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Select committee inquiry

Sale of Student Loans inquiry

Closed

Public Accounts Committee · Opened 16 August 2018 · Closed 16 August 2018

2 recommendations · 19 conclusions
Inquiry on parliament.uk ↗

What the inquiry looked at

“In December 2017, the Government sold part of its student loans book. The student loans book is money lent by Government to students to fund their studies. It is then paid back over time, depending on the income of the person who was loaned money. The value of outstanding student loans was £102 billion in March 2018; this is expected to reach £473 billion by 2049. A recent National Audit Office report found that the Government had sold loans with a face value of £3.5 billion for £1.7 billion—roughly 48p for every £1 in value. The NAO also found that the Department for Education (which owns student loans policy) had a different way of estimating the loans’ value than HM Treasury. NAO was also concerned that HM Treasury’s key incentive for selling loans was to reduce Public Sector Net Debt—a metric that has been queried by the International Monetary Fund, the Office for Budget Responsibility, and Committees in Parliament. It could also be difficult to establish the exact value of student loans to investors who have bought them. For example, returns to investors would increase if more student loans are paid back than the Government expects. The Committee will hear evidence from the Department for Education, from HM Treasury, and from UK Government Investments, and may explore the objectives for the sale, how Government can be sure selling the loans is good value for money, remaining risks, and lessons learned for the sale of more loans in the future.”

The committee's words, from the inquiry page on parliament.uk ↗.

What it found

In the committee's words, from the summary of 69th Report - Sale of student loans ↗

In 2017 government sold student loans with a face value of £3.5 billion for £1.7 billion, which is a return of only 48p in the £1. We did not expect government to recover the face value of the loans as repayments rely on people’s earnings, which means there is no realistic prospect of them all being repaid in full. But we do expect the Treasury and the Department for Education (the Department) to get the best possible deal on behalf of the taxpayer. In this case, government received too little in return for what it gave up—its own analysis shows that it could have expected to recoup the £1.7 billion sale price in only eight years.

Treasury’s focus on reducing its ‘public sector net debt’ measure is a short-sighted approach which fails to convince us that the deal is the best one for public sector finances in the long term. The willingness to accept offers from investors if they exceed government’s theoretical ‘opportunity cost’ of holding the assets runs the risk of accepting too low a price.

Forecasting future repayments is inherently an inexact science, but it is crucial to determining how much cash the government is prepared to accept now in place of uncertain amounts of cash in the future. Government has not convinced us that its model of future cash flows provides a good basis for deciding at what price to sell student loans. This is only the first in a series of sales, and as the government has now announced a second sale it must think carefully about whether its modelling is sufficiently developed to do justice to the real long-term value of these public assets.

Finally, we have concerns about the transparency of the deal. We accept that releasing all the details of the transaction has the potential to weaken the government’s hand in negotiations, but it is too easy to fall back on that as an excuse not to reveal information where there appears to be no public interest reason to prevent disclosure. Government should be transparent about who is investing in the loans and potentially profiting from public assets.

What the government said

No government response is linked to this report.

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How the inquiry ran

Each dot is a dated item listed on this page, from the inquiry's opening on 16 August 2018 to 12 September 2019.

