Taking the next steps towards a more sustainable and transparent ACC scheme

speech to Business New Zealand – not delivered word for word

Good evening.

I would like to acknowledge Phil O’Reilly from Business New Zealand and his team and Scott Pickering CEO of ACC and all of you here tonight.

Last year, the ACC scheme turned 40. It has become a critical part of New Zealand’s economic and social fabric.

We can be proud of our no-fault , 24/7 coverage for all New Zealand residents and visitors, covering motor vehicle, non-work and workplace injuries.

It is a scheme that will provide support for injured New Zealanders long into the future, and it is still reaching maturity.

While we have come a long way, there is still more to do to ensure we care for our most vulnerable who are injured, while keeping levies as low as possible.

Given our claims profile, it is important to have consistency and stability for levy payers.

I think it is also important to do more work around entitlements, and strengthening the public’s confidence in the scheme.

We must also help people be as safe and as healthy as possible.

Our government, through the Working Safer package of workplace health and safety reforms, has committed to achieving a 25 per cent reduction in serious workplace injuries and fatalities by 2020, with an interim target of a 10 per cent reduction in the rate of work-related ACC claims for more than a week away from work.

Past performance of the scheme

We owe it to New Zealanders that we never repeat what happened in the period from 2004 to 2008.This period saw a significant deterioration in the scheme’s financial performance and outcomes.

That deterioration translated into a dramatic increase in the outstanding claims liability (or the value of the expected lifetime costs of existing claims).

Yet this trend was not fully transparent at the time, and levy rates did not increase to keep pace with claims expenses.

This led to the situation in 2008 whereby we inherited a $4.8 billion hole in the ACC accounts.

Looking back, and to be fair to the last Labour government, I believe some of the increase in the outstanding claims liability was likely due to population growth, normal economic volatility and changes in accounting.

However, the large part was due to poor management, driven by expanding cover and entitlements, poor rehabilitation outcomes and weak cost-containment overseen by the last Labour government.

Scheme performance has improved over the past six years to ensure a more sustainable scheme

In 2008, when we inherited the $4.8 billion hole we also inherited a scheme heading in the wrong direction. A scheme with significant funding shortfalls and rising claims costs.

This government and ACC have worked hard over the last six years to improve the scheme’s finances and the way we treat injured people.

Some of the key decisions that the government and ACC took to turn things around included:

• ensuring ACC kept a clear and sustained focus on financial sustainability, while still meeting the real needs of injured New Zealanders
• making changes to clarify entitlements to ensure the sustainability of the scheme
• appointing people to the Board of ACC with the skills and commitment to do this
• ensuring ACC has an investment strategy that continues to outperform benchmarks
• commissioning a major stocktake of ACC’s accounts, and an independent review of arrangements for dealing with sensitive claims
• introducing new ways of delivering services to people, engaging with clients, and contracting with providers
• reviewing significant areas such as elective surgery
• introducing new experience and risk rating arrangements in the Work and Motor Vehicle accounts, and
• improving and developing ACC’s work in injury prevention.

Following on from this, the next few years required a sustained focus on improving ACC’s performance in supporting clients to return to work and independent living, and returning claims rates and costs to sustainable levels.

I would like to acknowledge the ACC investment team for their success. In 2009 the ACC investment portfolio was worth $10 billion. As at March 2015 it is at $31.5 billion. ACC’s investment team has consecutively outperformed its benchmarks for the last 19 years.

We are very fortunate to have great leadership at ACC. We have an excellent board chair with Paula Rebstock and a great Chief Executive in Scott Pickering.

Taking the next steps to improve ACC and my priorities

The work, earners’, and motor vehicle accounts (levied accounts) are now at or approaching full-funding and this Government has already delivered more than $1.5 billion in levy reductions in recent years.

This government has worked hard to achieve an appropriate balance between the financial performance of the scheme and the delivery of better outcomes to New Zealanders.

Under our stewardship, progress has been made on rehabilitation rates, and stakeholder trust and confidence in the scheme is improving.

