Financial review

It has been a year of change and turbulence across the Higher Education sector due to the impact of the COVID-19 pandemic on our students, staff, other stakeholders and the wider financial environment. The uncertainty was exacerbated by a lockdown in March 2020 which prompted Winchester into emergency planning to establish new ways of teaching and preparing our estate to be ‘Covid safe’. Despite the lockdown’s detrimental financial impact Winchester’s robust financial management, strong governance and swift mitigating actions resulted in a successful year-end surplus of £1.5m, operating cash flow of £11.0m and a £7.6m increase in closing cash and cash equivalents.

We are still challenged by the uncertainty the pandemic has caused and continue to regularly review and update our medium- and long-term financial forecasts. However, our strong performance for 2019/20 exceeded budget expectations and provides a stronger financial foothold from which to face another challenging year ahead as the world searches for a viable vaccine. This Financial Review (pages 50–54) puts the year in perspective and outlines our financial environment, finance strategy, financial KPIs, financial performance and our future outlook.

Financial environment

This year the financial environment was dominated by the direct and indirect impacts of the COVID-19 pandemic. This catastrophic event has led to increased uncertainty and risk across all parts of the global economy.

At a local level, Winchester experienced a number of unprecedented challenges including: • Rapidly investing in new equipment and practices for online delivery of lectures • Expenditure on campus adaptations to deliver a ‘Covid safe’ campus for the start of semester 1 • Mothballing buildings over the summer • Disruptions to summer estates works as contractors went into lockdown • Delayed opening of our new West

Downs learning and teaching building • Loss of catering and conferencing income over the summer and thereafter • Putting staff onto the furlough scheme (80% of salary), if they were unable to work, and topping their salary back up to 100% • Implementing a number of cost saving initiatives and mitigating actions including a voluntary redundancy scheme • Restricted travel for international students impacting current students and future demand • Turbulent financial markets adversely impacting pension valuations As well as the financial impact of the pandemic, Winchester encountered a University and Colleges Union (UCU) strike (representing our academic staff) in February and March 2020. The two weeks of action was over issues that were not all within Winchester’s direct control – a dispute between the UCU and the Universities and Colleges Employers' Association (UCEA). The dispute was over a number of factors, the primary one regarding the level of pay, which is negotiated at a national level by UCEA.

Winchester did all it could to minimise the impact of the strike on the student experience and where lectures were impacted, we endeavoured to find suitable alternatives so that classes could go ahead. We extended deadlines for student assignments by two weeks to allow for the disruption caused by the strike and financially compensated those whose lectures were materially disrupted by the strike.

The global pandemic and strike overshadowed ongoing concerns over the Government’s possible implementation of some of the Augar review recommendations, the ongoing decline in the number of 18-year-olds living in the UK and the impacts of Brexit.

Winchester is regularly reviewing the financial and operational risks associated with the withdrawal of the United Kingdom from the European Union and incorporates these into our risk register. We have undertaken a risk review of our supply chains to identify high-risk areas for further contingency planning and are reviewing our international partnerships. Winchester continues to hold regular Brexit meetings to keep abreast of the latest changes as the United Kingdom manages its exit from the European Union.

RESPONDING TO COVID-19

Winchester responded quickly to the challenges presented by the pandemic by mobilising a crossinstitutional project to manage the closure, and subsequently the reopening of the estate in preparation for the 2020/2021 academic year. The project was exemplar of our integrated thinking approach and is outlined in more detail on page 14.

Finance strategy

Our finance strategy is designed to empower Winchester to reach its potential and implement its Strategic Vision 2030. It has been drafted with reference to these five principles:

1. Long-term viability and matching resources with objectives 2.Maintaining productive capacity to meet current objectives 3.Financing development and investment

4.Evaluating strategic alternatives and managing risks 5.Integrating financial and other corporate strategies

In light of the financial environment we are navigating, the Finance Strategy outlines our four strategic priorities for the year ahead: Financial sustainability – To remain financially sustainable and produce sufficient cash to support our strategic objectives and provide institutional sustainability.