  1. Oral evidence 10 Sep 2018
  2. Report 22 Nov 2018
  3. Correspondence 9 letters

What it recommended 2 recommendations · 19 conclusions

1The Treasury and the Department for Education have not made clear how this transaction decreases...
Concluded (the committee's words)
The Treasury and the Department for Education have not made clear how this transaction decreases the long-term risk to the public finances. This first sale is part of a series designed to de-risk public finances and reduce public debt without affecting borrowers, however there does not seem to be a long-term strategy. The government’s current plan is simply to achieve sale proceeds of around £12 billion by 2022 for loans issued before 2012—this focusses only on debt reduction. In the first sale, it achieved this debt reduction by selling the rights to an estimated £3.3 billion of future repayments for a £1.7 billion lump sum now. But it is an example of selling off assets for short-term capital gain, without demonstrating how the deal is in the best long-term interests of the taxpayer given the scale of future repayments that has been sacrificed. Government’s own analysis suggests that, had it not sold the loans, it would have recouped the £1.7 billion in only eight years, and a further £1.6 billion over the next 25 years. Of all the student loans government has issued, the ones before 2012 are more likely to be repaid, and therefore represented a lower risk to public finances. This is because loans issued after 2012, are of a higher value, with a higher repayment threshold, and a higher interest rate. The government has not decided whether to sell these riskier loans: the Prime Minster has launched a review of post-18 education and funding which will include the terms of these loans. Government aims to report in early 2019. Any changes to the terms of these loans are likely to affect their value to investors in potential future sales programmes.
2Recommendations: • Before concluding any further sales, the Treasury and the Department need to articulate...
Recommended (the committee's words)
Recommendations: • Before concluding any further sales, the Treasury and the Department need to articulate how the transaction fits into the strategy for the whole loan book, and how it improves public sector finances over the long term. • Once the education funding review is complete, the Department and the Treasury should review how the disposal strategy can most effectively decrease the long-term risk to the public finances.
3The government’s objective to reduce ‘public sector net debt’, as with previous asset sales, runs...
Concluded (the committee's words)
The government’s objective to reduce ‘public sector net debt’, as with previous asset sales, runs the risk of being prepared to sell at any price. The sale of student loans falls into a wider programme of asset sales aimed at helping reduce government debt. This sale has reduced Public Sector Net Debt (PSND) by £1.7 billion. However other measures demonstrate the sale worsens public finances. For example, the sale increases Public Sector Net Financial Liabilities by £1.8 billion, and the impact on the Department’s accounts is similarly negative with the 2017–18 accounts recording a loss on the sale of £0.9 billion. We acknowledge that each measure accounts for the loans in different ways and has its limitations. However, the narrow focus on PSND as a measure of success often makes a sale look positive, at any price, regardless of the true impact on the public’s finances. This is like previous asset sales the Committee has reported on, such as the sale of Eurostar, and the sale of former Northern Rock assets. 6 Sale of student loans
4Recommendation: Government must develop public sector finance objectives for future sales that go beyond the...
Concluded (the committee's words)
Recommendation: Government must develop public sector finance objectives for future sales that go beyond the simple focus on reducing Public Sector Net Debt before any more asset sales are concluded to give a true picture of the value of the sale to the public purse.
5The uncertainty over future repayments undermines the government’s ability to accurately value the loan book.
Concluded (the committee's words)
The uncertainty over future repayments undermines the government’s ability to accurately value the loan book. The Department developed a model to forecast future repayments from the loan book so that it, and potential investors, could assess value. This forecasting is challenging because it must attempt to estimate the income of over 410,000 borrowers over a 34-year period, until the loans are settled or written off. If the forecasts in the model around macroeconomic and repayment assumptions are correct, then the sale price of £1.7 billion suggests an average return to investors of around 6.5% a year—with some receiving an estimated 13.1%. The data quality behind the forecasting affects the price investors will pay for the asset— more uncertainty means more risk for the investor, and so they apply a higher risk premium which lowers the price they are prepared to pay. So far the Department has only one full data-point against which to evaluate the model, so its accuracy is uncertain. It is vital that the Department continuously improves the model and monitors its accuracy to better inform valuations for future sales of the loan book— reducing the level of risk from an investors’ perspective and thus increasing the amount they are prepared to pay. The model is tailored to the sold loans only, and government has no similar model for the other loans issued either before or after
