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Interest rates deliver whopper long term ACC deficit

By Pattrick Smellie

Sept. 25 (BusinessDesk) - Plunging global interest rates have delivered the Accident Compensation Corporation's biggest-ever deficit on its 100-year Outstanding Claims Liability, at $8.7 billion for the year ended June 30.

Since that date, further interest rate falls have blown that out closer to $13 billion and the no-fault government accident insurer's accounts warn that a full one percentage point fall in rates during the next year could take the OCL deficit out to about $20 billion.

While the OCL deficit has no immediate impact on either ACC's ability to fund accident recovery or on the levies charged on employers, employees and motorists, the government is nonetheless reviewing the funding policy for the 27-year-old scheme and is likely to face an unwelcome election year recommendation to hike ACC levies.

Levies are set every two years, with recommendations due by mid-2020 from ACC, the Treasury and the Ministry for Business, Innovation and Employment.

The OCL deficit blow-out was sufficiently large to prompt ACC to hold a special briefing for media ahead of tabling its annual report in Parliament this afternoon.

However, chair Paula Rebstock was adamant the scheme was financially sustainable, stressed the very long time-frames the corporation has for dealing with its outstanding claims liability and the very high likelihood that global and New Zealand interest rates will eventually start to rise again. When that happens, much of the deterioration in the 100-year outlook will unwind of its own accord.

"I don't think there's any question that this scheme is sustainable," said Rebstock. "No question at all. There is no argument for restructuring entitlement."

Changes in interest rates were beyond ACC's control and the OCL deficit was an accounting loss, "not a cash loss."

In fact, the corporation made a cash surplus on its operations in the year to June 30 of $570 million and the OCL deficit was somewhat offset by another strong year from ACC's highly regarded investment team, who achieved 12.97 percent returns on the organisation's $44 billion of funds under management.

However, the $5.1 billion in investment returns was not enough to offset the effect of the ongoing slide in interest rates across global and local bond markets, which produced the largest recorded OCL deficit since 2008/09, when the global financial crisis crashed global interest rates to produce an OCL deficit of $4.77 billion.

The total size of the fund has more than doubled since then, making the latest year's $8.7 billion outcome proportionately similar to the 2009 financial year deficit.

However, notes to the ACC accounts disclose that the continuing decline in interest rates since June 30 has added approximately a net $4 billion to the OCL deficit, which looks like to come in between $12 billion and $13 billion when the corporation announces its September-quarter financial position later this year.

Rebstock said it would be "a mistake for the corporation to try to close that gap too quickly" because of the huge lead times it works to, with the OCL being a measure of the estimated total cost of meeting all current claimants' care, rehabilitation and income replacement over the next century.

Reacting swiftly to changes in the OCL could have "severe inter-generational effects on the current generation".

"The path back to balance is over a very long period."

The primary drivers of levy rates in the short term were actual rates of accident and injury, trends in treatment costs and the duration of both rehabilitation and income replacement.

The timing of the government's funding model review was uncertain, but ACC would need time to assess any changes, determine a view about levy rates and consult on those publicly before making recommendations to the government in mid-2020, she said. Both the current and previous government ignored recommendations for levy increases at the last two bi-iennial reviews and, in some cases, cut the politically sensitive levies.

Tables in the annual report show that ACC is undershooting its target funding ratio most severely in the Non-Earners' account, which covers people not in the workforce. It seeks to fund 88 percent of its liabilities there but is currently only funding at a 59.8 percent level. The Earners' and Motor Vehicle accounts are below their funding target ratio of 100-to-110 percent at 94.1 percent and 92.2 percent respectively.

"Under our funding policy, these levels of funding ratios would result in larger increases in recommended levies in the next levy-setting round that would otherwise have been required without such a large deficit," the annual report says.

Only the Work account is within that range, at 102.7 percent.

Over the last year, the corporation saw weekly compensation claims rise by 5.1 percent which sensitive claims - generally relating to sexual violence - continued to show exponential growth since their recent acceptance as a claim category, rising 25 percent in the year. The cost of treatment and rehabilitation services rose by 7.5 percent.

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