Operational efficiency – To continuously improve efficiency and effectiveness - by managing the cost of operations and delivering value for money whilst continuing to maintain a sustainable recurrent investment in the academic, corporate and support operations.

Capital investment – To ensure the maintenance of our estate and future strategic investment to support the delivery of excellence in education. Ensure capital investment is at a level that will not put Winchester at financial risk.

Treasury management – To assess and manage risk in all of Winchester’s growth and development activities and to operate sound treasury management as outlined in our Treasury Management Policy.

In order to assess our performance against our Financial Strategy, the Board of Governors monitor a number of KPIs, some of which are outlined on pages 28-29.

Financial KPIs

Key performance indicators (KPIs) are used by our Senior Management Team and by our Board of Governors to assess the Winchester’s performance. Our KPIs are regularly reviewed in line with our strategic plan and are modified, as required, to remain current with a rapidly changing external operating environment.

Our KPIs cover a number of operational areas from student satisfaction to student employability. Our financial KPIs reflect those used by our funding bodies and are reconciled to accounting data. Our three main financial performance KPIs for 2019/20 were:

FINANCIAL KPIs

Profitability %: EBITDA/Total Income

Margin for Sustainability and Investment (MSI)

Financing: Net bank borrowing/EBITDA

2019/20

12.7%

11.4%

1.0

EBITDA = Earnings Before Interest, Tax, Depreciation and Amortisation.

MSI is calculated from an average of the last three completed years and three forecast future years EBITDA, divided by the current year total income.

Our profitability percentage has increased to 12.7% in 2019/20 due to our improved financial performance in the year described in more detail under Financial performance which follows. Our MSI factor is similarly derived from EBITDA but is calculated from historic periods and future forecast periods taken from our business plan. The improvement for 2019/20 is due to the much higher outturn for the year. However, whilst our MSI showed an improvement for 2019/20, subsequent forecasts are expected to reduce this improvement following the medium-term impact modelling of the pandemic.

2018/19

9.1%

8.7%

(0.1)

Our financing KPI of 1.0 for 2019/20 represents the ratio of net bank borrowing to EBITDA. This is a strong result after having fully drawn our £30m Triodos loan in the year, showing that our net debt is no greater than our EBITDA. The negative ratio for 2018/19 was due to our cash exceeding our bank borrowing whilst the Triodos loan facility was still being drawn.

Financial performance

The onset of the COVID-19 pandemic has had a significant impact on this year’s financial statements, in respect of reducing both income and expenditure. However, despite the challenges resulting from the first wave of the pandemic we end the year in a strong financial position, which will better help us navigate what will be a period of continued uncertainty in the coming year.

For the year ended 31 July 2020, we report a surplus of £1.5m (2018/19 deficit £2.9m). Student recruitment was strong in the year and overall income is marginally higher than in 2018/19, despite sizeable reductions in accommodation rental income, catering income and conferencing income as a result of COVID-19. Student recruitment was supported by our new Faculty of Health and Wellbeing, which continues to become fully established with new courses proving extremely popular with students.

Staff costs are lower than the previous year due to a voluntary redundancy scheme at the end of 2018/19. Other operating expenditure has also reduced where the effects of COVID-19 saw a marked decrease in expenditure in the latter months of the financial year, due to: some staff on furlough; catering, conferencing and accommodation largely closed; buildings being mothballed for several months; and usual operating activities reduced. The year saw the final stages of construction of our new West Downs teaching and learning building, which was partly funded (£20m, 40%) from internally generated funds. However, the pandemic delayed the opening of the building until the first semester of 2020/21. During the year, Winchester signed a revised loan covenants with the Allied Irish Bank which now aligns with our Triodos Bank agreement, making compliance easier to monitor and bringing the loans in-line with the HE SORP 2019, reporting under FRS 102. Net cash inflow from operating activities increased from £5.8m to £11.0m. Maintaining our cash position is paramount during this period of uncertainty and – despite having endured the first wave of the COVID-19 pandemic – we begin the new financial year with more available cash than at the end of last year.

