding Council to help to mitigate the financial losses arising from COVID, it is likely that, in the medium term, the level of funds available to the Scottish Government and the Scottish Funding Council (and therefore the amount available for distribution to universities) will continue to decline in real terms.

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

Pamela Woodburn

Chair

1 December 2021

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Strategic Report

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