Strong investments performance reduces interest rate impact
ACC’s strong investment returns have lessened the impact of substantial falls in interest rates on our balance sheet in 2018/2019.
In the last financial year, our investment fund delivered a 12.97% return, substantially outperforming comparable funds. This added $5.1 billion to our assets and increased our investments to $43.8 billion.
Over the same period, we recorded a $570 million cash operating surplus, which we invested back into the Scheme.
However, this strong performance was not enough to offset the impact falling interest rates had on our balance sheet, something entirely outside of our control. This resulted in us reporting a deficit of $8.7 billion for the year ending 30 June 2019.
Importantly, this is not a cash loss. Neither does it have anything to do with our ability to pay for injury treatment, rehabilitation and compensation costs today.
Instead, the impact this has on our balance sheet relates to the amount of money we have invested today, relative to today’s value of the estimated cost of treating injuries decades into the future – which on average won’t be paid for another 20 years.
Predicting the future
A client with a broken arm or sprained ankle may only need our support for a few weeks or months. However, someone with a broken back or a traumatic brain injury could need our support for a lifetime. For this reason, when we forecast the costs involved in looking after these clients, we take a long-term view that stretches out over the next 100 years.
We predict that the lifetime costs of treating all our existing clients will be around $90 billion. Some of these costs won’t be paid for many years. For this reason, we invest levy revenue to generate returns to pay for the future costs of claims already on our books.
At the start of the financial year, the value of our investment fund was $40 billion. Based on interest rates at the time, this was close to covering the $90 billion costs we expect to pay over the next 100 years.
By the end of the financial year, we had successfully grown the fund to $44 billion.
However, over the same period, the fall in interest rates reduced the returns we expect to achieve from our investment fund over the next 100 years. This creates a shortfall in funds that need to be put aside today to meet future costs – around $9 billion more.
Although we have a gap to close, we do have many years over which to close it. One way will be to earn healthy investment returns, which we have a solid track record of doing. Another way would be interest rates going up – this seems unlikely in the near future, but a timeframe of the next 100 years is a different story.
Interest rates are outside of our control
The size and scale of the deficit were not something we could predict, prevent or fully hedge against. Interest rates have fallen to unprecedented lows and the sustained low rates are impacting the balance sheets of many global insurance companies and pension funds that invest in bonds and have long-term liabilities such as ACC.
What this means for levies
It’s too early to say what implications the deficit will have for when levies are reviewed again next year. This will be determined by conditions at that time including interest rates, the volume and cost of injury claims, and any changes to the Government’s funding policy for ACC.
Claim numbers exceeded two million for first time
During the 2018/19 financial year we received a record two million claims, including support for those affected by the Christchurch terror attacks on 15 March. Over the year, weekly compensation claims rose by 5.1%, while sexual violence claims rose by 25%. And overall, the cost of treatment and rehabilitation services increased 7.5%.
Improving the support we provide customers
During the year we delivered a range of initiatives to make it easier for customers to engage with ACC and access our services.
This included new systems to lodge and manage claims, an advanced data analysis, and a digital interface for business customers called MyACC for Business and a pilot for clients called MyACC. We also have a new nationwide case management approach that focuses on the specific – and often changing – needs of an individual client.
The investment we’re making in these areas is all about ensuring we make ACC as efficient and effective as possible – as well as meeting the needs of New Zealanders.
We also increased our investment in injury prevention programmes – from $69 million to $75 million – and strong partnerships allowed us to reach more than 750,000 New Zealanders with our injury prevention messages. For every dollar we invested, the future cost of injury claims reduced by $1.81 – the best return yet.
We also helped 55,000 injured clients return to work within 10 weeks, up from 52,000 in 2018.
For more information on our annual results you can read our full 2018/19 Annual Report.