INCOME

Total income for the year is £80.9m (2018/19 £80.5m) :-

TOTAL INCOME 2019/20 (£m)

Total: £80.9m

„ Tuition fees and education contracts „ Funding body grants „ Research grants and contracts „ Other income

TUITION FEE INCOME 2019/20

Per cent „ Full-time home and EU students „ Full-time international students „ Part-time students „ Self-financing courses Tuition fee income accounts for 81% of the Winchester’s income and has increased by 6% to £65.7m in the year, with the increase reflecting strong recruitment achieved in this and previous years; all this being achieved against the back-drop of a period of declining numbers of 18-year-olds resident in the UK. Funding body grants from the Office for Students and Research England were awarded at a similar level to 2018/19 at £3.3m. Income from research grants and contracts was impacted by COVID-19 with much of the research work being suspended following the onset of the pandemic.

Income from accommodation, catering and conferences was also significantly impacted by COVID-19 in the year, with income being 27% lower than the previous year at £8.9m (2018/19 £12.2m). Once lockdown was announced in March 2020, most students vacated their rooms. In support of its values, Winchester chose to refund students for their accommodation fees from the date the University went into lockdown, amounting to £3.2m of refunds being awarded. However, over the summer Winchester was able to support the NHS by providing 60 rooms at our Burma Road Student Village to house key workers for Hampshire Hospitals NHS Foundation Trust. The onset of the pandemic also meant that catering operations and conference activity was considerably reduced

from March 2020 onwards. Interest receivable reduced from £0.2m to £0.1m due to a reduction in the deposit interest rates and a lower cash balance held during the year. Interest payable was also minimised as £20m of drawdowns from the £30m Triodos Bank loan facility were not actioned until absolutely necessary.

EXPENDITURE

Total expenditure for the year is £79.4m (2018/19 £83.4m), a decrease of 5%. The main driver of this reduction was a lower operating expenditure in the final months of the financial year due to the impact of the COVID-19 pandemic.

Total staff costs for the year decreased by 2% to £45.9m (2018/19 £46.9m) due to changes in all categories of staff costs as follows:

• Basic salary and social security costs decreased by £0.2m to £37.4m due to the impact of a voluntary redundancy scheme at the end of 2018/19 coupled with careful scrutiny of staff recruitment during the year. • Pension costs decreased by 4% to £7.7m (2018/19 £8.0m). The increase in the TPS contribution rate to 24% in September 2019 increased contributions by £0.8m to £3.4m, but this was negated by pension provisions relating to the USS and LGPS reducing to £1.5m (2018/19 £2.8m). • Restructuring costs of £0.6m have been reported in the year as a result of a 2019/20 voluntary severance scheme (2018/19 £1.1m). • Staff as a percentage of income reduced to 56.7% (2018/19 58.2%), following the impact of the 2018/19 voluntary severance scheme.

Other operating expenditure decreased by 10% to £26.1m (2018/19 £29.0m) due to the impact of the COVID-19 pandemic in the final half of the year with many activities ceasing and staff being asked to take budget

BALANCE SHEET Fixed Assets

Capital additions during the year were £15.8m, with £14.4m relating to the final stages of construction and fit-out of the new teaching and learning building at West Downs. There were no significant disposals or impairments in the year, and the net book value of our fixed assets increased by £10.7m to £209.3m.

Current Assets

Current assets increased by £8.2m to £28.5m during the year due to an increase in cash.

Due to the on-going negotiations with the Allied Irish Bank at the end of 2018/19 regarding revising the loan covenants, the full outstanding loan of £4.7m was shown in 2018/19 in creditors falling due within one year. The Deed of Amendment with revised covenants was signed with the Allied Irish Bank during the year which caused the creditor to be re-classified between amounts falling due within one year and amounts falling due after more than one year, under the terms of the loan agreement.

STAFF COSTS AS A PERCENTAGE OF INCOME

Basic salary % turnover Staff cost % turnover

reductions of 10-20% and only spend on essential items. The reduction in expenditure more than offsetting the reductions in accommodation, catering and conference income. Depreciation reduced by 5% during the year, with some summer estate projects being deferred due to COVID-19. The postponement in the use of the new £50m teaching and learning building at West Downs resulted in no depreciation charge being incurred in the year, saving £1.7m against budget.

