Thursday, September 11, 2008

Inflation, risks and the “financial acumen” of university FDs

It’s an ill-wind of high retail price inflation that brings university staff pay rises of more than twice the government's public sector pay norm. The three-year pay deal for universities provided for a rise this year of 2.5% or the September retail prices index - whichever is higher.

Some universities will struggle to pay 5% and may defer its introduction. In response, the University and College Union has argued that the employers have had two years to budget for the settlement. The UCU general secretary has said that she would be “concerned about the financial acumen” of any institution that had failed to budget for the 5%.

As I often work as an interim finance director, I will resist the temptation to leap to the defence of higher education FDs although did anyone foresee that inflation was going to double? (Who wants to bet on inflation in two years time? The Bank of England’s central estimate for consumer price inflation is less than 2% although its range of forecasts ranges from under 1% to well over 3%.)

While no one (or almost no one) really expects FD and university governing bodies to foretell the future and provide for each and every contingency, this situation shows the importance of treating seriously sensitivity analysis – thinking through the “what ifs” of financial planning. Too often risk management is seen as a load of old risk registers – whereas good risk management requires a lot more of management and governance.

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