Brian Gaynor 's Opinion

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor: Our ACC - big, important and misunderstood

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Car owners contributed just over $1 billion to ACC last financial year; now a reduction in the amount they have to pay has been proposed. Photo / Brett Phibbs
Car owners contributed just over $1 billion to ACC last financial year; now a reduction in the amount they have to pay has been proposed. Photo / Brett Phibbs

New Zealanders have a poor understanding of the Accident Compensation Commission, one of the country's largest and most important organisations.

This misunderstanding was clearly evident last week when ACC released its annual report.

Letters to the paper, blogs and media commentary showed that the organisation's financial accounts are a mystery to many people.

One commentator wanted to know how the entity could report a surplus of $4.9 billion compared with a budgeted surplus of $1.4 billion.

She wrote: "I know nothing about finance and investment so this may be a naive question, but shouldn't you know that an extra $3 billion is coming your way if you're doing your job properly? If you don't know about the $3 billion surplus, then wouldn't the inverse be true - you're not going to know about a looming $3 billion deficit?"

These are not naive questions but they do show that the ACC is a much misunderstood organisation, even though it had 1,718,286 new claims in the year to June.

The ACC was established under the Accident Compensation Act 1972, passed under a National Government. The act followed the recommendations of the Royal Commission on Compensation for Injury, headed by Chief Justice Owen Woodhouse.

The new organisation embodied the royal commission's recommendation that the state should provide 24-hour, no-fault insurance for all personal injury. In return, New Zealanders would give up the right to sue for damages arising from personal injury.

The purpose of the 1972 act was to promote safety, the rehabilitation of individuals who suffered injury by accidents covered by the scheme and to make provision for the compensation of those persons or their dependants.

ACC is compulsory; no one can opt out and seek damages instead.

There are four major contributors to ACC's annual surplus or deficit:

• Net revenue, mainly derived from levies.

• Net costs comprising claims paid, injury prevention expenses and operating costs.

• Investment income.

• An estimate of future claims under an outstanding claims liability provision.

The corporation was funded on a "pay-as-you-go" basis until July 1, 1999. Under this policy, the ACC collected only enough levy income to cover the costs of claims paid out each year. Before 1999, the future cost of claims were included only in the notes to the financial accounts.

The organisation moved to a "fully-funded" model in mid-1999. This means the ACC now must have enough assets or investments to meet all the liabilities associated with the current and future costs of existing claims.

The main contributors to levy income of $4.72 billion in the year to June were: employees, $1.33 billion; petrol tax and motor vehicle licence fees, $1.05 billion; government funding through general taxation $969 million; employers $966 million.

Every year, the ACC releases a consultation document asking New Zealanders to make submissions on levy proposals for the following financial year. Submissions on the levies for the year to June 2015 close on Tuesday.

Few submissions are received on the levies even though they affect all employers, employees and motorists.

The ACC is proposing a 15 per cent reduction in the motor vehicle levy for the 2014/15 year but there is no recommendation to reduce the levy for motorcycle and mopeds.

This is because the number of claims from motorcycle and moped riders is far greater, on a relative basis, than from users of passenger vehicles.

There was one claim for every 106 cars in 2012/13, and one claim for every 18 motorcycles and mopeds in the same period. As a result, passenger vehicle owners are contributing more than 60 per cent of the ACC's injury costs for motorcycle and moped riders.

Motor cycle clubs are well organised on these issues and based on past trends they will lodge a large number of submissions, arguing that they should also receive a 15 per cent decrease in their levy for the June 2015 year.

After consultation, the ACC recommends any levy adjustments to the government, which has the sole discretion to set the levies. The ACC is the administrator of the scheme, the government makes most of the important decisions.

Claims and operating costs have remained remarkably steady over the past three years. In the year to June, the most claims have come as a result of falls (457,446) and injuries from DIY (66,979), rugby (58,420), animal-related activities (55,260), soccer (35,708), netball (27,670), assaults (27,244) and the construction industry (26,415).

The ACC's net operating surplus, which is probably the most important financial figure, has been remarkably steady in recent years.

The organisation's net operating surplus, which is a close reflection of its operating cash flow, has gone from a net surplus of $1.81 billion in the June 2011 year, to $1.82 billion the following year and $1.64 billion in 2012/13.

But last year's $1.64 billion operating surplus turned into an overall surplus of $4.93 billion after two non-operational factors - investment income and changes to the outstanding claims liability provision - were taken into account.

ACC's investment team reported investment income of $2.03 billion for the year to June, compared with a budgeted $1.17 billion.

The investment team delivered a return of 9.9 per cent for the year - 1.5 per cent ahead of its benchmark - through a low-risk investment strategy. This was the 18th consecutive year in which the ACC has beaten its investment benchmark, a record unequalled by any other large international diversified fund.

The organisation's largest asset classes are New Zealand bonds (44 per cent), global equities (21 per cent), NZ index linked bonds (10 per cent), NZ equities (10 per cent) and Australian equities (4 per cent).

The most volatile figure in the ACC's financial statement is the change in the net outstanding claims liability provision.

This is the estimate of the amount it will have to pay on existing claims beyond the year end balance date.

For example, if the lifetime cost of claims is estimated to be $6 million over the following 40 years, the ACC may need to put aside only $1 million for this as it will earn interest on any unused money over the course of the claims.

This $1 million starting point can be reduced when interest rates rise, as a higher return should be earned on investments. Thus ACC had an unusually positive 2012/13 year as it was able to generate high investment returns in a rising interest rate environment, even though it has a large bond portfolio.

At the same time it was able to reduce its outstanding claims liability provision by $1.26 billion, and include this in the 2013 surplus, mainly because of rising interest rates.

This positive $1.26 billion outstanding claims liability figure, which is a non-cash item, compares to a negative $3.96 billion in the previous year and a budgeted negative contribution of $1.16 billion for the year to June.

Although the ACC's accounts are extremely confusing, and the organisation could do a far better job in explaining these complex issues to the public, the good news is that it is in a very strong financial position.

This means employers, employees and motor vehicle owners can expect to see a reduction in their levies over the next few years, without any reduction in claims met and funded.

Brian Gaynor is an executive director of Milford Asset Management and one of 2,260,000 employees who pay levies to ACC.

- NZ Herald

Brian Gaynor

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the Financial Markets Authority (FMA) in 2011. He is also a Portfolio Manager at Milford Asset Management.

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