Interest and other finance costs have increased by 7% (£0.2m) due to the remaining £20m of the £30m loan facility from Triodos Bank being drawn during the year to fund the final construction and fit-out phases of the new teaching and learning building at West Downs.

Creditors

Creditors falling due after more than one year has increased from £45.4m to £66.6m, with the increase reflecting portfolio and have convened a Winchester’s pension portfolio.

the remaining £20m draw down of the Triodos Loan Facility and the transfer of amounts falling due after more than one year of the Allied Irish Bank loan, as mentioned above.

Pension provisions have increased by £19.6m as detailed in note 16 to the accounts, following an adverse actuarial valuation due to weakened financial markets following the pandemic outbreak.

Pensions

Due to the performance of our main pension schemes, and legal and actuarial changes to schemes, Winchester is likely to suffer future pension cost increases. The cost of Winchester’s three main schemes, Local Government Pension Scheme (LGPS), Teachers’ Pension Scheme (TPS) and Universities Superannuation Scheme (USS), amounted to contributions of £6.0m in 2019/20. In balance sheet liability of £20.0m (£6.6 2018/19) was charged in respect of the LGPS.

Over the past few years, the Winchester’s pension costs have risen faster than inflation. The Board of Governors have recognised the ongoing financial risk of our pension Pension Risk Review Committee that will meet at least twice per year to address the current cost risks associated with the Winchester’s pension schemes and to inform future decision making regarding the addition to these charges, a further

Cash Position

Closing cash and investments increased by £7.5m to £22.7m. This was primarily due to the mitigating actions during the year to reduce expenditure, and was assisted by the Government furlough receipts.

Future outlook

After a summer of opening mothballed buildings and implementing a ‘Covid safe’ campus, students were welcomed back for semester one 2020. Learning and teaching has been radically changed to blend both online and face to face teaching, where it is safe to do so, ensuring that Winchester is able to offer students the best possible learning experience under COVID-19 restrictions.

Our 2020 intake of new students was on budget, and our budget plans have incorporated a number of possible adverse impacts from the second, and possibly further, wave of COVID-19 infections. We are confident that Winchester has sufficient resources to remain financially sustainable. We have modelled the most challenging scenarios that the pandemic may cause, and whilst the worst scenario would require Winchester to seek further financial support, we believe that the most likely scenarios are fully sustainable.

Our prudent plans for 2020/21 have incorporated an inflated withdrawal rate and provisions for an increase in doubtful debts, and a reduction in other incomes. However, as with 2019/20, whilst under COVID-19 restrictions and with little certainty of the future impacts of the pandemic, Winchester continues to closely monitor its cash flows and revise its short- and medium-term forecast. The Board of Governors have also approved a list of ranked mitigating actions that would result in further cost reductions and income generation should any be required.

Despite the challenges COVID-19 presents, Winchester has remained committed to its values and has invested time and resources to consider how it can build upon its strong foundations as a compassionate university community where all individuals matter, where wellbeing is paramount and pastoral care is of the highest quality. To help us mitigate current and future challenges, we have developed our new 10-year plan: Strategic Vision: A beacon of education excellence, sustainability and social justice. The vision includes a Five-Year Business

CHANGES IN CASH MOVEMENT 2019/2020

Plan which set the baseline financial projections on which we modelled the possible impacts and scenarios of the short-term and medium-term challenges we are facing. With a robust strategic vision and business plan, a stronger than planned opening cash balance, and having met our budget for new student intake for 2020, Winchester is in a healthy position for a successful 2020/21.

SIGNED ON BEHALF OF THE BOARD OF GOVERNORS:

A C Lovell Chair of Board of Governors

Professor Joy Carter CBE DL Vice-Chancellor

Date: 2 December 2020

£20.0m £0.5m £3.4m

£20.6m

£15.2m £11.0m

£22.7m

Opening cash and investments

Cash inflow from operating activities

New borrowing

Cash flows from investing activities

Cash flows from financing activities

Capital expenditure

Closing cash and investments