7In deciding whether to sell, Treasury does not take sufficient account of a range of...
Concluded (the committee's words)
In deciding whether to sell, Treasury does not take sufficient account of a range of valuations, instead relying on a conservative ‘retention value’. UK Government Investments (UKGI) calculated the value of the loans in a number of different ways, but the government’s sale decision relied solely on its ‘retention value’. This value is calculated by discounting the estimated future loan repayments to assess what they might be worth today. The higher the discount rate, the lower is today’s value of those future repayments. Based on HM Treasury’s Green Book guidance, the Department and UKGI used a high discount rate component of 5.5% compared to the lower market discount rate of 1.6%, which resulted in a low retention Sale of student loans 7 value. Like all other recent asset sales the Committee has reviewed, government takes a conservative approach when calculating its retention value creating a risk that it sells its assets for less than they are worth. There are a number of other valuation approaches which use different rates, all of which produce a higher value for these assets. Focussing only on the retention value, which is the lowest, increases the risk that government is prepared to sell its assets for too little.
8Recommendation: When deciding to sell an asset, the Treasury’s Value for Money criteria should include...
Concluded (the committee's words)
Recommendation: When deciding to sell an asset, the Treasury’s Value for Money criteria should include a wider set of valuations than solely the retention value. This must include, but may not be limited to, the value the market might be prepared to pay for the assets: 1) at the point of sale, with a clear indication of any novelty discount, and 2) at points in the future, under different scenarios, as the novelty discount reduces and risks change.
9We are concerned about the lack of transparency to the public and Parliament surrounding this...
Concluded (the committee's words)
We are concerned about the lack of transparency to the public and Parliament surrounding this sale. Government has not disclosed the identity of the investors as it feels that to do so would negatively affect the demand for this and future sales and could put value for money at risk. However, UKGI made no actual assessment of the trade-off, if indeed there is any, between increased transparency and the potential for reducing value for money. Although we understand the sensitivities around some aspects of the deal, we expect transparency and openness wherever possible. In this case the public is not being allowed to know who a public asset has been sold to, even though beneficiaries of funds that invested may themselves be aware that their fund has done so. As such, decisions to withhold information should be made based on evidence, rather than assumptions, and the impacts considered. We have seen similar instances on previous asset sales, such as the Green Investment Bank transaction, where UKGI made untested assumptions.
10Recommendations: • UKGI should review how it balances transparency with any perceived risks to value...
Recommended (the committee's words)
Recommendations: • UKGI should review how it balances transparency with any perceived risks to value for money. It should write to us within six months with the outcome of its review and include an assessment of the impact of non-disclosure of investors. • For this first sale the Department should at a minimum disclose publicly the number and type of investors. It should seek permission from all investors to release their names, and do so where possible. For future sales there must be a presumption to release investor names, unless there is an evidenced and quantified risk to value for money in doing so. 8 Sale of student loans 1 The impact of the sale on public finances
6The Department elaborated on why it preferred a certain lump sum today to the possibility...
Concluded (the committee's words)
The Department elaborated on why it preferred a certain lump sum today to the possibility of more money in the future,8 and how it measured this.9 It explained that this first sale is part of a programme10 designed to de-risk public finances and reduce public debt, however the witnesses were not able to how the sale of this portion of the loan portfolio fits within a long term strategy to reduce the risks associated with the growing overall loan portfolio.11 The government’s current plan is simply to achieve sale proceeds of around £12 billion by 2022 for loans issued before 2012; this focusses only on debt reduction.12
11The government’s current simplistic objective of reducing PSND also meant that any sale options that...
Concluded (the committee's words)
The government’s current simplistic objective of reducing PSND also meant that any sale options that may have achieved higher value for the taxpayer were disregarded.22
12This is another example of selling off assets for short-term gain, at the expense of...
Concluded (the committee's words)
