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I’m posting this again as it connects to yesterday’s post on reducing interest rates. The pdf included at the bottom has more detail and the reminder that the Browne review recommended a real interest rebate (for those whose monthly repayment was less than any above-inflation interest accruing).

But, in general, ICR loans cannot be understood by looking at the interest rate – because payments are not made in a way that is comparable to fixed term repayment loans where the level of cash payments is fixed (and where the first payment is the most valuable!).

That a real interest rate encourages people to do so is a design problem.

Critical Education

I recommend reading the Treasury Committee’s report into Student Loans. It was published last month and is based on a series of hearings held from October to December.

I prepared a couple of private submissions before my appearance as a witness. Unfortunately I neglected to “OK” them for publication afterwards. One was on the background to interest rates on student loans; the other a briefing on accounting.

I have covered the accounting on here in detail but the interest rate piece summarises some thoughts that came together at the time. The pdf below gives some background to the following extract from the Treasury report:

The Committee also took evidence from Dr Andrew McGettigan who, when asked about the interest rate as a mechanism to introduce a degree of progressivity into the student finance system, argued that this was not the Government’s original intention.
(page 17)

The exchange referenced above…

View original post 712 more words

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The Sunday Times reports today that the independent Augar review may recommend lowering interest rates on post-2012 student loans from RPI plus 0-3 percentage points to something akin to that accruing against older loans (the lower of RPI or bank base rates plus 1 pp).

Amongst a raft of other measures, I single this one out not just because its political appeal is obvious, but because it connects with the last post on the Money Saving Expert and Russell Group proposals for reforming the annual student loan statement.

What MSE/RG desire can only be solved by reducing the complexity of loans, not by presentational tweaks. Even though reducing interest rates only benefits higher earners in terms of reducing repayments, the public benefit of simplification trumps that redistributive element of the current scheme. Our current regime’s complications have a propensity to lead people into confusion that engenders harmful financial decisions: making voluntary additional repayments or paying upfront.

Setting aside broader questions about the funding of HE, it is better to forego some repayments from higher earners in order to avoid the potential to lead all borrowers astray.

Finance OhOhOh

What does it mean to say that 75% or 80% won’t repay their student loans before the policy write-off kicks in?

The phrase is a more than a little ambiguous. Strictly speaking it means that over three quarters of borrowers won’t clear their balances. It doesn’t mean that those former students won’t pay out cash amounting to more than the balance they had on leaving university. That is, total repayments are in many cases likely to exceed what was lent to borrowers.

A difficulty then arises: the value of cash is not stable. £1 today is not going to be worth the same as £1 in 2045. How do you compare the value of a cash stream paid out over 30 years with an outstanding balance shown today?

Most people want to know this, because they want to consider whether making additional voluntary loan repayments will save them money in the long run. A thought that arises naturally when looking at the interest rate in isolation.

Some might have the means to pay off their loan balances in full. For certain individuals, this will be a sensible decision: particularly in the case of Postgraduate loans, whose fixed interest of RPI + 3% is likely to punish borrowers who do not repay what they have borrowed quickly (the interest rate combines poorly with concurrent repayment, a low starting debt and a lower repayment threshold).

I start in this way, because this issue is ignored by MSE/RG, who have instead focused solely on reassuring those borrowers whose repayments are projected to be lower than the remaining balance on their account. Quite rightly, they want to advise that group that they should not make additional payments. Unfortunately, they bungle their approach and in doing so leave borrowers with a mess of information and mis-information.

Low Estimates

It is important to stress that in their statement and accompanying report MSE/RG only use one toy example to demonstrate their new statement. And that means what they are suggesting cannot be relied upon.

The example:
A new graduate earning £35,000 has made one year’s worth of repayments in 2018/19. At the repayment threshold of £25,000 that generates a total annual payment of £900. The statement shows the outstanding balance (£50,422) and its movement over the past year (though this is relegated to Page 2). More prominence is given to the final payment date of April 2048. A third and final page outlines “Predictions of your likely future contributions”. It is here that problems arise.

