Financial review

The University uses Earnings Before Interest, Taxation, Depreciation and Amortisation (EBITDA) as our key financial metric. University EBITDA in 2023/24 was £84 million. This is a reduction of £64 million on the EBITDA reported last year (2023: £148 million) driven by the impact of growth in income slowing relative to growth in expenditure, as detailed in the commentary below. EBITDA in 2023/24 equates to 5.8 per cent of total income (2023: 10.7 per cent). The University’s balance sheet remains strong with total net assets amounting to £3.1 billion (2023: £2.7 billion).

Scope of the financial statements

These financial statements have been prepared in accordance with the Statement of Recommended Practice Accounting for Further and Higher Education Institutions 2019 (SORP 2019), the Scottish Funding Council’s 2023/24 accounts direction and with Financial Reporting Standard (FRS) 102.

Financial performance

Commentary on financial performance in 2023/24 excludes the impact of the non-cash credit to staff costs of £352 million, relating to movement on the USS pension provision in the year (in 2022/23 this was a smaller non-cash credit of £53 million). This is a result of the University previously holding a provision on its balance sheet for our share of the USS Deficit Recovery Plan. The movement year-on-year (either up or down) does not represent cash moving in or out of the organisation as it is an accounting adjustment. Further comment is provided in the pensions update below.

FRS 102 requires that unrealised gains and losses be reported as part of the statement of comprehensive income and expenditure. These gains and losses, which are not realised cash movements, form part of the total comprehensive income for the year of £393 million (2023: £182 million). 

Income

Total income in 2023/24 was £1,434 million (2023: £1,385 million). This represents an increase of 4 per cent from last year. This was principally driven by higher research income and increased returns on our treasury investments as a result of the higher interest rate environment in which we operate. 

The University has a broad range of income streams and the funding mix remains fairly consistent across financial years.  In total, tuition fees (37 per cent), funding body grants (15 per cent), research income (25 per cent) and other income (17 per cent) account for 94 per cent of the University’s total income. The remaining six per cent relates to investment income, donations and endowments. 

In what has been a challenging year for student recruitment across the wider higher education sector, income from tuition fees and education contracts grew by three per cent in the year to £527 million (2023: £514 million). Our student headcount is slightly down, though new student intakes grew; the reduction in overall population is driven by graduation of larger-than-planned cohorts recruited during the Covid years. Our student headcount fell by 0.5 per cent to 49,485 (2023: 49,740).

Funding body grants decreased by one per cent in 2023/24 to £209 million (2023: £211 million) driven by lower strategic funding. Included within funding body grants is our recurrent teaching and research grants received from the Scottish Funding Council. We have seen an increase in our core research grant in recent years linked to our excellent performance in the 2021 Research Excellence Framework (REF).

Research income grew by eight per cent on the previous year to £365 million (2023: £340 million). This reflects our current research activity along with the recognition of a £20 million Simons Foundation gift to fund future research activity and £15 million in capital funding received from the Edinburgh and South-East Scotland City Region Deal (2023: £30 million). Our research award pipeline remains strong and the associated income of these awards will filter through into our research income over their lifetime.

The University’s non-teaching and research income remains a key component of our funding model. Other income in 2023/24 has increased by seven per cent to £238 million (2023: £222 million). Driving this is the improvements we have seen in our commercial operations with income from our accommodation and catering business increasing to £98 million in 2023/24 (2023: £93 million) and income from other services, like consultancy, increasing to £66 million in 2023/24 (2023: £59 million).

Investment income has risen by almost 50 per cent in 2024 to £64 million (2023: £43 million). Contributing to this improvement are higher amounts of interest receivable on our treasury and cash funds due to higher interest rates.

Donations and endowments totalled £30 million in 2024 (2023: £55 million). This can be a volatile income stream across financial years. The total in 2023 included the receipt of £40 million of endowment funding that will be used to fund Phase Two of the Mastercard Foundation Scholars Program. 

Expenditure

Total expenditure in 2023/24 was £1,409 million (2023: £1,280 million), a ten per cent increase on last year. This excludes the impact of £352 million non-cash staff costs relating to movement on the USS pension provision we held on our balance sheet until the end of this year. 