This is another example of selling off assets for short-term gain, at the expense of demonstrating how the Treasury will achieve deals that are in the best long-term interests of the taxpayer. We have seen this previously across multiple asset sales that we have reported on, such as the Sale of Eurostar, and the sale of former Northern Rock assets.23 We are not alone in our view, with the Treasury Committee warning that the sale of these loans does not improve the government’s financial position.24 The Office for Budget Responsibility and the International Monetary Fund have also described this focus on reducing net debt as a “fiscal illusion”.25 15 House of Commons Library, Prime Minister’s announcement on changes to student funding, March 6, 2018 16 Q 60 17 C&AG’s Report, para 10 18 C&AG’s Report, figure 7 19 Q 58; C&AG’s Report, para 1.8 20 Q 58 21 Q 59 22 C&AG’s Report, para 3.3 23 Committee of Public Accounts, The Sale of Eurostar, Session 2015–16, HC 564, House of Commons, January 2016; Committee of Public Accounts, The sale of former Northern Rock assets, Session 2016–17, HC 632, House of Commons, November 2016 24 Treasury Committee, Student Loans, Session 2017–2019, HC 478, House of Commons, February 2018 25 Office for Budget Responsibility, Economic and fiscal outlook, November 2017 Sale of student loans 11 2 Dealing with uncertainty and the transparency of the sale Uncertainty in value
13In order to estimate a value of the loans for sale the Department and UKGI...
Concluded (the committee's words)
In order to estimate a value of the loans for sale the Department and UKGI had to forecast the future repayments of those loans.26 UKGI, in conjunction with the Government Actuary’s Department, developed a model to estimate, and help investors estimate, these potential future cashflows.27 We understand the inherent uncertainty and difficulty in forecasting this future income given the challenge in estimating the incomes of over 410,000 borrowers until they settle the loans or their loans are written off, for example because they retire.28
14UKGI told us that the model has “performed well to date”, and that the accuracy...
Concluded (the committee's words)
UKGI told us that the model has “performed well to date”, and that the accuracy was within the Department’s tolerance levels.29 UKGI further explained that the government’s advisers have quality assured this model but it is impossible to know for certain how accurate the forecasts are until more data is available.30 If the forecasts in the model are correct, then investors will achieve an average return of 6.5% per year, with some receiving an estimated 13.1%. Actual returns, however, may differ as the model has over-estimated actual cash-flows by 0.9% in one test using annual data and under-estimated them by 4.9% in another using interim data; this fluctuation in accuracy highlights the uncertainty of the model’s estimates.31 This uncertainty also has a direct impact on pricing as investors need sufficient information to make an accurate judgement of the value of the loans. With uncertain information, investors are likely to place a higher risk premium leading to lower proceeds. Importantly, the value for money of the sale is likewise dependent on the performance of the model given that if the cash flows were underestimated then investors’ returns will increase, and the reverse is also true.32
15In February 2018 the Prime Minister announced that there would be a “wide ranging review...
Concluded (the committee's words)
In February 2018 the Prime Minister announced that there would be a “wide ranging review into post-18 education”. This review is expected to report in early 2019 and is set to look at the cost of studying for future students, including “the level, terms and duration of their contribution”.33 We questioned the Treasury and the Department on the impact a change in the terms of the Plan 2 loans would have on the value of the loans. The Treasury and the Department confirmed that there has been no decision to sell these loans and therefore UKGI stated that it does not have a similarly detailed model for Plan 2 loans.34 26 Qq 5, 6 27 Q 16 28 Qq 1, 5 29 Qq 23 30 Q 11 31 Qq 82–89; C&AG’s Report, para 3.18 32 C&AG’s Report, paras 19, 3.14 33 House of Commons Library, Prime Minister’s announcement on changes to student funding, March 6, 2018 34 Q 18 12 Sale of student loans Retention value
16The Department explained that it calculated the value of the student loans in four different...
Concluded (the committee's words)
The Department explained that it calculated the value of the student loans in four different ways and compared them to ensure it “minimised the risk of getting it wrong”.35 We recommended multiple valuations in previous reports on Eurostar and Northern Rock and commend the Department for applying good practice.36 The Treasury’s value for money test, however, included only one value test: that the sale price be broadly neutral to, or exceed, a retention value.37 It set the test using primarily its Green Book guidance, and based on the assumption that government cannot borrow more money. The Department explained to us that the price at which government would sell these loans is based therefore on the theoretical return it could make by reinvesting the estimated future cash flows elsewhere.38
17The retention value is calculated by discounting the estimated future cash flows, shown in figure...
Concluded (the committee's words)