However, my interest is ensuring that we take the next steps over several years to improve the ACC scheme for our most vulnerable and for all New Zealanders.

We need to do this for injured people, but we also need to ensure the hard working New Zealanders who pay into the scheme have better visibility of where their levies are going

At a very high level my priorities for ACC include:

• better and more meaningful injury prevention
• the modernisation of ACC’s systems
• better and faster dispute resolution for injured people
• more consistent and faster decision-making on claims
• better management of  our most complex and serious claims
• a more financially responsible and transparent levy system
• more sustainable levy reductions.

A more financially responsible and transparent levy system and progressively more levy reductions

Tonight I will focus on how we can deliver a more financially responsible and transparent levy system, as well as ongoing levy reductions. We cannot take current performance improvement for granted.

Continued improvement is crucial to maintain levy stability and avoid volatility. While the scheme’s performance and overall financial position has improved since our government has taken stewardship, it is still subject to short-term volatilities. Population growth and the ongoing growth in health-services costs are just two examples of economic factors driving the increase in funding requirements.
Since last year, discount rates (which help ACC calculate the impact of interest rate changes on the value of the outstanding claims liability) fell considerably.

If discount rates fall, the value of ACC’s outstanding claims liability increases, and vice versa. This is why a conservative, long-term approach to levy setting is the correct one.  We will undertake further work to balance the need to keep levies as low as possible, while ensuring the scheme’s long-term financial viability, stability and sustainability. At the same time we will meet the public’s expectations that ACC should be more responsive and transparent.

Improving the levy setting process

Recently, the process for setting ACC levies, and ensuring that account balances remain reasonably stable, has not worked as well as it could have.  Levy funds are ring fenced and can never be spent on anything else.

I consider that there is a need for greater certainty, stability and transparency in this process.  Let me outline some of the issues that have arisen:

The respective roles of the government and the ACC board are vague. By this I mean:

• responsibility for setting levies ultimately lies with the government and should not be delegated
• at times, levies set by government have been materially different to those recommended by the ACC board - this difference has made it harder to hold the board accountable for the performance of the scheme.

Solvency ratios and levy rates have fluctuated more than is necessary.

The 2014 Performance Improvement Framework (PIF) Review of ACC also identified these weaknesses, noting that “There is no overarching legislative framework that establishes the objectives to be met, or principles to guide, the annual levy setting process.”

I am therefore introducing legislation which will put in place a new levy setting framework. I’m doing this because it’s a sound and responsible approach in its own right.  It will also bring the levy setting process into line with accountability and transparency requirements in key sections of the Public Finance Act, which apply to the operation of the government’s core budget.

I’m pleased to announce that the government will introduce three steps to strengthen governance and transparency of ACC funding and levies in an amended Accident Compensation Act.

I will explain these steps in detail shortly, but in brief:

1. We will embed principles of financial responsibility into the Act – in order to provide a framework for funding and levy setting for the levied accounts.
2. The Act will require the government to establish a funding policy for the levied accounts. This will guide the development of recommended levy rates.
3. We will specify stronger reporting requirements to provide greater transparency on the decisions taken and their downstream consequences.

Step one – Principles of financial responsibility will be embedded in the AC Act

Now to the background and detail of these three steps.

Principles of financial responsibility and levies appear in the Act but they are not consolidated in a single place, or presented as a coherent approach.  I propose to consolidate and clarify existing principles to establish a stronger framework within which a government funding policy can be set.

The following principles are included in the new bill:

• Full funding – A full-funding approach should continue to be taken, as currently required in the Act, but further detail needs to be incorporated to better guide funding and levy decisions.
• Levy rates should remain reasonably stable and predictable over time. More stable levies tend to give clearer, less ambiguous signals to levy payers.
• Each of the scheme’s levied accounts must remain solvent over the long term, matching an adequate level of assets to the outstanding claims liability.  To ensure solvency, surpluses or deficits from previous periods need to be made good, and reflected in subsequent levies.

