NEW ZEALAND GAZETTE, No. 35 — 22 APRIL 2016

consultation on differential rates reflecting risk for light passenger vehicles took place between 14 December 2015 and 29 January 2016.

Principles of Financial Responsibility in Relation to the Levied Accounts

Section 166A of the Act requires the cost of all claims under the levied Accounts to be fully funded. This means adequate assets must be maintained to fund the costs of claims. To achieve full funding when setting levies, section 166A requires the Minister for ACC to have regard to the following principles:

• The levies derived for each levied Account should meet the lifetime costs of claims made during the levy year.
• If an Account has a deficit or surplus of funds to meet the costs of claims incurred in past periods, that surplus or deficit is to be corrected by setting levies at an appropriate level for subsequent years.
• Large changes in levies are to be avoided.

These objectives result in a trade-off between funding stability and levy stability. The Board’s funding policy (outlined below) specifies how these objectives are to be balanced.

As of 24 September 2015, the government has responsibility for the funding policy to which ACC must give effect when making levy recommendations (see section 166B of the Act). This funding policy must be consistent with, and explain how it is consistent with, the financial responsibility principles in section 166A. The 2016/17 levy consultation process started before this change took effect and, therefore, the Board’s funding policy applied.

The Board’s Funding Policy

The Board’s funding policy identifies the following requirements:

• Levies will be based on new year costs with an adjustment to return or collect any surplus or deficit in the Accounts.
• Accounts will aim to hold assets between 100% and 110% of reported liabilities (“funding band”) and target a funding ratio of 105% over a ten-year horizon.
• The annual average levy increase for the Motor Vehicle Account must not exceed 15% above the Labour Cost Index (LCI).

The Board’s funding policy is consistent with the principles in section 166A of the Act.

The levies recommended to the Minister for ACC by the Board for the Motor Vehicle Account for 2016/17, as well as those indicated for subsequent out-years, were consistent with the Board’s funding policy.

Assumptions Underlying the Levy Rate Recommendations for the Motor Vehicle Account

The 2016/17 levy rates consulted on and recommended by the Board to the Minister for ACC were determined based on the following:

• The claims experience continuing in line with trends as at 31 March 2015;
• Estimates of future investment returns given current and expected future market conditions as at 31 March 2015; and
• Risk-free interest rates developing as implied by the New Zealand Government bond yield curve at 31 March 2015.

See Appendix B for an explanation of these terms.

Conditions, and particularly economic conditions, underlying ACC’s assumptions are volatile. There has been significant movement in economic factors since the assumptions were set. Overall, the funding ratio for the Account is currently higher than was forecast at 31 March 2015. The expected and actual funding ratios are shown in Figure 1 below.

Figure 1: Motor Vehicle Account—expected and actual funding ratios

All else being equal, this higher funding ratio would be expected to reduce future levy requirements. However, the levy and funding ratio paths shown in Figure 2 below are based on the calculations used for levy consultation purposes. ACC will take all new information into account when calculating levy rates for the next levy consultation. The assumptions underlying the levy and funding ratio paths are reasonable.