ACC launches 2004/05 year levies consultation

ACC launches 2004/05 year levies consultation

ACC today launched the 2004/05 year levy setting process with the release of proposed rates for public consultation.

Interested parties have until 18 September to make submissions on the rates. After submissions have been analysed, the ACC board will make recommendations to the Government via the Minister for ACC with the final rates being announced towards the end of the year.

Summary of proposed average levy rates for 2004/05

For every $100 of payroll or for every $100 earned (except Motor Vehicle). Excludes GST.

Who pays Levy component Current 2003/04 average Proposed 2004/05 average Proposed change

Employers Employer work account levy $0.90 $0.95
Residual claims account levy $0.31 $0.31
TOTAL $1.21 $1.26 +4.1%

Self-employed people Self-employed work account levy $1.79 $1.83
Residual claims account levy $0.31 $0.31
Earners’ levy $1.07 $1.07
TOTAL $3.17 $3.21 + 1.3 %

All earners - through Inland Revenue Earner account levy $1.05 $1.05
Residual Earner account levy $0.02 $0.02
TOTAL $1.07 $1.07 No change

Motorists – through annual vehicle registration fee & excise tax on petrol Motor Vehicle account levy & petrol levy (average per vehicle) $135.78 $114.08
Residual Motor Vehicle account levy (average per vehicle) $76.18 $90.96
TOTAL $211.96 $205.04 - 3.3%

Chief executive Garry Wilson said that, operationally, ACC had completed one of its best years, but influences beyond its control had forced up costs.

"We have had record investment returns and a very strong scheme performance. But declining interest rates and upward revisions in the assumed duration and cost of claims have pushed up the expected future cost of long-term claims," Mr Wilson said.

"We had hoped to hold our levies or even recommend a drop in some. However, we have not been able to absorb all the cost increases, especially due to interest rate movements, and some small average levy increases are proposed."

In this consultation round, ACC is proposing a 3.3 percent drop in the average motor vehicle levy. This is substantially due to a reserves adjustment which, on its own, would support a reduction in the levy of $20.63.

While a growing number of vehicles and expected lower costs per claim support the reduction, other factors, particularly falling interest rates, constrain the amount the levy can be reduced. Accordingly, the proposed Motor Vehicle levy would drop to $205.04 from $211.96.

The levy for the Earners' Account, which covers the cost of non-work injuries, is also being held.

For the Employers' Account, ACC is proposing that the average composite levy rise 5 cents per $100 of liable earnings with a 4 cent average rise for the Self-employed Account.

The composite levy is the total levy payable for the specific ACC account. It embraces the current and expected future costs of an injury and the Residual Claims levy. The Residual Claims levy covers the ongoing cost of injuries that occurred before 1 July 1999, the year in which ACC moved to fully funding the lifetime cost of injuries in the year they occur. The Residual Claims levy is set at a rate sufficient to build reserves that will fully-fund those injuries by 2014.

ACC is also proposing that the Residual Claims levy remains unchanged except for the Motor Vehicle Account where it will rise from $76.18 to $90.96, reflecting changed assumptions about the long-term costs of injuries.

Impact of falling interest rates During the last financial year, ACC had around $4 billion in reserves invested in bonds and equities in New Zealand and overseas from which it earned in excess of $400 million.

As ACC is a "fully-funded" scheme, it uses investment income to help cover the future costs of injuries which, since 1999, must be provided for in the year the injury takes place.

This means that future levy payers will not have to pay the cost of injuries happening now.

As there can be a significant time gap between the collection of levies and the incidence of the future costs they will cover, ACC invests the money with the expectation that returns will also contribute to offsetting those future costs.

To estimate future costs and investment earnings, ACC uses a "discount rate" which reflects long-term interest rates. This discount rate has dropped from 6.5 percent to 5.5 percent.

Every 1 percentage point fall adds between $800 million and $900 million to ACC's long-term liabilities.

The downward adjustment in the discount rate this year has been exacerbated by changed assumptions on the lifetime costs of injuries

A better understanding of the lifetime costs has resulted in ACC lifting its estimates into the future from 31 years to 50 years. The result is that additional funding is required to meet the full costs of injuries.

Mr Wilson said weekly compensation and rehabilitation claims had gone up in the last year.

"This might suggest that people are getting injured at a higher rate. But the population has grown, there are more cars on the roads, more people in the workforce and more people in the injury prone over 80s. This explains most of the increase," he said.

Improved rehabilitation and increased use of electronic claiming are among measures that were helping to contain scheme costs.

"Around 40 percent of claims to ACC are filed by medical providers electronically. As a result, we are getting them faster and can begin rehabilitation faster," Mr Wilson said.

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