Firstly, a more prominent display for the final repayment date and potential point of write-off is welcome. I’d also like to see a reminder that student loans have another feature absent from commercial loans: death and disability insurance. Parents who remortgage to pay their children’s education upfront have no such protection.

Secondly, the statement imports most of the problems bedevilling the various online calculators available. It contains no caveats about how these figures might differ for men or women or for those from different ethnic backgrounds. I previously forced the Student Loan Company to take down its calculator for assuming all graduates were men.

Thirdly, and most importantly, the statement uses a set of assumptions that are likely to produce much lower estimates of repayments than found in official government loan models or in those operated by London Economics and Institute for Fiscal Studies.

Crucially, MSE/RG  make the mistaken assumption that the Bank of England targets the same inflation rate used to calculate the interest accruing against student loans . But the BoE targets CPI, while RPI is used for the loans: CPI is typically significantly lower than RPI, which is no longer classed as an official statistic. Then they assume that average earnings will increase by the current rate of 2.7% for the next 30 years; most other models assume a return to a rate over 4% in the next decade.  And they decide the earnings will only increase in line with this rate: that is, no graduate-specific rate, no promotions or positive job changes, and no periods out of work.  All this means that projected earnings are dampened and so are repayments.

It is probably because the model lowballs repayments, that MSE/RG have missed the problems I have already outlined. Their example borrower is expected to repay a further £39,000 in total by 2048. On models used by IFS and London Economics, a graduate on a starting salary of £35,000 would be expected to repay much more than that in cash terms and crucially, much more than the £50,000 outstanding balance.

What appears to be a pedantic criticism in fact gets at a crucial conceptual problem. If the MSE/RG only use one such example – a high earner who still repays less than they borrowed – then it is no surprise that they completely ignore the most difficult issue:

What should a borrower do if Page 3 of their statement shows that their expected cash repayments are above the outstanding balance?

Should they look to see if they can pay it off?

What are future repayments worth?

Here’s where the murky topic of present value and discounting forces itself to the fore. How do we adjust the total repayments (£39,000 in this case) made over 30 years (so made at different times) into a figure that makes sense as an equivalent to a cash sum today?

Unfortunately, here MSE/RG drop a clanger.

In attempting to turn that estimated total into “today’s money”, they have made a mathematical mistake and ended up treating the £39,000 as if it were a lump sum paid in 2048. They have inflation-adjusted by dividing £39,000 by 1.02 (their assumed 2%) twenty-nine times (1.02 to the power of 29). That gives you the £22,000.  In symbolic form:

£39,000/(1.0229) = £22,000

Think of this as a compound interest problem in reverse. If you put £22,000 into a savings account that gave you 2% per year (paid once per year) you would get roughly £39,000 by 2048.

But that’s not what we should be doing!

The £39,000 isn’t a lump sum paid 29 years in the future. Some payments go out this year, and so shouldn’t be discounted at all. Those paid out 10 years away should only be divided by 1.0210, those in twenty years by 1.0220, and so on. By reproducing the first set of figures used by MSE/RG, I calculate that their “today’s money” equivalent should instead be closer to £29,000 than £22,000.

So in short, MSE/RG underestimate likely repayments (partly by intention, partly by mistake) and then really muck up a present value problem to leave the “today’s money” equivalent lower again. (Note that there is a more technical problem with MSE/RG’s choice to use inflation as the discount rate: this is very unlikely to be appropriate for individuals. A more sensible discount rate might move the “today’s money” equivalent figure to something more reasonable, but it doesn’t change the fact that MSE/RG are suffering from some basic conceptual confusions here.)

The net effect will be to reassure lower earners that they shouldn’t look to make additional repayments, which will only cost them more. But in doing so they underestimate the future repayments of all borrowers and therefore mislead them about their financial position.

