Sharing risk on loans

A belated realisation on my part…

the changes to accounting and budgeting for student loans were introduced retrospectively. BIS’s budgets and accounts for 2013/14 utilised them even though they were only published in the 2014/15 guidance.

From p.89 of BIS’s financial statement for 2013/14:

There were increased AME costs this year arising from increased student loan outlays and impairments as the higher value post-2012 reform loans are incurred (£9,047 million compared with £7,133 million in the previous year), and the introduction of a new HE budget risk-sharing arrangement with HM Treasury that spreads additional costs over 30 years for BIS.

‘Risk-sharing’ refers to a measure to manage the volatility of estimates of graduate loan repayments. The Treasury has set a ‘target impairment’ for loans of 36% and any excess ‘RAB charge’ over that relating to variations in forecasts is covered by a new provision. Official RAB is currently 45%. With roughly £9bn of loans issued last year, a variance of 9 percentage points would equate to about £0.81bn.

Last year (2013/14), £0.8billion was placed into the relevant ‘resource AME’ account – this will be charged back to BIS over the next thirty years and will come out of normal departmental expenditure allocations. That is, BIS has to find savings of roughly £26-27m each year for the next 30 years to ‘clear’ that resource AME allocation.

For 2014/15, BIS has permission to add up to a further £1.98bn to that same allocation as a ‘management charge’. It if were fully used, and this may not happen, then a further £66m would need to found from elsewhere annually. (For comparison, in 2013/14 BIS could have utilised up to £1.2bn, but only £0.8bn was needed.)