Rod Oram on ACC

The left-wing bloggers appear to be very excited about Rod Oram’s interpretation of ACC’s performance. He is extremely critical of National’s understanding of the ACC accounts. I do agree with him that the current increase in ACC liabilities is a consequence of accounting for the long-term liabilities of ACC in a poor fiscal environment. This statement below is true:

“Liabilities: They are indeed $21.875b according to the latest report from PricewaterhouseCoopers, ACC’s actuaries. And they will have risen by $9.2b in the three financial years ending this June.

“But these liabilities stretch out a maximum of 40 years. And they are highly influenced by changes in economic conditions, investment returns, discount rates, accounting standards and actuarial assumptions.”

But this makes dangerous assumptions

“Some of these adverse factors will turn positive in due course. If ACC massively hiked premiums now to cover paper liabilities, it would have to offer massive refunds when the liabilities failed to eventuate. Instead, it manages prudently by smoothing such swings over the medium term.

“”

Oram assumes that some of these factors (he implies most of them) will resolve themselves. His reasoning is suspect – simply because the rate of increase in liabilities has been fairly constant over the past three years. This implies a deep-seated structural problem. 2005-6, for instance, was a boom year in which investments made massive gains, and yet ACC still increased its liabilities by $2.6 billion. Is Oram truly trying to suggest that these were merely accounting adjustments? In that case, we may as well ignore all ACC accounting reports because they are utterly meaningless.

Come to think of it, exactly why are we trying to account for all long term liabilities? Does any insurance company besides ACC actually do this?

“When Labour took office in 1999, it decided to be prudent. It set the goal of achieving full funding for all liabilities by 2014, and beefed up ACC’s finances to set it on that path. From 1999 to 2008, ACC had improved from 64% under-funded to 45%.”

No, Rod. As far as I can tell, ACC are alone in their quest for fully funding long-term liabilities. I think this should not come under the category of prudent at all. Wrongheaded makes more sense. Most insurance companies do make provision for long-term liabilities. Only they don’t normally try to calculate 40 years worth.

So Nick Smith is not being alarmist, he is just using the same set of assumptions that the slightly insane accountants at PriceWaterhouseCoopers are using. So he is correct in saying that, to achieve this odd goal of having all your long-term liabilities funded, we will need to increase the ACC levies from the inordinately large amount they are now, to something truly horrifying. Oram, of course considers ACC rates to be “a bargain”.

“And they are bargains by international comparison. According to Pricewaterhouse-Coopers’ mammoth study of ACC last year, the average levy here was 94 cents per $100 of payroll in 2006-07 while the average Australian rate was $1.73, ranging from a low of $1.18 in Queensland to a high of $3.14 in South Australia.”

Not quite. Oram overlooks the fact that Australia has considerably more heavy industry than New Zealand (which is why South Australia has such a high average rate) and workmen are compensated at 100% of their salary for the first 26 weeks of their injury, instead of 80% (it then drops to 75% in Australia, but injuries needing more than six months rehabilitation are rare). When National allowed competition into workplace insurance the rates offered by private companies were substantially less than ACC for the same cover.

As I have said in a previous post. ACC’s blow-out of liabilities is much more likely, overall, to be an extension of their overly lax entitlements. Oram decries National’s desire to wind these back:

“The new National government sharply criticises these increased entitlements. It is threatening to roll them back. Yet, of the $9.2b increase to $22b in ACC’s liabilities for the three years to this June, only $595m came from cabinet-approved rate increases and new programmes plus $205m from court-imposed rulings and government legislative changes to expand the scheme’s coverage.”

Again, Oram misses the point. I mean, apart from the obvious one that $595 million should never be preceded by the word “only”. The other missed point being that the $595 million in question is current expenditure. Some of that expenditure produces yet more long-term liability. Therefore, some of the overly over-calculated, long term liability is a direct result of Labour’s changes to entitlements. There is no such thing as a free lunch. And just to emphasise the Oram does not grasp this, these are his comments on cost control:

“Costs: The comments of Key and Smith might give you the impression that ACC has poor cost control. In fact, PWC’s analysis shows ACC’s work account claims management and administration costs were 19.7% of services against the Australian average of 25.2%. ”

Personally, I think administration costs of 19.7% are pathetic. The health insurance industry average is 12.4%. But the real costs that need control are the new entitlements. These are not free. These are paid for by taxpayers. And these are the costs that National is talking about. The almost lackadaisical processing of claims so that ” I was walking down the stairs and noticed my knee was painful”, is an acceptable claim, the culture of entitlement that leads ACC to fund wheelchairs for people with minor fractures of the foot and sprained ankles. The wanton welfarism that makes “stress” a workplace injury. These are the things that are pushing up ACC’s short- and long-term costs.

Rod Oram may think that ACC’s problems are just accounting artifacts and Labour’s good intentions. The sad fact is that ACC has all the symptoms of a monopoly organisation – fat, sluggish, bloated, poor cost control, ballooning liabilities and complete lack of vision. Only healthy competition and a sharp knife will help.

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