Universities in England still grappling with the impact of Covid-19 are facing “significant” financial risks from high drop-out rates and soaring pension costs, according to analysis by the Institute for Fiscal Studies (IFS). The IFS annual report on education spending says there will be funding shortfalls in colleges and universities, where the pension deficit has increased from £3.6bn in March 2018 to an estimated £21.5bn last August. Researchers say there will be mounting long-term costs for the government, with a predicted £12bn shortfall in student loan repayments as graduates struggle to find work in a labour market devastated by the pandemic. For universities, there are likely to be additional losses from accommodation, conferences and catering. Ben Waltmann, an IFS research economist and a co-author of the report, said the number of students entering higher education had held up better than expected this summer, but said universities still face financial shortfalls from no-shows or higher than usual drop-out rates. “By far the biggest source of risk now appears to be the large deficit on the main university pension scheme which has increased from £3.6bn in March 2018 to a monumental £21.5bn in August 2020, according to the latest preliminary estimate,” he said. “With contributions already at more than 30% of earnings, it is hard to see how a deficit on this scale, if confirmed, could be evened out without further cuts in the generosity of the scheme.” Disputes over the pension scheme have already triggered prolonged and widespread strike action on campuses. According to the IFS, reduced interest rates and depressed rates of return will cost universities an additional £8bn to meet existing pension promises, double the previous estimate by the IFS. The report also highlights financial problems in further education (FE) – which the education secretary, Gavin Williamson, has made a priority – as well as sixth-form colleges, where large increases in student numbers due to improved GCSE results this summer are likely to lead to a fall in real-terms funding for each student, despite £400m in additional funding this year. IFS analysis of state-school funding, which was published in September, showed schools in England suffered their worst decline in funding since the 1980s, with secondary schools and those in the most deprived areas hit the hardest. The decline was so deep, the IFS said, the additional £7bn pledged by the government would not be enough to reverse the cuts by 2023, leaving school spending 1% lower than in 2009-10. On college and sixth-form funding, Geoff Barton, general secretary of the Association of School and College Leaders, said: “The government talks about the importance of further education, but simply doesn’t put its money where its mouth is, as this report starkly shows. “The additional investment of £400m into the sector this year hardly touches the sides following years of real-terms cuts and the likelihood of rising student numbers. Colleges and sixth forms urgently require a significant uplift in funding that matches the government’s rhetoric.” David Hughes, chief executive of the Association of Colleges, added: “With the spending review just weeks away and the FE white paper shortly after that, there is real opportunity to put college funding back to the level it should be, to not only improve opportunities for young people and adults but also to help build the resilience and financial security of colleges to face up to what is undoubtedly the toughest year on record.” The University and College Union general secretary, Jo Grady, said: “The government urgently needs to address the continuing uncertainty about higher and further education funding, after years of underfunding and marketisation which have been exacerbated by the coronavirus pandemic and its economic consequences.” A government spokesperson said: “We understand this has been a challenging time for the education sector which is why we introduced a range of support to help colleges and universities manage their finances and safeguard students. “We have protected grant funding for further education, worth over £3bn for a full year, and increased education and training investment this year for 16-19 year-olds by an additional £400m. “We also brought forward over £2bn worth of tuition fee payments for universities, and announced a major package of £280m to stabilise research funding.”