According to London Economics, a male graduate with a starting salary of £35,000 would start in the top decile, in fact the top few percentiles of recent graduates. Contra to MSE/RG’s toy model, a top decile male is likely to repay the loan entirely before the write-off. They are likely to make cash repayments of close to £100,000 and repay significantly more in present value terms than what they were loaned.

My point here is not to emphasise how badly that higher earner is served by MSE/RG’s approach – though they are! But to emphasise how poorly chosen and executed this work is. They’ve chosen a unrepresentative example and blundered in their workings, because they don’t understand how student loans, the graduate labour market and finance really work.

Had they chosen a more representative example, like a teacher starting in the region of £22-25,000 then they would still have the problem of massively underestimating likely repayments. A teacher who works for 30 years is more than likely to repay the equivalent of what was borrowed, but their nominal cash repayments would potentially be much higher than our friend who starts on £35,000. That results from making the majority of their repayments later, when each pound repaid has much less present value.

Here’s where we return to the problem I outlined earlier.

What should you do if the estimated cash total for repayments is higher than the outstanding balance?

The proposed statement offers no guidance, doesn’t even recognise the potential issues and as I’ve explained is likely to mislead borrowers by treating the present value problem of “today’s money” far too casually. So casually that they get the maths wrong!

A statement along the lines envisaged by MSE/RG certainly needs to present the projected salary pathway along with projected median earnings for some context. Here, I suggest looking at London Economics’ 2017 report for UCU.

Although it predates the decision to raise the repayment threshold to £25,000, it illustrates well the size of cash repayments (“nominal”) before they are translated into net present values (NPV). It very helpfully shows salary pathways for various occupations as well as repayments cashflows.

The chart below is taken from that report. On this model, public sector workers are also earning over £100,000 by the time the write-offs occur and have made loan repayments in excess of £100,000 by the time the 30years is up!! (London Economics use official long-range projections for average earnings).

London Economics for UCU, The Impact of Student Loan Repayments on Graduate Taxes

How Much?

How reassuring is it to have a brief statement that shows cash repayments of that order? In a detailed report, with a narrower audience, you can take care to explain the issue. But the space needed for a careful approach is not available in an annual statement for general readers.

There’s the real problem: the pay-off between detail and concision is not going to play out neatly. The explanation needed to walk a borrower through what they should legitimately conclude if the present value figure is higher than the outstanding balance defies inclusion in a three-page statement.

It is very difficult to see how the providing estimated repayments is helpful if former students do not understand some sophisticated finance. But then we’d have to open the question about what discount rate is appropriate for individuals …

A Step Back – first do no harm

Here though is where we should pause and realise that the complexity of loans should lead us to reach a different conclusion.

We have long recognised that student loans are confusing. We can now see that they are so confusing that a consumer affairs website and a sector lobby group can misunderstand them.

If you start from the principle, “first do no harm”, then you realise that there probably isn’t a presentational fix and we should instead reconsider the design of the scheme.

We should recognise that real interest rates are a design flaw that mislead borrowers into inappropriate comparisons. That is, the problem is bigger than can be addressed by presenting the statement differently.

We should now recognise that real interest rates encourage people into bad thinking and that bad thinking leads them into poor financial decisions (for example, remortgaging to pay children’s fees upfront).

Our student finance system should minimise its propensity to lead people into harmful financial decisions in the first place. Student loans should clearly be a good deal and no one should be left thinking that it might be better to accelerate repayments (and thereby inadvertently repay more!).

To my mind, such a principle trumps the additional repayments that real interest rates generate from higher earners. The real solution to the problem with which MSE and RG grapple is to reduce interest rates to CPI-only (or less).

No one should be confronted with a annual loan statement that misrepresents what a student loan commits you to. With CPI-only inflation, you can be sure that the value of your repayments will not exceed the value of your outstanding balance, even if you clear the balance in full before 30 years are up. Since an individual’s discount rate should be higher than CPI (at the very least since you need to factor in a value to reflect the death or disability insurance built-in to student loans), it won’t make sense for anyone to repay early. With a low interest rate, there would then be no reason to include spurious estimates about repayments in the statement.

