Andrew Little: A Future for ACC

11 November, 2009

SPEECH NOTES

Unions Whanganui
'A Future for ACC' Seminar
Davis Lecture Theatre
Whanganui Museum

Tuesday 10 November 2009 @ 5.00pm
ANDREW LITTLE
National Secretary 

 

Striking up a conversation about ACC with most people usually quickly leads to glazed eyes and wandering attention.

ACC is one of those issues that seems big and complex because it is a big and complex institution.  We all hear stories of how difficult it can sometimes be dealing with some of the more complicated claims.  And we hear the stories of people who we think possibly should not be on the scheme.  And finally, it seems to be a favourite of politicians to fiddle around with from time to time.

But ACC is very important.  We all contribute to it either through a deduction in our pay, by employers through a payroll levy, through motor vehicle registration fees and through general taxes. 

It is also important because most of us will most likely come into contact with it at least once in our lives.  Whether for something as uncomplicated as a sprained thumb or wrist from falling off a bike or tripping over at home to something as complex and far reaching and hugely debilitating as a permanent brain injury from falling from scaffolding at height at work or a serious road accident.

There is another reason why ACC is very important.  And that is the reason why it was set up in the first place.  ACC was set up 35 years ago because of very serious concerns about whether injured people were getting access to the proper support and assistance they needed to rehabilitate themselves and sustain themselves and their families following injury.  I want to come back to the origins of ACC later.

But the reason we are here this evening is because the government has recently announced it wishes to make changes to ACC.  This is not unusual. There hasn't been a government since the inception of ACC that hasn't made changes to the scheme.

There are two aspects to the changes the government wants to make.  The first are the changes to levies - what you and I and others pay for the scheme.  The second are changes to cover - that is, the things for which ACC will be claimable. 

Underlying both these aspects is a third called "full funding".  The issue and policy of full funding is more than one of how well financed ACC is.  It is a factor that determines the nature of the scheme and whether it is a publicly-owned one or a private one.  I want to discuss the issue of "full funding" because it relates very strongly to the very reasons ACC was set up in the first place.

Turning to the changes the government has recently announced, including what it has introduced legislation into parliament for, these are the things it wishes to do:

• Increase the earner's levy from $1.72 to $2.80 for each $100 earned. This is a 65% increase. The earner's levy is used to pay for non-work injuries
• Increase the work account funded by a levy on employer's payrolls from 75 cents per $100 of payroll to $1.18, a 57% increase.
• Increase the motor vehicle levy from $287 to $470 including GST. And because motor cycles of varying sizes have their levies calculated on a proportion of the motor vehicle levy, they are increasing significantly, too. The proposal was to increase levies on motor cycles to $1200 for mopeds and small motor cycles and to over $3,000 for larger motor cycles, but this was moderated to around $800 for larger motor cycles.
• For employers and the self-employed, the levy increases from $1.31 to $1.89 for each $100 earned.

There is one other account, called the non-earners account, which is not funded by levies but is funded by general taxes.

In addition to this, the government is undertaking a stock-take of the scheme.  This is being undertaken by a committee chaired by former Labour Cabinet Minister David Caygill.  The brief appears to be fairly broad and it is hard to predict what may come of this process.

The government is also repealing a number of ACC provisions introduced by the previous Labour government.  This includes cover for suicide victims, reversing vocational rehabilitation changes, changing the basis on which loss of earnings is calculated for seasonal and temporary workers, and introducing "incentives" for employers in relation to safety.

Added to this ACC says it is introducing new administrative measures to help in the management of claims.  They say they are looking at new methods to "triage" claims, develop programmes to reduce unnecessary time off work after injury and adopt a new approach to managing longer term claims.

Finally, as a result of political pressure - largely because the minister for ACC recognised late in the piece that he could not get the numbers in parliament to pass the original changes he wanted - the government is now looking at forms of privatisation of ACC.  This will happen particularly in the earner's account and work account.  They call it competition, but it is privatisation.

All of these changes are being justified on the basis that ACC is in some sort of financial crisis.  Indeed, in the last few weeks we have heard the language of "massive losses", "massive cost blowouts", even "bordering on insolvency".

If, of course, ACC is in such a diabolical state and it is running out of money and it may not be able to sustain the many claimants who it provides for year after year, then a massive hike in levies and cut-back in provision may look justified.  But the truth is a little different.  Firstly, in the most recent financial year, ACC earned far more in levies than it paid out in compensation costs, medical costs and the costs of running itself.  In fact, it generated a surplus of around $1 billion.

It has investment assets of around $11 billion.  Unlike many other managed funds in New Zealand or around the world, it actually achieved a positive return on its investments in the last year.  For many years it has performed ahead of benchmark funds.

So, if ACC is producing a $1 billion surplus and has reserves of $11 billion, why the concern and the talk of crisis?  The issue comes down to what the ACC does each year when it provides an estimate of its future liabilities.  It is here that the issue of "full funding" is relevant.

