Regulation blog

Our students rightly expect to attend excellent – and excellently-led – institutions and they, and taxpayers, are, to a greater or lesser extent, paying for their university education.

Some commentators defend the need to pay high salaries. Higher education in England is world-leading by many measures, and needs to attract and retain the best people in a globally competitive market to run what are large and complex organisations, as the argument goes.

Others are saying with increasing insistence that some vice-chancellors are paid far too much. And, they ask what can be done about it. For some critics, the answer is obvious: the universities’ regulator – the Higher Education Funding Council for England (HEFCE) – should tell universities how much to pay their senior staff, including reducing their salaries as it sees fit. 

The problem with this, put simply, is that HEFCE cannot do this. We are not legally empowered to tell a university how much to pay its vice-chancellor or senior staff. Parliament does not permit it. If we were to do so, those same critics would no doubt, and rightly, be critical of a body that broke the law – because that is what we would be doing by exceeding our statutory powers. Our credibility and ability to bring about change relies on us staying within these powers.

What is less simple is how the system which enables and sets senior pay actually works. Those who misunderstand HEFCE’s remit tend also to misunderstand the legal status of the universities we regulate.  They are not public bodies– although they are often thought to be because they get some of their income from public funds, they fulfil some public functions, and there is public interest in what they do. But according to legislation they are private and autonomous bodies. They are also, as charities, legally obliged to be independent of government control. The importance of this autonomy to a world-leading system was recently reasserted by Parliament during the passage of the Higher Education and Research Act 2017. 

Of course there are checks and balances. To start with, universities have to abide by the law. A university, like any other institution, is bound by the criminal and civil laws which apply to employment, finance, the environment or any other area of its activities that is subject to legislation.

Those that are charities are subject to charity law, with all the responsibilities for governors – as trustees – that that entails. HEFCE acts as the principal charity regulator of the universities which are exempt charities (that is, charities exempt from registration with the Charity Commission). This role is devolved to HEFCE by the Charity Commission. So under the Charities Act 2011, HEFCE is required to promote compliance by governing bodies with their legal obligations in exercising control and management of the administration of the charity. But we cannot enforce it.

As part of this, HEFCE publishes guidance on how governing bodies should approach the setting of senior pay, including taking into account appropriate standards, charity responsibilities and value for money. But ultimately it is for the governing bodies to set the amount.

What HEFCE can do is specified by the 1992 Further and Higher Education Act. We may give grants, and may set conditions for those grants – such as stipulating that governing bodies must use these funds for the purposes for which they were given. But importantly, the Act explicitly says that conditions can only be set for the funds the university receives from HEFCE. Following the changes brought about by the student loan system, HEFCE funding can be less than 15% of a university’s income.

We also require universities to demonstrate that they are taking value for money seriously in their governance. We have worked with the sector, its representative bodies and the government to establish the framework for universities to report to us on value for money. We are then required to make an annual value for money report on this to government.

HEFCE can – and does – investigate any governance issues arising in universities, case by case, where there is value in doing so. This includes governance around the setting of VC pay. That is what we did in the case of the University of Bath, resulting in a report that included 13 recommendations for change. The University is required to report back on its progress on implementing these before Christmas. We have subsequently received another complaint relating to governance issues around the retirement package of the vice-chancellor of the University and we are currently making initial enquiries into this.

Those who want to see VC pay limited or reduced are frustrated by this system. They may want to find ways to change it. The new Office for Students (OfS) comes into being on 1 January 2018, and will replace HEFCE’s regulatory role from 1 April. It has been set up in recognition of the dramatic changes in the higher education landscape over the past few years, and it will have to think hard about this issue – although its Chair, Sir Michael Barber, has already said of the OFS “what we are not in a position to do is simply to tell universities what to pay their vice-chancellors.”

This debate is not going to go away any time soon. In addition to students, unions and commentators, Jo Johnson, Minister for Universities, has also called for ‘restraint’ in senior pay. But for now, the regulators and others working with the current system can only act as the current laws require them to do.