No one should be weighing up whether paying upfront or making additional payments later makes sense for them.

We should cut interest rates to reduce the complexity of loans and reduce the likelihood of individuals losing money through bad decisions. The Treasury may not like it, but there is a broader public interest issue here.

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You’ve probably seen the coverage of the Money Saving Expert / Russell Group team-up and their proposals for overhauling the annual statements provided by Student Loans Company. Although the intentions are good, the “revamp” misfires and they’ve based a key part of their statements on an elementary mathematical blunder.

MSE and RG are keen to emphasise the “tax-like” behaviour of ICR loans by turning borrowers’ attention away from interest accruing and the outstanding balance (which is more likely to be written off than cleared). Instead, they want your focus to be on the current and future repayments.

The problem is that income contingent student loans are complex and have long lives.

Not only is it hard to give a sensible indicative level of cash repayments, it is extremely difficult to translate that projected cash total into something meaningful today. (MSE are most concerned by individuals who make additional voluntary repayments, which in most cases is throwing away money). Even if you have some familiarity with financial concepts like present value and discounting, the unusual nature of ICR loans makes such methods less reliable.

Unfortunately what’s proposed by MSE and RG makes a hash of this crucial issue: how should you understand today what repayments your student loan commits you to.

At this point, I should say that I haven’t read the accompanying report. I have only looked at the example statement. I will read the report tomorrow and blog a bit more.

The problems are located on the final page of the form: “Predictions of your likely future contributions”.

Various key assumptions are set out: repayment threshold, average earnings, salary growth, inflation and your working life. Average earnings growth of 2.7% is assumed for the next 30 years (government loan models assume AEG returns to over 4% in the long-run); the repayment threshold increases in line with that as does salary growth (no promotions or pay rises are factored in); your working life is assumed to be 30 years with no career breaks. We might quibble over these figures; we might also refer back to the previous work on this blog that forced the SLC to take down its “repayment calculator” owing to “everyday sexism”.

The first mistake seems to come with respect to inflation.

Student loans are linked to RPI, but the Bank of England targets CPI. RPI is higher than CPI and the spread in recent years has been as much as 1 percentage point. This suggests that the MSE/RG model is underestimating interest.

The second mistake is more fundamental. It comes when the statement tries to present its example of a £39,000 “future contributions” estimate (a cash total) in “today’s money”.

It can be seen quite quickly that there’s a blunder here. The form treats that £39,000 as if it were a single lump sum paid in 2048 and derives an equivalent figure in today’s money by removing 29 years’ inflation (at 2%).

£39,000 / (1.02 ^ 29) = £22,000
(where “^” means “to the power of”)

It doesn’t really need saying that student loans don’t work like this! You aren’t asked to pay up in 2048!

That £39,000 results from different payments made at different times and so each payment needs to be “discounted” to reflect when it was paid. One made today isn’t discounted, one made in ten years is divided by 1.22 (1.02 ^10), and only those sums paid in 2048 should be discounted with a factor of 1.78 (1.02^29).

So it’s immediately apparent that the MSE/RG approach underestimates interest and undervalues the repayments made, leaving borrowers with a misleading view of what their projected repayments are and what they are worth.

In the proffered example, this may not appear to be an issue as estimated cash repayments are lower than the outstanding balance of £50,422. But this will not be the case for everyone. In many ways MSE/RG have chosen an easy example: it is much harder if you have set out a statement for higher earners, where estimated cash repayments exceed the outstanding balance and borrowers want to consider whether additional repayment will save money. In such a case, the MSE/RG will misinform borrowers.

There is a further issue: a discount rate matched to CPI is completely inappropriate for an individual here. (The government’s financial reporting discount rate is RPI +0.7%). I will say more about this in tomorrow’s post. My own feeling is that discounting itself is inappropriate here (and that this means that real interest rates are a poor design feature in ICR loans) but if you must discount, then you should set the rate to match annual increases in average earnings as that is the main driver for estimating cash repayments.