To go back a step, in the last years of the last National government, it amended the ACC legislation to provide for "full funding".  Full funding means that the corporation collects enough levies in each year to fund the lifetime value of all claims made in it in that particular year.  To explain this further, let me illustrate with an example.  Say a 23 year old young man has a serious accident - say he falls from a height at work and suffers a serious brain injury.  The nature of his injury is that he is paralysed and is brain injured to the point where he is unable to return to his previous work, and unlikely to return to any work.  In addition to his medical costs he will be entitled to earnings related compensation for the rest of his working life in addition to any support or rehabilitation costs that may be needed.  This would be an expensive claim.  And the idea of "full funding" is that the full cost of this claim would be met from the levies collected in the year in which the accident happened.

Full funding means that ACC collects and holds enough funds to meet the lifelong value of the claim at any time.  Even though it is not and never will be in a position of having to do so.

For the most recent financial year, the actuaries significantly increased their estimate of future liabilities to $23 billion.  This is how much they say ACC should have on hand - just in case.

For the actuaries trying to calculate the value of our 23 year old's claim, they need to look at the likelihood of recovery from the injury, movements in inflation and wages indexes to track movement in his earnings related compensation, changes in returns on ACC's investments, possible increases in medical costs through the acquisition of new technology and so on.  The actuaries are expected to do this for a 23 year old for 40 years or more out from the date of the accident.

And of course the timing of payments to the claimant wont be in the year that the accident has happened; the bulk of any compensation payments and, indeed, medical and rehabilitation costs will be met many many years following the accident.

The most recent annual report for ACC illustrates the uncertainty about the estimates of the future value of these claims.  The note in the report explaining how future liability is calculated states that it is the best estimate based on a number of factors including trends in historical claims data, reviewing current conditions that can affect future trends and "scanning the horizon of possible changes that may affect trends in the future".

A lot of trends have to be analysed.  And as for "scanning the horizon of possible changes", well this could be just about anything.

The report goes on to state:

Due to the uncertainty in the outstanding claims liability estimate and the number of assumptions required in this determination it is highly likely that the actual experience will differ from the stated estimate.

And then the report goes on to state that a risk margin is added. 

The reality is that when we are considering the issue of ACC's long term future liability, we are dealing with something deeply uncertain and imprecise.

So, when we hear claims of ACC being in crisis, or as the Minister says, "in a pickle", we are talking about the value of this hugely uncertain, imprecise and almost certainly overstated liability, a statement of what might happen.  In my view, there needs to be a debate about whether the "full funding" approach to financing ACC is necessary. Currently, Labour Party's policy supports full funding, and the last government maintained the full funding model.

Indeed, in 2007, most of the ACC accounts (the work account, the earner's account and the motor vehicle account) were all fully funded.  That is to say, the assets backing them were equal to or in excess of the value of the assessed liability of the claims on ACC's books.

And it is likely that Labour's support for the full funding model was because of the two major financial crises ACC suffered in its history.  One was in the late 1980's when as a result of the economic restructuring and massive unemployment in New Zealand the corporation simply failed to collect enough levies to meet its claims.  And there was evidence then of a systematic running down of the corporation's reserves in any event.  The second crisis was at the end of the 1990's which led to the change in the legislation in 1998 that required full funding by 2014.

The problems with full funding will be quite apparent.  Of the many thousands of claims ACC receives every year - ranging from the sprained thumb to the serious brain injury - it will simply not be possible to accurately estimate the long term future value of many claims.

Take our 23 year old young worker who has fallen at work and suffered a serious brain injury.  What if he died at the age of 35?  Or 45?  What if he recovers sufficiently in a few years to be independent and not need home care, or as much home care?

And to the extent that the estimates are based on returns on investment, who knows how the local world economies will perform over a period of 40 years?  The global financial crisis was based entirely on those who gambled against what might happen in world economies in the future and the great masters of the universe in institutions like Lehmen's Bank, Goldman Sachs and Merrill Lynch couldn't do it.  Why should ACC?

If we go to the 1967 report of the Royal Commission which proposed ACC in the first place, the Woodhouse report, it is very clear amongst its five principles that full funding is not one of them.  Indeed, the report describes the ACC scheme contemplated by that commission as a social insurance scheme.  And this was confirmed by the author of the report, the redoubtable Sir Owen Woodhouse, now aged 93, in a report in the NZ Herald only weeks ago.

The five guiding principles enunciated by the Woodhouse Commission were:

• Community responsibility: that is, that New Zealand as a whole benefits from a comprehensive accident and injury scheme under which accident victims are properly supported and rehabilitated, including receiving meaningful compensation to see them through the period of debilitation and the whole community should contribute
• Comprehensive entitlement: that rehabilitation, support and compensation is available to all suffering injury by accident
• Complete rehabilitation: the aim is to see people returning to work and/or a meaningful life
• Real compensation: compensation is for the whole period of incapacity and income-related
• Administrative efficiency.

In relation to the cost of such a scheme, which at the time was internationally novel, the commission stated:

Even if the country were entirely free from current economic pressures, the money argument would weigh heavily upon an inquiry concerned, as this is, with systems of social insurance.

It has to be remembered, of course, that the motivation for setting up the Woodhouse Commission of Inquiry was because of the manifest inadequacy and unfairness of the systems then in place to deal with accidents and getting rehabilitation for victims of them.  The two principal means were either the Worker's Compensation Act, for people injured at work, or the law suit in tort of negligence.