The retention value is calculated by discounting the estimated future cash flows, shown in figure 1, using the Social Time Preference Rate (STPR) plus an ‘asset specific risk’.39 Government works on the assumption that if the money is not tied up in an asset it can be reinvested at return equal to or greater than the STPR—5.5% for this deal, excluding the asset specific risk.40 This rate is significantly higher than market risk free interest rate of 1.6% and therefore meant that government’s retention value was lower than: what investors were likely to pay, how the Department valued the loans in its accounts, and the other valuations the Department calculated.41 It also demonstrates the impact of government’s stated counterfactual: to think about the return which could be made by utilising the money raised from selling student loans, rather than borrow more money. In effect, government does not consider borrowing more money at 1.6%, but pays a return of 6.5% to the private sector for £1.7 billion (see above) as government believes it can reinvest this money and get a return of at the very least 5.5%.42
18Although government did look at multiple different valuations, cross-checking them against each other, the final...
Concluded (the committee's words)
Although government did look at multiple different valuations, cross-checking them against each other, the final determinant as to whether to proceed with the sale is wholly based on the retention value.43 Focussing only on the conservative retention value increases the risk that government is prepared to sell its assets for too little. Transparency
19Just under 200 potential investors expressed an interest in the sale, of which 59 eventually...
Concluded (the committee's words)
Just under 200 potential investors expressed an interest in the sale, of which 59 eventually invested. The bulk of the investors were pension funds and insurance companies, and others included banks, private wealth managers, alternative asset managers and hedge funds.44 UKGI told us that the names of investors had not been made public because “it is very commercially sensitive information.”45 UKGI said that it, working alongside 35 Q 25 36 Committee of Public Accounts, The sale of Eurostar, Session 2015–16, HC 564, House of Commons, January 2016 (Recommendation 2); Committee of Public Accounts, The sale of former Northern Rock assets, Session 2016–17, HC 632, House of Commons, November 2016 (Recommendation 3) 37 C&AG’s Report, para 2.6 38 Qq 3, 5 39 C&AG’s Report, para 2.8 40 Q 5; C&AG’s Report, para. 2.8 41 C&AG’s Report, para 14, figure 9 42 Qq 5–7 43 Q 25 44 Qq 27, 28; C&AG’s Report, para 3.19, figure 15 45 Q 29 Sale of student loans 13 the Treasury, had advised the Department not to name the investors. It said that the information was commercially sensitive because government would expect to go back to other investors in future programmes, some of the investors did not want their names disclosed, and that it did not think it would be helpful to the success of future sales for the names to be made public.46
20UKGI further explained that it is a characteristic of some investors that they do not...
Concluded (the committee's words)
UKGI further explained that it is a characteristic of some investors that they do not disclose the investments that they make and that such investors would not have wanted this investment to be the first time they did so.47 It said that it was only “very few” of the investors that did not want to be named, and that “having agreed not to disclose the names of one or two investors, we obviously do not do it for the rest of them.”48 The Department commented that there was a choice to be made as to whether to disclose names, and that the expert advice was that you get a better price if you apply the confidentiality rule.49 We challenged UKGI further on whether disclosure would really have an impact on the commercial price and whether any assessment had been made of the supposed gain achieved by the lack of transparency. UKGI acknowledged that it had not done any such assessment.50 It also commented that the decision not to disclose had been made before knowing how many bidders would be attracted to the sale and well before investors were finalised.51
21In the context of its role in making recommendations to the Secretary of State on...
Concluded (the committee's words)
In the context of its role in making recommendations to the Secretary of State on value for money, the Department told us that, before the second sale, it would be pressing UKGI on the point about whether there is a quantifiable benefit from non-disclosure to weigh against “transparency of the sort that I and the Secretary of State would obviously like.”52 We noted that the absence of an assessment of the approach to transparency, alongside other factors, undermined the ability to conclude on value for money of the sale.53 In March 2018 we reported on the sale of the Green Investment Bank. In that case UKGI assumed that certain contract clauses would dissuade potential investors from bidding, or reduce the sale price, without apparently testing that assumption.54 In other cases, it only evaluated the impact of decisions after they were taken.55 We recommended that analysis should be used to support these decisions before they are made, not after they are taken.56 46 Qq 30, 34 47 Q 35 48 Q 31, 39 49 Q 38 50 Qq 40, 45, 47 51 Qq 40, 48 52 Qq 48, 50 53 Q 55 54 Committee of Public Accounts, Oral evidence: Green Investment Bank: creation and sale, HC 468, 20 December 2017, Qq 55–59 55 Committee of Public Accounts, The sale of the Green Investment Bank, Session 2017–19, HC 468, 14 March 2018, para 3. 56 Committee of Public Accounts, The sale of the Green Investment Bank, Session 2017–19, HC 468, 14 March 2018 14 Sale of student loans

Evidence

Oral evidence sessions 1

Correspondence 9 letters