(Note that this problem of discounting also bedevils the analyses of those academics who assume that paying fees upfront is necessarily cheaper than taking out loans. They misunderstand the time value of money).

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As outlined in previous blog posts, I first contacted Reading about the money the university owes to its trusts in mid-January. On April 10th, I finally received an email responding on the record to the questions I had raised. That statement was worded in confusing fashion so it has taken a bit of time to have things clarified.

The main development: Reading has now revealed that the £120million is owed to more than one of its trusts (and not simply the National Institute for Research in Dairying – NIRD). The table provided compares the amount owing at the end of July 2018 (end of year for the 2017/18 accounts) with end of January 2019.

Reading goes on to argue that these loans do not represent external debts, but interest is being levied. The university provided particular detail on the £77million owed to NIRD (though it subsequently confirmed that all the loans are being treated in the same way). The money outstanding is being 

“treated as a loan with an interest rate applied using the weighted average return on short term cash investments. Interest is payable on these sums and is rolled up in the balance on a monthly basis and recorded as such in the accounts. The sum is technically repayable on demand, and is therefore accounted as being repayable within one year. This is consistent with accounting practice for intra-group transactions. This approach has been endorsed by previous and current auditors.”

NIRD exists to advance research into agriculture and dairy at Reading. The statement goes on to specify recent NIRD-related projects at Reading:

“Since 2014 NIRD has funded several projects directly related to the objects of the Trust totalling £1.45m, including specialist equipment for measuring emissions from dairy farming, improvements to facilities at the Meat and Growth Research unit, and expansion of cowsheds for housing cattle at Hall Farm in Shinfield.”

£1.45million over the last five years is not very much and indicates a potential problem for Reading in finding £77m worth of relevant projects to finance over the coming years. (the new vice-chancellor used an Open Letter in February to explain that “all considerable net proceeds of the sale will over time be reinvested in research in food and agriculture at the University”).

Reading’s latest missive further specifies that:

“The University is currently in discussions with NIRD on funding for a number of eligible projects. These include funding research facilities at the University’s Food Pilot Plant, which is involved in numerous studies and trials into milk and other dairy products, and the Hugh Sinclair Unit for Human Nutrition, which undertakes research into the impact of nutrition on human health and disease, including cardiovascular disease.”

No costing for these possible projects is provided. It is worth emphasising that Reading would have to divert sums from elsewhere to cover these plans as it has spent the money the trusts have loaned the university. This has financial implications for the operation of the university. The unrealistic treatment of the loans as payable on demand allows Reading to avoid specifying a timescale by which the balances should be settled.

Finally, Reading confirms that an independent committee with “external specialist legal advice” has been established to represent the interests of NIRD.

“The independent committee representing the NIRD Trust was set up to consider all aspects of the current and future dealings of the Trust and the University’s relationship with it. This includes considering spending plans using the proceeds of the sale of land at Shinfield in the form of grants. The committee is fully independent and no specific remit or time limit was set for reporting.

“The issue was fully investigated and reported to the then Acting Vice-Chancellor in November 2018 at which point we sought external specialist legal advice, the independent panels were set up, and in December 2018 the University informed [Charity Commission] and OfS.

“Our correspondence with OfS and CC was on a precautionary basis to inform them that the above issues had been identified and advised them of our plan to review and improve the governance of the NIRD Trust. While the detail of the letters are confidential, both CC and OfS provided acknowledgement of the information and CC asked for further information which was provided.”

So with regard to NRID there are several strands of the issue that are still to be resolved.

But overall, the university owes £120m to its associated trusts. Money it does not currently have and which has to be generated from other activities in order to settle the claims, even if the loans are converted to grants. In short, the financial situation at Reading is much worse that would appear from simply looking at the “consolidated” figures in its financial statement and it is not clear how its future performance will be affected.

Other universities with trusts of this kind do not appear to have got themselves into this mess. 

