Why a Government change reducing ACC’s liability by $7b will not reduce levies

ACC's overall liability calculation would be reduced as a result of the change. Photo / RNZ

The amount of money ACC estimates it will need to pay out in claims would be reduced by $7 billion as the result of an accounting change agreed by the Government.

Unfortunately for households and businesses, the change will not mean a reduction to levies they pay to fund ACC – or the trajectory by which those levies are expected to grow.

ACC, the state-owned insurer for accident and injury claims, calculates an outstanding claims liability (OCL) figure to help it work out how much it might be on the hook for in claim costs in the years to come.

Levies and government funding levels are used to ensure ACC has enough money to pay for this liability.

Currently, one way of calculating the OCL includes adding 12.7% risk margin to the base calculation – the margin is to ensure the insurer can cover the cost of claims if they come in above its central estimate.

As a result of accounting changes, the risk margin will be reduced to zero, shaving about $7b off ACC’s OCL when the change comes into effect next year, according to information released to the Herald under the Official Information Act.

The change will also have a saving to ACC’s reported expenses by about $350 million a year, which will flow over to a saving for the Government, reducing the Operating Balance Before Gains and Losses (Obegal) – a measure of the surplus or deficit that has fallen out of favour with the current Government.

Unfortunately for people and businesses, this will not lead to a reduction in ACC levies – or even a change in the trajectory of levies.

ACC Minister Scott Simpson said the new standard had “no impact on levies”.

“The Government sets the funding policies and it already excludes the risk margin,” Simpson said.

“I am absolutely committed to ensuring the financial sustainability of ACC to ensure we have a system that is not only there for us, but for our grandchildren too. I plan to announce further steps on this in due course,” he said.

ACC has not yet started using the new accounting standard, known as IFRS17. The Government is still working through the implications of the new standard.

The current standard used by ACC is IFRS 4. This standard forces ACC to add a risk margin to the OCL; however it is believed this standard is more appropriate for private insurers, given it is assumed that if a public insurer, such as ACC, ever got into trouble, the Government would bail it out – or put it on a footing that would allow it to rebuild its balance sheet.

The Government is having several struggles with ACC, notably the ballooning costs of claims and poor performance when it comes to rehabilitating people.