Our new funding policy and smoothing across the Accounts

Transcription

1 Our new funding policy and smoothing across the Accounts For the 2016/17 levy year we propose to: apply a new funding policy to calculate our 2016/17 levy rates. We also want to know what you think about smoothing the levy rates over each Account. Hon. Nikki Kaye, the Minister for ACC, has also asked us to consult on her behalf on: a proposed funding policy to apply from 2017/18 under the recently enacted Accident Compensation (Financial Responsibility and Transparency) Amendment Act. Below you ll find information explaining the funding policy, our proposed changes and the proposal from the Minister. From 1 April 2016 the residual levy will no longer be collected and therefore isn t included in our proposed levy rates for 2016/17. The removal of the residual levy will likely affect the Work levy you pay, but not the Motor Vehicle or Earners levies. You can find out more information on the residual levy in The residual levy document. Explaining the funding policy When calculating our levies each year we are required to use a funding policy. The funding policy is a guideline which sets out clear objectives for us to follow, such as maintaining levy stability and minimising the risk of over or underfunding any of our Accounts. Our funding policy requires us to target the level of funds compared to liabilities within a funding band. The band includes a buffer which helps us manage any unpredicted volatility in levies. For the 2015/16 levy year our funding policy midpoint was 117.5% for the Work Account, 115.5% for the Earners Account and 116% for the Motor Vehicle Account. Our proposed funding policy Working with Government to create a long-term funding policy Over the last few years we ve been working with the Government on developing an approach to increase the transparency of the levy setting process. This includes the Government giving clear guidance (through a funding policy) on how it wants to balance the need to collect levies that meet the lifetime cost of claims in a particular year, whilst maintaining a reasonable level of solvency and levy stability. This is expected to improve the alignment between what the ACC Board consults on and recommends, and what is subsequently decided on by Government. It will also be clearer what the longer term impact of levy decisions are. In May 2014 we recommended a new funding policy to Government who agreed that the new policy aligned to their longterm objectives for the Scheme. We ve also decided to use the funding policy we proposed in this year s levy consultation. Funding policy and smoothing across Accounts, 2016/17 Levy Consultation ACC of 5

2 Our proposed funding policy for 2016/17 Our proposed funding policy for 2016/17, on which our proposed levies are based, requires us to start by calculating the lifetime costs of all claims made during the levy year. We then consider the funding position of the Accounts and the target we re aiming for. The target mid-point for all Accounts is now 105%. If we over or underfund, we return or collect these funds over the next ten years previously this was between three and five years. This ensures that the projected levy path follows the underlying cost more closely than the previous funding policy and helps us better manage volatility. The graphs below show where the Accounts currently sit in relation to the proposed midpoint of 105%. Proposed Work Account funding path 1 113% 115% 115% 114% 114% 114% 113% 112% 112% 111% 111% 110% 109% 109% Proposed Earners Account funding path 1 123% 121% 118% 117% 116% 115% 114% 113% 112% 111% 111% Funding policy and smoothing across Accounts, 2016/17 Levy Consultation ACC of 5

3 Proposed Motor Vehicle Account funding path 1 102% 105% 105% 105% 105% 106% 106% 105% 105% 105% 105% 105% 105% Levy year ending 30 June We re able to propose reducing the levies across all Accounts while still collecting enough to cover the estimated claims that are likely to happen in the coming year. Our proposed 2016/17 funding policy (with a midpoint of 105%) means that we need to lower the levy to ensure we re not overfunded. However, we expect the levy rates across the Work, Earners and Motor Vehicle Accounts to slowly increase in future levy years due to rising healthcare costs. That s why we want to discuss the option of smoothing across the Accounts. Smoothing the levies The lower funding band and current funding position means that we can lower the levy. As mentioned above, over time levies are expected to slowly increase. Reaching our funding policy target will also increase the rates as there will no longer be any excess funds to return to levy payers. We want to know what you think about smoothing these rates. Keep in mind this isn t a formal proposal, but we want to understand whether this is an option you would like us to consider. To maintain lower rates for longer, we would need to decrease levy rates by a smaller amount. Instead of a levy reduction in 2016/17 followed by a levy increase in 2017/18, we could cut levies by a little less in 2016/17 and keep rates more stable over two or more years. Below you ll find an example of how this might look in the Earners Account. The rate used is just an example; we could smooth the rate over any chosen time period. Funding policy and smoothing across Accounts, 2016/17 Levy Consultation ACC of 5