The application of these principles will see relatively stable levies that reflect underlying costs, in the absence of economic shocks or large swings in ACC’s claims performance.

Any response needs to be flexible to meet the circumstances, and to reflect the priorities of the government of the day.

Step two – The Act will require the government to establish a funding policy for the levied accounts

Under step two, I propose amending the Act to require the Government to issue a funding policy statement based on the principles I have outlined.

This would become a standing document, to be revised periodically as needed. ACC will be tasked with implementing the funding policy through the levy rates it consults on.

An important change is that responsibility for setting a funding policy statement at the outset will be the role of the government. This establishes a more normal governance structure, whereby the government sets policy and the crown agent implements it.

This should help alleviate some of the problems I have noted. There should be a closer match between the levies that ACC consults on and recommends, and the final decisions taken by the government. Finally, ACC should become more accountable for its performance, with greater visibility of what it is actually responsible for.

Step three – Stronger reporting requirements would be specified

Step three is aimed at improving disclosure about the reasons for levy decisions and their consequences.

More transparency is needed so we can ensure that the downstream consequences of funding decisions are calculated, with both the government and the public fully aware of them.

This will also improve accountability of the scheme, by making trends through time clearer and making it easier for  external scrutiny of ACC's performance against the principles in the AC Act, and the government funding policy statement.

This proposal will not affect the consultation requirements already in the AC Act. As per Section 300, public interest will continue to play an influential and instrumental role in the decision-making process.

I am confident that this proposal will strengthen transparency for stakeholders, and provide clarity on what needs to be reported.

Now I would like to turn to this year’s approach to setting levies.

Now that the scheme is essentially fully funded, our government is committed to implementing further levy reductions.

This legislation will take time; it will need to go through consultation, parliament and the select committee process.  I did consider issuing a ministerial direction in the meantime, before the legislation is passed, but on balance decided not to do so.

In terms of the amendment bill timing milestones, consultation will likely occur in August/September 2015 and the government’s decision on the final shape of the legislative change is expected before the end of 2015.

Indicative levy reductions in Budget 2015

Budget 2015 indicates that further ACC levy cuts worth around half a billion dollars are likely in 2016/17 and 2017/18.

This is an estimate based on current financial projections, and the new levy setting framework which I’ve announced today.

Final decisions on levies aren’t made until after ACC’s public consultation, but all the signs are that further cuts will be possible across work, earners’ and motor vehicle levies.  This will benefit business, workers and motor vehicle owners alike.

To give a picture of how levies continue to come down, this year the average ACC motor vehicle levy, including the annual licence levy and petrol levy, will fall from around $330 to $195.

On current projections, this is likely to fall further to $120 from 2016, making the average levy around one third of what it is right now.

We are committed to providing at least $500 million, and that the reductions will be across three accounts – motor vehicle, work and earners.

However, we will have to wait for the outcome of ACC’s consultation with levy payers and its recommendation to cabinet before we decide on final levies. The final decisions on levy reductions will also have to factor in any updates in forecasts in costs and solvency, such as economic conditions and ACC’s performance. The exact amounts each year may vary depending on the consultation and considering other issues like the residual levy being removed.

These cuts are a continuation of around $1.5 billion of levy reductions announced since 2012. As always, the government will be prudent, and balance levy cuts against the need to ensure ACC’s accounts can withstand economic volatilities.

Conclusion

The government has been considering these issues for several years. This is because we have known for some time that, after years of responsible management, the goal of all ACC’s levied accounts being sustainably fully funded was going to be achieved.

In May 2014 cabinet made an important first step. We also recognised that some changes to existing legislation would be required to confirm the government’s proper role in the setting of funding policy. Since then, during a period of considerable short-term volatility in discount rates and actual account solvency, we have been considering how best to move towards the new arrangements.

These announcements signal a new era for ACC as the first levy setting year when all three levied accounts are solvent. We have had several years of levy reductions with two more years of at least half a billion to come. The new legislation will help us achieve a more sustainable and transparent ACC scheme for New Zealand. This is important for all New Zealanders.

Thank you