ACC report confirms volatility in accounts

ACC’s latest quarterly report highlights the impact of short-term volatilities on the ACC scheme’s financial position, says ACC Minister Nikki Kaye.

“The overall financial position of the scheme has improved over the past few years and it is now essentially fully funded.

“However, the quarterly report to 31 December 2014 confirms what the government has been saying about volatile discount rates and their effect on the scheme’s overall liabilities.”

Discount rates help ACC calculate how much it needs to have invested today to meet its future claims costs, taking into account returns it expects to earn on its investments.

If discount rates fall, the value of ACC’s outstanding claims liability increases, and vice versa.

“The latest report shows a net increase of $2.2 billion in the outstanding claims liability for the financial year to December 2014, driven largely by changing discount rates.

“Early indications are that there were further significant shifts in January and February.

“When you’re dealing with such volatile short-term conditions, you shouldn’t get carried away with results at any one point in time.

“The government has taken a long-term view focusing on levy stability. The short-term volatilities highlighted by this report demonstrate that the government’s approach is a sensible one.”

ACC’s improved financial position has seen $1 billion returned to New Zealanders in levy cuts since 2012, with a further $480 million of cuts due in 2015/16.

“I’ve consistently said that the government is very committed to further levy reductions.

“People want levy cuts, but they also want stable levies which don’t change dramatically from one year to the next.

“The disadvantage of not taking a long-term view is that short-term volatilities could see big levy cuts one year, followed by big increases the next.

“That’s not good for businesses, which need stability to help them plan ahead.

“The government is committed to balancing the need to keep levies as low as possible, while also ensuring the accounts can withstand short-term volatilities.”

ACC’s second quarterly report for 2014/15 is available here

Editor’s notes:

More information about discount rates

Each year, ACC is required to collect enough money - through levies - to meet the anticipated lifetime costs of all claims it receives that year.

Because it doesn’t need to spend the money it collects for future costs straight away, ACC invests this money.

That means ACC doesn’t need to collect the full amount it will eventually have to pay out, since it can grow the funds it invests with investment returns.

When deciding how much money it needs to have invested today in order to meet its future costs, ACC projects what those actual future costs are likely to be, then ‘discounts’ them back into today’s value.

This is done using discount rates, which are calculated using a Treasury mandated methodology.

For example, the projected costs of all current claims are around $86 billion, but the current ‘value’ of those costs is around $30 billion, ie $30 billion is what ACC needs to have invested now, so that as this grows with investment returns it will be sufficient to meet those $86 billion of costs downstream.