Staff costs for the year were £756 million (2023: £706 million), an increase of seven per cent. Staff costs remain our largest expenditure item and represented 54 per cent of total expenditure for the year (2023: 55 per cent). 

Salary costs increased by 12 per cent in 2023/24, driven by a price increase of four per cent and a volume increase of eight per cent (which equates to 958 full time equivalents). The price increase is driven by nationally agreed cost of living increases and staff movement through pay grade scales.

Pension costs reduced across the year to £133 million (2023: £145 million) which was driven by the outcome of the 2023 USS valuation that ended with lower employee and employer contribution rates from January 2024. 

Our mix of staff costs across different activities remained consistent in 2023/24 with 57 per cent relating to teaching (2023: 56 per cent) and 18 per cent relating to research grants and contracts (2023: 18 per cent). The remaining 25 per cent relates to our professional services and commercial staff that provide library, IT, premises and other administrative support to our core teaching and research activities (2023: 26 per cent). 

In the spring of 2024, the University implemented a revised pay grade scale that adjusted the point at which grades start and end on the national pay spine points. Staff costs in 2023/24 included the first tranche of the impact of this decision, with the full impacts materialising from August 2024.

After staff costs, our next largest expenditure item is other operating expenses which increased by 17 per cent to £540 million this year (2023: £462 million). 

Other operating expenses includes the costs of supporting our academic and research mission as well as the costs of supporting our students through scholarships and bursaries and accommodation and library services.  The cost of supporting our estate, including utility and maintenance costs, and general administrative costs are also included in other operating expenses.

Other operating expenses represented 38 per cent of total expenditure for the year (2023: 36 per cent). The increase across the last year has been driven by an increase in student support payments and the general high inflation environment we have been working in which has had an impact on all aspects of our cost base.

The University’s depreciation charge increased by seven per cent to £91 million in 2024 (2023: £85 million). Depreciation charges are a reflection of our capital investment programme. The increase this year is driven by higher charges relating to our equipment purchases, which have increased in the last few years. There was no impairment made to fixed assets in 2023/24 (2023: nil).

Interest and other finance costs were £22 million in 2023/24 (2023: £27 million). This includes the cost of servicing our long-term borrowing (see note 20 to the financial statements) that is being used to help fund our capital investment plans, alongside our existing cash reserves and our annual cash generation from our operations.

Update on Pensions

Pension schemes in the UK are required to undertake a formal valuation every three years to establish the scheme’s assets and liabilities. The assets represent investments that are made in order to fund pensions (funded by employer and member contributions) and the liabilities relate to the amounts expected to be paid out to pensioners over time.

The Universities Superannuation Scheme (USS) struck its latest valuation as at 31 March 2023. The 2023 valuation result shows a notable contrast to the outcome of the 2020 valuation as it moved from a position of significant deficit to a surplus.

Outcomes from the scheme valuation showing a surplus are improvement to benefits for members as well as a reduction in contributions for both members and employers. Following the conclusion of the valuation, the University is no longer required to make deficit reduction contributions and therefore the previously held provision for future deficit reduction payments was released in full. This results in a credit to the income statement of £352 million.

The USS is one of the largest private pension schemes in the UK with over 340 member organisations, and over half a million individual members who account for over a fifth of the people in the UK who are still actively paying into private defined benefit schemes. 

The long-term financial sustainability of the scheme is a priority for the University and we will continue to work constructively with all parties involved.

The University has recorded an actuarial loss on its funded pension schemes of £13 million in the year. This follows on from the previous year when we recorded an actuarial gain of £30 million. The actuarial loss or gain is a non-cash movement and is not a measure of the University’s operational financial performance. It is simply the annual difference in the estimated value of the assets and liabilities in the University’s own defined benefit pension scheme. 

Certain assumptions are used to value the future liabilities and assets belonging to each pension scheme. These estimates reflect changes to the actuary’s assumptions as a result of another year’s experience. The actuarial loss of £13 million is broken down as per the table above (see note 33 for further details on the individual pension schemes). The actuarial loss or gain can vary greatly from year-to-year depending on the remeasurements which have taken place.

