How historically low interest rates are impacting our balance sheet
Globally, interest rates have fallen to historic lows, but this doesn't affect our ability to care for Kiwis today.
Globally, interest rates have fallen to historic lows. Insurance companies and pension funds internationally are feeling the impact. Many of these organisations are facing deficits, ACC included.
No impact on our ability to support Kiwis
The deficit shouldn’t be mistaken for a cash loss, or a reflection of what the organisation has spent and received in revenue during the year. Instead, it's an accounting valuation of our treatment, rehabilitation and compensation costs far into the future.
For us, these costs stretch out beyond this century, all the way to 2119.
Future interest rates are hard to predict; but what is certain is that we have enough funds today to support those who need our care.
When interest rates fall, our liability rises
We fund the cost of treating people’s injuries through levies and our investment fund. We plan for today and decades into the future so that our clients have the support they need for as long as they need it.
Some of these costs won’t be paid for many years, for example, someone who has experienced a serious injury may need care for the rest of their lives. Rather than collecting all the money we need today from levy payers, we also invest to generate returns to pay for future costs.
Our investment fund has historically performed well. It has been expertly managed by our investments team to generate the best returns available from the market, reducing the levies that we would otherwise need to charge. We have investments totalling more than $40 billion.
Interest rates are beyond our control
Many global insurance companies and pension funds with long-term liabilities that pay out costs many years into the future have been similarly affected.
Because the outstanding claims liability is very long-term, it's highly sensitive to external economic factors such as changes to interest rates.
What’s the bottom line impact?
We did not – and could not – have predicted the sharp decline in interest rates or fully hedge against the movement.
Our investments are growing, but despite impressive performance from our investments team, this growth will not be enough to offset the substantial impact of the fall in interest rates. Earlier this year, we published our Q3 2018/19 financial results, reporting a $4.3 billion deficit. This is almost entirely due to interest rates falling to historical lows.
This has nothing to do with our ability to pay claims today, which remains sound. But we must estimate our treatment, rehabilitation and compensation costs decades into the future, and it’s the valuation of those costs that gets impacted by interest rate movements.
In future years, if interest rates were to increase this could result in a surplus.
We will be reporting our full year 2018/19 financial results later this month.