ACC levies likely to rise as fund hits deficit

Although ACC ran a $570 million operating surplus this year, the future is murky as interest rates push its liability to $53 billion, leaving a record-high accounting deficit. Marc Daalder reports.

The Accident Compensation Corporation has had another bumper year but the decline in interest rates has left its future less certain.

During a media conference on Wednesday, Board Chair Dame Paula Rebstock touted the fund's operating surplus of more than half-a-billion dollars and highlighted its 12.97 percent investment return. But even that good news, which saw the fund rise from $40 billion to $44 billion, could not overshadow the massive increase in its liability.

Although ACC's funding policy is currently being reviewed by the Government, Rebstock admitted that she was likely to recommend levies rise in 2020 because "our levies for a very long period have not reflected the underlying costs of claims".

Outstanding Claims Liability at issue

The central issue in the fund's $8.7 billion accounting deficit is ACC's Outstanding Claims Liability. This figure represents the total lifetime cost of all claims that have already been made and stretches out for a century to 2119.

In other words, if no more claims are filed, and taking into account the current single effective discount rate (which saw a 1.09 percent drop to 2.42 percent over the 12 months to June 30), ACC needs $53 billion now to cover the expected lifetime costs of exiting claims. That $53 billion would be invested so as to grow enough to cover costs.

The issue is that ACC only has $44 billion, leaving it with the largest deficit of this kind in its 27-year history. The drop in interest rates helped the ACC's investment fund - its bond portfolio jumped significantly - but was more than made up for with a $10.8 billion increase in the OCL.

The numbers released by ACC on Wednesday only accounted for the 2018/2019 financial year, ending on June 30. In August, the Reserve Bank of New Zealand cut interest rates another 0.5 percent, which Rebstock said will only further swell the OCL.

This chart from ACC's annual report illustrates the link between interest rates and the OCL.

What should be done?

Rebstock cautioned the Government against taking any sort of drastic action. Although it seems likely that interest rates will continue to drop or remain low for some time to come, the 100-year horizon on which the OCL is based is much less certain.

Given that ACC's investment fund has performed so well - averaging above a 10 percent annual compound interest over its existence, when similarly-composed funds would see just 8.8 percent - Rebstock thinks ACC should largely be able to recover on its own.

If interest rates go up in the medium-term, the OCL will also drop significantly. Urgent action to correct the deficit is not needed, she believes, and will only place a crippling and unnecessary financial burden on current earners.

Levies "will need to increase"

Nonetheless, there is likely to be some increase to levies. During the Global Financial Crisis, levies were raised $.30 per $100 of eligible earnings in both 2009 and 2010. The latter change, which brought the rate to $2.00 per $100 of liable earnings, came after ACC ran a $4.8 billion deficit.

Rebstock said part of this deficit was due to the slashing of interest rates around the world, similar to what we are seeing today.

But since New Zealand recovered from the GFC, levies have consistently dropped or remained stable. Now, what's holding up the fund is its above-average investment returns, Rebstock said.

"Our levies for a very long period have not reflected the underlying costs of claims," she said. "They haven't done that because we've had headroom provided by the out-performance of the fund. That has shielded New Zealanders from the full costs of the scheme."

That is likely to change. In a briefing document, ACC wrote: "We do expect in the medium term that levies will need to increase, reflecting things like medical inflation, weekly compensation claim growth (driven by a strong economy), legislative and pay rate impacts, and under-funding in the accounts".

Costs higher than before

Indeed, ACC's costs have risen significantly in recent years. For the 2018/2019 financial year, the cost of claims was $4.4 billion, a 10 percent increase over the previous year and nearly 50 percent higher than five years ago.

A record two million claims were received this year, up from 1.98 million in 2018.

The largest increased price tag was in "operating  and other costs", where the $749 million spent in 2018 jumped by more than half, to $1.13 billion. But the cost of treatment and rehab services also increased 7.5 percent and weekly compensation rose by 5.1 percent.

ACC highlighted in its report an increased investment in injury prevention initiatives. The fund invested $75 million in such schemes and expects to save $1.81 in future costs of injury claims for every dollar spent on these programmes.

Along similar lines, ACC has pledged to invest $40 million in the Government's gun buyback and expects to save $70.5 million through reducing future claims for firearm injuries.

Claims by the numbers

Over the past five years, ACC has also expanded the range and accessibility of services it offers to survivors of sexual violence, which has led to significant increases of claims in that area. 2019 saw 25 percent more "sensitive claims" - which refers to sexual violence - filed than in 2018.

ACC helped 55,000 injured New Zealanders return to work within 10 weeks, up from 52,000 last year but still just short of its goal.

Nearly 84,000 people filed a claim for weekly compensation. Of people who were receiving weekly compensation for more than a year, 3,660 were returned to independence in 2019.

The average time to process a review was 87 days.

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