Rod Oram: ACC - the political claims and the reality

Last updated 05:00 15/03/2009
Oram: Politicians are flinging lots of scary numbers around.

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ACC IS a mess, according to the prime minister and Nick Smith, the agency's minister.

Only a wholesale clearout of ACC's board and changes to legislation and policy will secure its future, they say. 

To make their case, the two politicians are flinging lots of scary numbers around. ACC has suffered a "very significant blowout in its liabilities" to $22 billion, the prime minister said on TV3 on Tuesday.

ACC is "massively" under-funded, so either "premiums will go up and go up enormously so literally mum and dad will be paying thousands of dollars a year more or we get on top of this scheme", he added.

For his part, Smith said on March 4 that the latest analysis of ACC's liabilities "translates into ACC levy increases over the next five years of 185% for employees, 71% for employers, 129% for motor vehicle owners".

But there is a huge gap between the rhetoric of John Key and Smith, and reality.

Liabilities: They are indeed $21.875b according to the latest report from PricewaterhouseCoopers, ACC's actuaries. And they will have risen by $9.2b in the three financial years ending this June.

But these liabilities stretch out a maximum of 40 years. And they are highly influenced by changes in economic conditions, investment returns, discount rates, accounting standards and actuarial assumptions.

Over the past year, those external factors have contributed the lion's share of the increase in liabilities. For example, a change in international accounting standards for all insurers contributed $1.45b to the $9.2b.

Some of these adverse factors will turn positive in due course. If ACC massively hiked premiums now to cover paper liabilities, it would have to offer massive refunds when the liabilities failed to eventuate. Instead, it manages prudently by smoothing such swings over the medium term.

Funding: From its inception in 1974 to 1999, ACC was funded on a pay-as-it-goes basis from the levies of the day and annual government grants. But its long-term liabilities were largely unfunded.

When Labour took office in 1999, it decided to be prudent. It set the goal of achieving full funding for all liabilities by 2014, and beefed up ACC's finances to set it on that path. From 1999 to 2008, ACC had improved from 64% under-funded to 45%.

Turmoil in global financial markets has hit investment returns over the past year, delaying progress to full funding. But ACC was on to it. Over a year ago, it recommended to Maryan Street, ACC minister in the previous government, that the date for full funding should be moved to 2019. Doing so halves the increases in ACC levies that would otherwise be required to meet the goal.

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As her successor, Smith agrees in ACC meetings that the date should be moved. But he continues to use estimates of levy increases, as he did on March 4, based on the current date, thereby seriously distorting the view the public is getting of ACC.

Levies: ACC's activities are divided up into six accounts. Levies fund four, the government one and a mix of the two fund the last. The process of setting levies is thorough and transparent. For example, a steering committee includes representatives from Business New Zealand, the Council of Trade Unions and the AA.

At the end of its part of the process, ACC recommends new levies to its minister. The minister then takes independent advice from the Department of Labour before making a proposal to cabinet.

Back in October, ACC recommended modest increases to levies for the coming financial year. In contrast, the Department of Labour recommended far higher ones, mostly because it was pushing for full-funding on the old timetable.

Smith used these unreasonable Department of Labour figures to fulminate about ACC's alleged shortcomings and to scare people into believing massive hikes were coming.

But lo and behold, on three of the four accounts funded by levies, the government has agreed to exactly the low increases ACC proposed. Only on one account did it set the rate slightly higher.

The rates are bargains. For example, the work account remains fully funded even though the levy for employers and self-employed rises only 4% from $1.26 to $1.31 per $100 of payroll. This even covers large increases in the likes of doctors' and nurses' wages.

And they are bargains by international comparison. According to Pricewaterhouse-Coopers' mammoth study of ACC last year, the average levy here was 94 cents per $100 of payroll in 2006-07 while the average Australian rate was $1.73, ranging from a low of $1.18 in Queensland to a high of $3.14 in South Australia.

Entitlements: The previous National government had made ACC a mean and ugly agency. Policy directives forced it to cut corners and throw people off benefits at the earliest opportunity. If you felt hard done by, you had to go to court.

The Labour government somewhat widened the scope of ACC by, for example, removing the malpractice test on medical injury, doing more for long-term workplace injuries such as hearing loss and bringing in hard to define but real issues such as workplace trauma.

The new National government sharply criticises these increased entitlements. It is threatening to roll them back. Yet, of the $9.2b increase to $22b in ACC's liabilities for the three years to this June, only $595m came from cabinet-approved rate increases and new programmes plus $205m from court-imposed rulings and government legislative changes to expand the scheme's coverage.

The new government seems particularly worried about ACC's non-earners account. It is the second-largest of the six accounts and it is the only one the government funds directly and exclusively. And it is the one for which it has had to find recently an additional $297m.

This fund covers people not in paid work, that is, mostly young and older citizens. More than 45% of all ACC claims are made through it, yet it represents less than 20% of ACC's liabilities. If the government is trying to cut this account, it will run into a storm of public protest.

Rehabilitation: ACC's record on getting people back to work is deteriorating, the government says. Yes, it has slipped. But there is a small global decline in return to work rates for a wide range of factors, including an ageing workforce. ACC's performance is still better than Australia's and among the best in the world. Moreover, the same slight downward trend applies to the 24% of our workforce covered by the accredited employers programme. So there is no difference between ACC or employers handling their rehabilitation.

Costs: The comments of Key and Smith might give you the impression that ACC has poor cost control. In fact, PWC's analysis shows ACC's work account claims management and administration costs were 19.7% of services against the Australian average of 25.2%. In other words, ACC pays out 80.3c of every dollar on compensation and services whereas the Australians pay out only 74.8c.

Yes, in these tighter times even better budget control is needed. ACC was long working on that before National came to power.

Investments: You might also have thought from government comments that ACC's investment managers had lost a bundle in the global financial markets.

In fact, for the seven months to the end of January they earned a positive return of 2.73%, a gain almost all other fund managers only dreamed of as global markets crashed.

Unusually, ACC has its own in-house investment team led by Nicholas Bagnall and Phil Newport. They have outperformed all comparable investment teams in the private sector in New Zealand for the past 10 years and in Australasia for the past seven, earning a return of 8.7% a year. ACC has out-performed the Superannuation Fund since the latter's inception, despite the latter's more costly use of external fund managers.

All the information in this column comes from widely available sources, including ACC's briefing to the incoming minister, dated November 2008.

So the government can only be taking its extreme line on ACC because it's panicking or politicking.

If it is the latter, it must have its sights set on sharply cutting ACC's services.

- © Fairfax NZ News

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