Sale of student loans Contents

2Dealing with uncertainty and the transparency of the sale

Uncertainty in value

13.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

14.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

15.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

Retention value

16.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

17.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

18.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.


19.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 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

20.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

21.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

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

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

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

Published: 22 November 2018