The Commission noted that the benefits available under the Worker's Compensation Act were pitiful and that the chances of succeeding in a negligence claim where that was applicable were very small because of the defences available to defending parties and because of the notion of contributory negligence.

The Commission stated:

The time has clearly come for the common law action to yield to a more coherent and consistent remedy in the whole area of personal injury.  We recommend, therefore, that the court action based on fault should now be abolished in respect of all cases of personal injury, no matter how occurring.

And so ACC was based on removing the right to sue in favour of comprehensive and meaningful rehabilitation and compensation.

It is interesting to note the Commission's view on the role of private insurance companies in this type of scheme.  The Commission stated:

...such a comprehensive and compulsory scheme of social insurance could not reasonably be handed to private enterprise.

... the scheme is founded upon the principle of community responsibility.  Directly or indirectly everyone one must contribute to it, and clearly it should be handled through an agency of the government.

... the third reason [for favouring a government agency as opposed to insurance companies] relates to the cost of administration.  Over recent years an amount equal to 40% of the amounts actually paid out in benefits under the Worker's Compensation Act as being required by the insurance companies to cover their various expenses and leave some reasonable margin for profit.  The evidence is conclusive that the figure could be reduced to approximately 10% if the scheme were handled by a single independent authority...

The original architects of the scheme saw that for the scheme to work the risk needed to be spread as far and wide as possible so that the cost of it could be kept to a minimum to each person and that the support could be meaningful.

In the debate that has kicked off this year about ACC, it is interesting to see what I describe as the market fundamentalists now coming out and attacking the whole idea of ACC.  Foremost amongst these is the Business Round Table.  Their critique is based not on a community or social insurance model.  It is based on a selfish, self-centred, "what's best for me" model.  It is not about an efficient spread of risk making decent rehabilitation and compensation affordable for everyone; it is about letting the misfortunate suffer their misfortune.  It is a deeply anti-social approach.

In my view, the full funding model is applicable for an arrangement under which a portfolio of claims might be transferable to other parties, possibly other insurance companies.  Full funding means that the remaining value or tale of existing claims can be passed on.  Full funding is also applicable in a situation where the future liability on a particular claim can be capitalised, that is to say a lump sum can be paid out.  This is the American insurance model.  In the United States, accident claims against insurance companies or negligence actions in court lead to a lump sum award to meet the future cost of loss of earnings, medical costs and other costs on the claimant.

And so my fear is that full funding is the first, and really the most vital, step towards privatisation of ACC.

And yet, as even the Woodhouse Commission itself recognised, and as we all know from lived experience, private insurance companies are interested in those activities that will generate them a margin; they are not interested in the socially important aspects of a scheme such as ACC, such as proper rehabilitation and return to work.

This is not a denunciation of the private sector or even of the private insurance companies.  There is a market for private insurance that operates reasonably well at the moment.  But ACC was always set up as a unique arrangement.  It was about maximising the spread of risk of injury and accident to ensure efficient spread of risk and an effective sharing of the cost burden.

Indeed, the international consulting firm Price Waterhouse Coopers evaluated the scheme in 2008 and found it to be efficient and effective.  The Price Waterhouse Coopers report found that the ACC employer contribution rate as a proportion of wages is substantially lower than comparable Australian workers compensation schemes and that the overall cost of ACC is quite low even after taking into account differences in coverage compared to other jurisdictions.  The cost of managing claims was calculated at 8% of total expenditure compared to comparable Australian schemes with management costs of between 9 and 32%.  The report also noted that ACC pays a higher portion of total premiums directly to claimants.

But of course, there is more that can be done.  As Dave Feickert will describe later this evening, we still have a major problem with the incidence of workplace injury and fatality in New Zealand.  More needs to be done on accident and injury prevention.  ACC needs to play a key role in this.

And more can be done on rehabilitation.  From a union point of view, we need to keep the pressure on for return to work at the optimal time; there is a balance between getting people back to work so they can re-establish their usual social patterns and forcing people back to work when they are not fully recovered and fit for work.

And there will always be arguments at the margins about what ACC should cover and what it shouldn't.  It is clear from the Woodhouse Commission's report that it was never intended to cover and compensate people for every exigency and difficulty that life throws at us.  And in the early days of the scheme, there was much court action over whether pregnancies following failed hysterectomies constituted accidents covered by ACC.

Today, we get into the tricky areas of claims in relation to suicide and attempted suicide and support for victims of sexual abuse.

The aim must be to have a scheme, as its architects originally planned, that covers injuries and accidents for which the risk can be broadly spread.  It means a scheme that generates enough in levies that can sustain the claims made on it each year and have enough in reserve to meet costs in the extraordinary years.  And above all, it must be a system that offers the best hope for recovery and rehabilitation not only for the victims of injury and accident but for their families and communities in which they live.  Without ACC, the cost of picking up the pieces would be too great.

ENDS

For more information please contact Andrew Little on 027 551 3476 or EPMU communications advisor Neale Jones on 027 276 7609.