John Judge writes on what must be done to have a sustainable accident compensation scheme
Last year, the ACC (Accident Compensation Corporation) financial situation came under the spotlight with the announcement of a $4.8 billion deficit.
That single year's result, which was more than all the finance company losses combined, took the corporation's total deficit (the difference between its assets and liabilities) to nearly $12.8 billion.
This year's forecast financial result shows a dramatic improvement, with an estimated surplus between $2.2-$2.6 billion. That is a very encouraging result. But it is just the start of the journey for ACC.
I say a journey because ACC's liabilities still exceed its assets by more than $10 billion - the equivalent of 2.5 years of levy income. It is vital that ACC continues to address this deficit and moves towards financial sustainability.
The deficit represents a major hole in ACC's ability to pay for the care that those already injured will need in the future. ACC's basic promise to all New Zealanders is that ACC will look after those who are injured. It is important that we have the funds to keep that promise.
It is also important to understand the nature of the surplus and how it has been achieved.
Like any other organisation with a balance sheet problem, the main requirement was careful control of income and costs.
ACC's income increased through a strong performance by its investment fund and slightly increased levy revenue.
Costs were controlled in three ways:
ACC limited its services to those it was legislatively required to provide.
It strove to get greater value from its purchasing of health services.
It focused on improving its rehabilitation performance; we have improved our ability to restore injured New Zealanders to the best possible health position more quickly.
All of these factors improved ACC's operating (or annual cash) performance for this financial year, but were not enough on their own to explain the significant turnaround from a $4.8 billion annual loss to a $2.2 billion annual surplus.
The main reason for the big turnaround is that when these cost savings are projected into the future they significantly impact ACC's outstanding claims liability - that is, the projected lifetime costs of the claims already on our books.
Because ACC is now rehabilitating people more quickly, we will incur less cost both now and in the future. But the deficit remains significant.
If ACC was an insurer in the private sector it would still fail to meet the required prudential standards.
To meet those minimum standards, ACC would require an immediate cash injection in the order of $17 billion.
That involves $10 billion to cover our remaining deficit and $7 billion to give ACC the capital the Government would require a private sector insurer to hold.
Such a cash injection is, of course, impossible. That means the path to financial sustainability for ACC lies in continuing the process that started a year ago.
Last year we prepared plans to meet the deficit over 10 years. This year's surplus is a good start. However, in each of the remaining nine years ACC has to do two important things.
First, it has to generate an operating surplus (higher income than costs) so that it can chip away 8at the $10 billion deficit.
The current forecast is that we need to generate an operating surplus of about $2 billion next year, $1.6 billion the following year and a lesser amount in each of the last seven years. The required surpluses decrease each year as the deficit decreases.
Second, and this is extremely important, ACC has to make sure its overall cost structure is driven down so that the inroads we make into the deficit are sustained. There is no point making progress this year only to go backwards next year.
That is why ACC cannot simply use this year's surplus to fund more services or reduce levies. In fact, the term "surplus" is slightly misleading. ACC does not have $2.2 billion spare in the bank - we are merely $10 billion, rather than $12.8 billion, short.
Much better but only a start. ACC needs to continue in the future with the changes it has made. So what does that mean?
We need to keep looking for new ways to do our job more efficiently and stay focused on managing costs. People can expect to see more change at ACC.
It may also mean more, but smaller, levy increases, although that is ultimately a matter for the Minister.
For their part, New Zealanders can help by doing what they can to prevent injuries and by working hard on their own rehabilitation.
This is the best way for all of us to preserve our unique ACC scheme.
* John Judge is chairman of ACC.