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Research Professional has obtained the names of seven universities currently subject to “enhanced monitoring” by Office for Students.

The list includes SOAS. In December I was asked by SOAS UCU to review the institution’s finances. I was greatly concerned by the cashflow projections and by the plan to shrink the School over the next few years. 

The Independent summarises the SOAS situation. OfS is primarily concerned about “weak operating cashflow”.

Minutes from a November meeting of its board of trustees show the university is now required to “notify the OfS immediately of any material change in the school’s projected financial performance or position”.

SOAS said the “external environment for UK higher education institutions is a challenging one, especially for relatively small and specialist institutions”.

“In line with our forecasts, we reported an overall deficit of £1.2 million for 2017-18. As our staff and students know, we are taking action to reduce costs and grow income, while protecting the student experience,” a spokeswoman added

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£1.15billion was lost on the second loan sale in December according to the annual Supplementary Estimates, which itemise the additional budget given to government departments.

The sale raised just under £2billion, but this price was below the valuation of the loans sold in the Department for Education’s accounts. DfE has previously received assurances that the losses on the sale of pre-2012 income contingent loans would not impact on its budget and here we can see that it has been given additional resource AME to cover the sum.

A first sale, in December 2017, lost £900million. That means the sale programme has lost over £2billion already, with three planned sales still to go. Current national accounting conventions mean these losses are not recorded against the deficit, but that seems likely to change after Eurostat advised ONS that it’s new accounting treatment should see loan sales dealt with as “capital transfers”.

Elsewhere in the Supplementary Estimates, we can see that DfE has been given over £11.7billion extra resource to bulk up the ring-fenced part of its RDEL budget that is uses to cover the estimated non-repayment on student loans issued in year (which was only £3.9bn for 2018/19). The DfE might not need all of that to cover the ballooning cost of loans, but notes indicate that the RAB charge has been pushed up by 2.5 percentage points because of “adaptations” to the department’s loan model, plus corrections to both overestimated earnings for 2016/17 and underestimated loan outlay the following year. This would take the RAB charge very close to 50%, meaning that the government only expects to receive back the equivalent of half of what it loans out today. We will get a fully picture of this in the summer when DfE’s annual report for April 2018 to March 2019 is published. (Though this might also be the last occasion on which RAB is used for departmental budgeting!)

These revisions to data and modelling also push up the cost of loans already issued, which explains why the supplementary resource is higher than 50% of the loans issued in the year to March.

Note that departmental budgeting and accounting is separate to national accounting and is governed by different conventions and practices.

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While today’s Spring Statement promised that the Augar review would appear “shortly” and that a government response would be forthcoming later in the year, the real HE action was located in Annex B to the OBR’s latest Economic & Fiscal Outlook.

This section – “Accounting for Student Loans” – outlined the state of play regarding the ONS’s decision to reclassify student loans in the national accounts. Although the OBR “does not yet have sufficient clarity” on the detail of the new method to include it in its forecasts (a number of issues remain to be resolved), it does now understand the difference between the approach that is proposed (“the partition model”) and its own Hybrid model (published last summer).

The fundamental concepts in the two models are similar: the current fiscal illusions in the student loan accounting treatment are reduced by recording as upfront spending an estimate of the write-offs associated with the loans issued that year. At the same time, the interest accruing against loan balances is only recorded as income if it is expected to be repaid. Thus the spending on loans increases in the year they are issued and the income being generated from all extant loans is reduced. Spending goes up and income comes down leading to a large change in Public Sector Net Borrowing Requirement – the “deficit”.

Previously the OBR had estimated the impact on the deficit of implementing this new treatment at £12billion in 2018/19, rising to £17bn by 2023/24.  Their new – albeit provisional – estimate is that £10billion would be added this year and £14bn in 2023/24. That said, “this estimate is subject to considerable uncertainty”. Currently, the deficit is estimated to be £22.8bn this year and £13.5bn in 2023/24. In both cases, the key target measure is moved adversely and significantly; it is more than doubled in the later year.