The EUSBS is in deficit Ð the present value of the scheme liabilities is greater than the market value of the scheme assets. The net liability of the EUSBS as at 31 July 2024 was £32 million, having increased from a £20 million deficit as at 31 July 2023. The deficit on the EUSBS is reported on the balance sheet under pension provisions. 

The most recent valuation for our in-house Edinburgh University Staff Benefit Scheme (EUSBS) was as at 31 March 2024, although valuation of the scheme has yet to formally conclude. Benefit structure and associated contribution rates by the Trustee and the University are being considered as the valuation concludes. 

Net Assets

Total Net Assets are £3.1 billion (2023: £2.7 billion) having increased by 15 per cent, principally driven by the release of the USS deficit recovery provision we previously held. The net book value of fixed assets increased by £96 million to £2.2 billion (2023: £2.1 billion). This is a reflection of the University’s programme of estates development and equipment procurement.

Endowments

In the year to 31 July 2024, the Endowment and Investment fund unit price grew by 3.5 per cent. The value of the Endowment and Investment fund grew to £580 million. The Investment Committee regularly reviews the fund managers and asset categories in the unitised fund to diversify risk while optimising returns. All of the University’s fund managers are signatories to the United Nations Principles of Responsible Investment (UNPRI).

Responsible Investment Policy

Treasury and cashflow

The University manages its treasury funds through cash and cash equivalents balances and investments in both current and non-current assets.

Management and investment of treasury funds allows the University to generate investment income that contributes to EBITDA achieved in the year.

Cash and cash equivalents at the end of the year are £216 million lower than previous year, although much of this reduction was planned with a large amount placed into investments.

Overall treasury funds have reduced by £86 million, driven by capital expenditure of £186 million, which significantly exceeds EBITDA generated in the year.

The University cash and cash equivalents balance as at 31 July 2024 was £240 million (2023: £456 million) with movements presented in the chart below. The University is careful to manage its cash balances to ensure adequate resources are available to fund our ongoing obligations and our physical and digital infrastructure investment plans. It should be noted that a substantial amount of our cash and cash equivalents are ring-fenced 

and must be used under the terms in which we received it. For example, research purposes or donations with specific requirements.

Institutional sustainability

Our financial statements are prepared on a going concern basis, which is an accounting term that means we have the resources to meet our obligations and continue to operate for the foreseeable future. Although we and the rest of the higher education sector face many challenges — both financial and non-financial (see Understanding our Risks section for more information) Ð we are confident in the continuing financial sustainability of the University.

As a result of an extended period of high inflation and higher than planned cost of living pay awards, expenditure growth has outpaced income growth in recent years. This trend is unsustainable over a prolonged period of time and the University is taking action to reverse this trend by managing its cost base and protecting key income streams.

The University’s governing body, the University Court, has comprehensive arrangements in place to monitor, assess and ensure the institution’s on-going financial sustainability. We continue to work hard to model various impact scenarios on the University’s financial position. This focuses on existing and emerging risks and opportunities and is carried out to ‘stress-test’ the University’s financial strength. With our management of risks and our cost base we are confident we will remain a going concern and deal with our short and longer-term commitments.

Outlook

The financial year 2023/24 was a challenging one for the University and the sector. EBITDA achieved in the year fell notably from prior year reflecting current challenges in the higher education sector. As we move into a new financial year that will bring with it new challenges, we must be prepared to actively and constructively address our increasing cost base to shape the University to deal with its short and longer-term commitments.

Growth in tuition fees, our largest income stream, is forecast to continue at levels below recent historic trend. Against this, our expenditure is forecast to grow at a level greater than income driven by pressures from inflation, changes to pay scale and the recent increase to employer’s National Insurance contributions.

The University presently faces a financial challenge greater than in any recent times, but we are well placed to respond to these challenges through the next financial year and beyond.

We remain committed to a holistic and integrated reporting model to provide the best quality assessment of our financial position to our broad audience of stakeholders and interested parties. This approach is embedded in our Strategy 2030 and underpins the decisions we make and the direction in which these take the University.

Lee Hamill

Director of Finance

19 December 2024