NEW ZEALAND GAZETTE, No. 22 — 2 MARCH 2017

These principles provide guidance on how to balance the trade-off between funding stability and levy stability.

The Government’s Funding Policy

The funding policy issued by the Minister for ACC on 10 May 2016 (outlined below) specifies how ACC is to balance these principles when recommending levies for each levied Account. ACC must recommend levies for each levied Account consistent with the funding policy.

The funding policy requires that:

• Levy rates must be based on the estimated lifetime costs of claims expected to occur during the levy period (new-year claim costs).
• Accounts will aim to hold assets between 100% and 110% of the outstanding claims liability, with a midpoint funding ratio target of 105%.
• A funding adjustment must be included that takes each Account’s funding position to the 105% target smoothly over a ten-year horizon.
• Any increase to the levy rates for each Account must not exceed 15% (in addition to the Labour Cost Index (LCI) for the Motor Vehicle Account).

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

Variations in claims and economic experience are expected for a scheme such as ACC. The ten-year horizon allows for a gradual return of an Account’s funding ratio towards the target and is expected to result in relatively small ongoing changes in levy rates. A shorter horizon would result in a more rapid return to the target funding ratio, but also larger changes in levy rates.

Levy rates are recommended and set every two years. The effect of this is to reset the funding horizon every two years. All other things being equal, this will mean that an Account’s funding ratio will approach the target, but never fully arrive at it. As the funding ratio approaches the target, funding adjustments will decrease and levy rates will more closely reflect new-year claim costs.

Another way to consider the funding policy is that it determines both how quickly the funding ratio approaches the funding target and the levy rate approaches new year claim costs. Any deviation from the funding policy changes the expected trajectory towards these targets.

In practice, experience will not exactly match what was assumed when recommending levy rates, and therefore levies are expected to vary around the best estimate forecasts shown in this report.

The levies recommended to the Minister for ACC by the Board for 2017/19, as well as those indicated for subsequent out-years, for both the Work Account and the Earners’ Account, were consistent with the funding policy.

Assumptions Underlying the Projections for the Work and Earners’ Accounts

Projections in this report are based on the assumptions underlying the 2017/19 levy rate recommendations made by ACC, but with prescribed rather than recommended levy rates where these differ.

The 2017/19 levy rates consulted on and recommended by the Board to the Minister for ACC were determined based on the following:

• claims experience trends up to 31 March 2016. Increases in costs, compared to the previous consultation, have been driven by a higher than expected number of weekly compensation and medical claims, and claims remaining active longer than previously projected. These trends have been reflected by allowing for:
  • an increase in projected claim volumes particularly for claims receiving weekly compensation which, in addition to population growth, are assumed to continue increasing at around 2% per annum over the next three years before flattening off. This assumed increase is lower than recent claims volume growth of around 6%;
  • a small increase in the projected duration of weekly compensation claims. The reflected increase is less than recent experience implies; and
  • superimposed inflation estimated at 2–5% for various types of medical treatment and social rehabilitation;
• estimates of future investment returns given current and expected future market conditions as at 31 March 2016; and
• risk-free interest rates as implied by the New Zealand Government bond yield curve derived as at 30 April

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