OBR are also to be commended for giving attention to the problem of revising estimates. Estimates of write-offs depend on forecasts of repayments and the economic variables baked into the income contingent repayment scheme. What should be done when these vary from original estimates?

OBR concludes that Eurostat, the body responsible for official government statistics in the EU, will push the ONS towards using one-off lump sums to record revisions. This has the risk that

“changes in long-term expectations [might have] a distorting effect on the year-to-year path of the deficit that would make it less meaningful and less suitable as a target aggregate for policy”.

As we can see in the figures above, it deficits are generally small then revisions to student loan spending estimates could blow PSNB around.

Finally, OBR also refer to Eurostat guidance on the new treatment that was published in December. Though brief, it contains a key reference to the accounting treatment for student loan sales.

“further capital transfers should be recorded in case of the sale of loans or when significant changes of law, having an impact on the amounts which will be repaid, occur.” (my emphasis)

OBR do not comment on this aspect of the guidance. ONS have so far only indicated that the treatment of sales is an area where conceptual issues remain to be determined; they have provided no indicative treatment for future.

Eurostat’s reference to “capital transfers” here though points to a revision to that treatment too. This blog has previously argued that ONS has mistakenly treated recent loan sales as “revaluations” rather than “capital transfers”. It looks like Eurostat will vindicate that opinion and now require the losses made through sales to be recorded against the deficit.  (Don’t ask me how leaving the EU might affect Eurostat’s authority!)

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Although Reading has still not provided details of the £120million its owes to the National Institute for Research in Dairying Trust, for which it acts as sole trustee, a couple of letters and a blog post have provided a bit more insight.

Reading’s UCU branch has published a letter from the acting vice-chancellor, Robert van der Noort, which argues that the £120m is not a debt.  I was told by Reading press office that the money owed to the trust is a loan and that interest is payable.  (As an aside, I first contacted Reading in mid-January and spoke to them at length over a week before publication, when I gave them a list of questions. These were reiterated in the email to which the letter refers. They have still not answered these.)

Following a staff vote of no confidence, van de Noort published an Open Letter on Reading’s website. It contained the following paragraph:

Undoubtedly, some past activities and investments, such as our Malaysia campus, have not performed as well as we would have liked. Others have given a positive financial return for the institution, which we have reinvested in necessary improvements to our campus environment, teaching and research infrastructure and student experience – including the redevelopment of a modern library. Despite views to the contrary, the NIRD land sale is one of these and all considerable net proceeds of the sale will over time be reinvested in research in food and agriculture at the University. (my emphasis)

The future of the loss-making Malaysia campus is now under review. More pertinent to our concerns, Reading management here appears to admit that money coming from the trust should have been spent on research relevant to the trust’s objects.

The key point is that Reading does not have that money currently to hand and “over time” funds will have to come from elsewhere to match the £120m. That has financial implications for university, despite what has been said so far and irrespective of arguments over what exactly constitutes a “debt”.

In a blog originally intended for wonkhe but appearing today at Times Higher Education, van der Noort expends a lot of words saying not very much but does confirm the outlines of what we reported:

The article in The Guardian highlighted an issue that we have already dealt with, relating to the sale of land belonging to a charity for which the university was both trustee and beneficiary. Acting on the best advice available, we took steps last year to resolve this, and there are no wider implications for the university group’s finances. This concerned a historical issue of governance that needed to be put right.

Reading have as yet not explained how the matter has been resolved (if it has – we have yet to hear from Office for Students) and, again, the article makes no mention of the loan.

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Back in December, I made an offer via Twitter to look over the accounts of any universities where academics and/or students had any concerns about what was happening.

A member of staff at Reading approached me. A quick look at the latest financial statement (for 2017/18) flagged up a few issues. The main one was contained in Note 19 “Creditors: Amounts falling due within one year”.

It looked as if the University was committed to paying £120m to the trusts for which it acts as sole trustee.

