Govt should make its ACC intentions clear

18:45, Jul 10 2012

During moments of stress and confusion, some people find it comforting to squeeze a tennis ball, talk to vegetables, or set off explosive devices in the back yard - gonzo journalist Hunter S Thompson was particularly fond of the latter.

Chalkie builds spreadsheets.

In coming to terms with the stramash at the ACC for example, it is soothing to put data in little boxes, time after time, and you soon find pretty patterns of numbers that help make sense of it all.

Let's face it, for an organisation tasked with helping people recover from accidents ACC's headline-hogging antics have been most disturbing.

Way back in 2009 incoming ACC minister Nick Smith got all red in the face about an apparent blow-out in its liabilities to $21.9 billion.

The figures meant huge levy increases, he said, that were ''simply not acceptable''.

Changes needed to be made, he said. ''The government is determined to get better governance and management of ACC to contain costs.''

Since then, scandal has claimed the scalps of ACC chairman John Judge, CEO Ralph Stewart and Smith himself.

This was probably not the sort of change Smith had in mind, although he might get a grain of comfort from the cost containment part.

The problem for politicians like Smith is that people generally get nervous when they talk about changes to ACC. We want it to just be there, like NZ Super.

The latest imbroglio, involving evidence ACC was unfairly limiting legitimate claims in an effort to make its numbers look better, was tailor-made to fuel fears of a political strategy aimed at changing the whole system.

Chalkie reckons citizens are right to be suspicious other agendas are in play.

The ACC system is ingenious and unusual. It has been in place more or less in its current form since 1974 and is based on the work of a 1967 Royal Commission on worker compensation chaired by Justice Owen Woodhouse, who has since been knighted for his work.

The idea is to ensure injured workers get support quickly and fairly, helping them return to work and minimising the economic cost of accidents. So rather than requiring costly, and lengthy legal action to claim compensation, for example, the system compensates workers based on the nature of their injury, rather than its cause.

This approach has several benefits. For example, a 2008 report by PWC noted it takes US claimants an average of 15-20 months to get compensation through legal action, whereas no-fault systems like ACC deliver benefits in three weeks for uncontested claims and four months in contested claims.

The report also noted more people get compensation in a no-fault system, more of the compensation goes to the benefit of the claimant, and workers are faster to regain health and return to work.

Not bad. But when, as in New Zealand, the right to sue for compensation is replaced by a compulsory state-run insurance scheme - as per section 317 of the Accident Compensation Act - the latter had better work well. Hence the alarm when people are perceived to be stiffed by the state.

It doesn't exactly shout out a principled focus on service when ACC has targets to cut 1150 people, or any specific number, off its claimant list.

Not only is likely to produce arbitrary outcomes for the people concerned, it is also, Chalkie reckons, based on bogus reasoning.

When you look at the numbers over, say, a decade, you can start to see which ones are most influential.

The income from levies has increased steadily from year to year, usually much faster than inflation. Last year the total was $4.8 billion.

This money comes mainly from levies on workers, although taxpayers contribute a general sum to pay for people who are not in paid work, such as children and the retired. Last year the non-earners amount was $956.7 million.

For some reason this non-earners levy is much more variable than the standard - National screamed blue murder coming into office when they found it had to go up by 26 per cent in 2009, but it has also declined in three of the last 10 years, most recently in 2011.

Anyway, the next significant number is the amount ACC pays out to claimants. Last year it was $2.6b, down 10 per cent on the previous year, which was itself down 6 per cent on the year before.

Over time, though, payouts have trended upwards, with a particular spike of 29 per cent in 2006.

What's left over after subtracting payments and running costs from levy income is the amount ACC can stash in its coffers for the future.

In the last 10 years, ACC has never failed to make an operating surplus. Between 2002 and 2009 the amount didn't stray far from an average of $507m, but in 2010 it leaped to $1.8b and last year hit $1.9b.

This was the inevitable result of rising levy income and falling claims payments.

So in any given year over the last 10, ACC has comfortably met its obligations for that year. However, the aim is to ensure it has enough to meet its obligations in future years - and this is where the jiggery pokery happens.

In principle, ACC wants to raise enough money during the year to pay not just the current costs of claims arising in the year, but also the future costs. Some payment obligations can be decades long, so ACC must ensure it has resources to cover them.

Doing it that way also means levies are set at a level to cover the whole-of-life costs of claims.

As a result, every year ACC tries to figure out how much its future obligations will cost and includes any changes as a charge in its financial statements. Last year the increase in claims liability was $80.6m, but in the year to June 2009 it was a massive $5.8b, hence Smith's ruddy complexion and that year's bottom line deficit of $4.8b.  

The trouble is, estimating future costs requires making lots of assumptions, and minor changes in assumptions can make big differences.

For example, a transition to new NZ IFRS accounting standards starting in 2005 meant ACC had to apply a risk premium to its liabilities estimates. Where previously it chose the mid-point between high and low expected payouts, the new standard required it to apply a risk premium to that estimate.

In a 2009 report the Office of the Auditor-General noted that after the transition, ''ACC's claims liability increased by $1,603m at 1 July 2006 and by $1,976m at 30 June 2007.''

Perhaps the biggest single influence on liabilities, though, is the discount rate. This is the number used to reflect the fact that, normally, cash-flows today are worth more than cash flows in future years. The higher the discount rate, the smaller future liabilities become in today's terms, and vice-versa.

The difference can be significant - a 1 percentage point change in discount rate can produce a 10-20 per cent change in future liabilities.

The choice of discount rate is therefore highly influential in ACC's accounts. Change the discount rate and with a single keystroke you can add or subtract huge sums on the bottom line.

As Chalkie understands it, three years ago a Treasury policy change meant ACC's future liabilities were assessed based on a combination of government, rather than corporate bond rates in the short-term, and an arbitrary 6 per cent rate long-term - the latter chosen because New Zealand lacks long-term bonds able to provide a genuine market rate.

Choosing government stock rates effectively lowers the discount rate because government stock trades at lower yields than corporates, while 6 per cent long-term is arguably too low. How many investors would choose to tie up their money for 20 or 30 years at 6 per cent?

More than that, perhaps, the changes have coincided with a period of unusually low interest rates. For example, the 10-year government bond yield hovered around 6 per cent between 2002 and mid-2008, but has subsequently slumped to around 3 per cent.

No wonder ACC's liabilities got a lot bigger.

Of course, it's important that ACC does its best to estimate future liabilities, but Chalkie reckons its also important to maintain some realism in the process, rather than mechanically running through a financial model that may or may not produce a meaningful result.

Let's talk about how best to run accident compensation by all means, but let's not twist the numbers to make a political point. If the government does want to privatise ACC again - as many suspect - Chalkie would rather it came out and said so.