4 Smoothing across the Earners Account Agreed levies Future levies Levy $ % 122% 118% 117% 116% 115% 114% 113% 112% 111% 110% 110% 109% 108% 108% % 80% 60% 40% 20% 0% Percent funded Earners Earners Levy Rate On the graph above, you ll see that decreasing the Earners levy by $0.03 rather than our proposed $0.05 means we could maintain the levy rate at $1.23 for two years before slowly increasing. The projected levy rates in later years would be around the same as those projected under our proposed rate for 2016/17. In comparison, the graph below shows our 2016/17 proposed Earners levy without smoothing applied. Agreed levies Future levies Levy $ % 121% 118% 117% 116% 115% 114% 113% 112% 111% 111% 110% 109% 109% 108% % 80% 60% 40% 20% 0% Percent funded Earners Earners Levy Rate Funding policy and smoothing across Accounts, 2016/17 Levy Consultation ACC of 5

5 Proposed Government funding policy for future levy consultations As part of this year s levy consultation we are also consulting on the Government s proposed funding policy on behalf of the Minister for ACC, Hon. Nikki Kaye. In September 2015 the Accident Compensation (Financial Responsibility and Transparency) Amendment Act 2015 was enacted. The aim of these amendments to the AC Act is to strengthen financial responsibility and improve the transparency of the levy setting process. Under the amendments the Government is responsible for setting the funding policy that we use when setting our levies each year. This will improve the continuity between levies consulted on by ACC and subsequently agreed upon by the Government. The new legislation requires the Government s funding policy to be consistent with the principles of financial responsibility which are now incorporated in the Accident Compensation Act These principles require levies to be set to meet the lifetime costs of claims each year that any deficit or surplus in the Accounts be corrected through appropriate adjustments to levies, and that large changes in levies are avoided. Although the Act has just been enacted, we ve decided to use the Government s funding policy when calculating our proposed rates for 2016/17. The Government s proposed funding policy follows the same key aspects as those highlighted in Our proposed funding policy : Accounts will have a funding solvency midpoint target of 105% levies will be based on new year costs with an adjustment to return or collect any surplus or deficit in the Accounts over the next ten years the annual average levy increase for any Account will not exceed 15%. The amendments to the Act also require the Minister for ACC to consult on the Government s proposed funding policy before it is put into practice or changed. The Government would like your feedback on whether you would like the funding policy to be applied through legislation from 2017/18 onwards. In particular, the Minister would like your views on the following points: Moving from the target midpoint to help keep levies stable To ensure that levies remain stable, we sometimes propose a move away from the target solvency midpoint. However, it s really important that we balance levy volatility with ensuring the Scheme can continue to meet its outstanding claims liability. The Government would like your feedback on what you think is a reasonable period to move away from the target solvency midpoint to help levies remain stable. The current proposal is ten years. Levy increases over time Over time levies are expected to slowly increase due to rising healthcare costs. Reaching our funding policy target will also increase the rates. Government would like to know whether you would prefer levies to increase over time, be smoothed over a few years (as explained above), or maintained at the same rate for longer and then have a larger increase in future years. Capping large levy increases As levy rates are likely to increase over time, it may be necessary to cap increases in levy rates from year to year. This helps ensure that New Zealanders aren t suddenly negatively affected by changing levy rates. The proposed funding policy includes capping the yearly increase in the average levy rate at 15%. Government would like your feedback on the following questions: Is it reasonable to cap increases from year to year? At what level should those increases be capped? Funding policy and smoothing across Accounts, 2016/17 Levy Consultation ACC of 5