That seemed unlikely. It was not as if the University was in a position to produce such sums and anyway the figure included for 2017 indicated that a slightly smaller sum had been in the same category in the previous financial year.

The accounts offered no explanation. I would have expected to see something either in this Note or in that devoted to “Related Party Transactions”. This prompted me to look back through Reading’s previous financial statements.  I had to go all the way back to 2014/15 to see the first clue:

“Included in other creditors is an amount of £40.9m owing to the University’s endowment trusts (2014: £13.2m). This total increased significantly in the year due to land disposals by the trusts.”

In subsequent years, the amount owed to the trusts increased rapidly, climbing to £87m and then the £107m of the 2016/17 accounts. What I now know is that this reflects the manner in which the proceeds arrived from the sale of land at Shinfield belonging to the National Institute for Dairying Research Trust: £20m in 2014, £50m in 2015 and a further £50m in instalments over the next 3 years.

The University spent these sums and noted that it owed NIRDT the £120m. In a statement issued on Saturday in response to our Guardian story the University argues that the sales were fully documented in its accounts.

“The University is confident that it has responded appropriately to the issues relating to the sale of land that formed part of the assets of the National Institute for Research in Dairying trust. The details have already been set out in the University’s published financial statements.” (9 February 2018)

I don’t disagree. But what is missing from all recent financial statements is any account of the loans, which the University says were made to itself by the Trust. The University has nowhere disclosed the terms of the loan and, although it told me interest was payable, it was not able to say what interest was due and indeed whether any had been paid.  The terms of the loans should have been published in the accounts and declared in the notes devoted to “related party transactions”.

There are prima facie conflicts of interest when a trustee is also the beneficiary of a trust. In this case, Reading appears to have accepted that it should have acted differently …

“The appropriate governance arrangements are now in place relating to the university’s management of the trust …” (my emphasis)

but is still being less than clear regarding how the matter is going to be resolved. I was told that two independent panels with legal representation have been convened: one to represent the interests of the trust, the other, the university. And that the university has also informed the regulators of what Office for Students called “a reportable event”. OfS said it had received this notification “recently”, but would not give any more specific timeframe.

There is obviously a broader question about what this means for the university’s finances and whether such a loan should be thought of as a “real debt”. I take that to be part of what needs to be resolved. Since the trust is designed to fund research at Reading, it is never going to be in trust’s interests to precipitate a brutal reckoning, but it seems clear that the loan is on generous terms (rolled over and increased each year) and isn’t being used solely for agricultural research. This indicates two sets of questions: was the conflict of interest properly managed? should the loan have been approved and extended annually?

Setting those questions aside, and returning to the finances: it is clear that the university has used proceeds from the sales to cover over problems in the last few years (deficits from ordinary activities of c. £20m in each of the last accounting periods).* It is not all clear what additional pressure may be put on the university’s position when the matter is fully resolved. (If anyone knows more about trust law and potential precedents, feel free to comment below).

More broadly, there is a question regarding how appropriate it is to “consolidate” the accounts of related trusts into university statements. NIRDT accounts do not appear to be published. Since it is a trust connected to an “exempt charity” , its accounts do not appear on the Charity Commission website; since it is not a company, there is nothing at Companies House. Reading does produce an annual statement regarding the investments held by another of its trusts, the Research Endowment Trust, but does nothing similar for NIRDT. Does anything prevent OfS from requiring universities to also publish the accounts of such trusts? (Again, if anyone with more knowledge in this area wants to comment, please do so below).

Judging from my inbox, this story has wider pertinence. My offer is still there. Please email if you want me to have a look at something.

*update: while over £110m was spent on acquiring fixed assets.

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I was recently asked by SOAS UCU branch to review the financial situation of the institution and assess the current management strategy.

Here is a recording of a public event from last week, where I outlined my concerns about plans for the School to shrink. The other speakers are from the library and academic staff at the institution.

Video

I am always happy to help union branches dissect management accounts and plans.

Please contact me by email for details.

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