2012/13 ACC Levies

Office of the Minister for ACC

CABINET ECONOMIC GROWTH AND INFRASTRUCTURE COMMITTEE

Proposal

This paper seeks Cabinet’s decisions on 2012/13 Accident Compensation Corporation (ACC) levy rates and related policy for the Work, Earners’, and Motor Vehicle Accounts.

Executive summary

The following table summarises: ACC’s current 2011/12 levy rates, ACC’s recommended levy rates, the Department of Labour’s (the Department) advice on levy rates, and my recommendations on levy rates for 2012/13. All rates in this paper are GST-exclusive unless specified.

	Work Account Average levy per $100 of liable earnings	Earners’ Account Levy per $100 of liable earnings (GST-inclusive)	Motor Vehicle Account Average levy per vehicle
Current 2011/12 Rate	$1.47	$2.04	$334.52
Department’s recommended rate	$1.15	$1.51	$334.52
Consultation and ACC recommended rate for 2012/13	$1.15	$1.70	$334.52
My proposed rate	$1.15	$1.70	$334.52

For the Work and Motor Vehicle Accounts, the levy rates I have proposed are those that were consulted on by ACC, and were recommended by both the Department and ACC.

For the Earners’ Account, the Department has recommended lower rates than ACC consulted on and recommended. My key reasons for following ACC’s recommended rates are that I am concerned by the recent volatility and continuing uncertainty in world financial markets and suggest that we should take a prudent and careful approach to fixing levy rates for 2012/13.

This paper also addresses changes to settings in a number of related areas that have been recommended by ACC and/or the Department, including:

Charging administration costs on the residual portion of levies;
Increasing the maximum and minimum liable earnings for the Work and Earners’ Accounts;
Capping the impact of classification unit changes on Work Account levies at +10% or 0.02 cents, whichever is the greater, or -25%;
Changes to a classification unit in the Work Account;
Creating a new classification unit in the Work Account;
Increasing the maximum liable earnings for the Workplace Safety Discount Programme;
Increasing the minimum liable earnings for entry to the No-Claims Discount programme;
Increasing the proportion of Motor Vehicle Account levy paid through the petrol levy as opposed to the licence fee levy;
Changes to the classifications of motor spirit that the petrol levy is charged on.

If levy rates or other settings are to be changed from the prior year, these must be set in regulation by 31 March 2012 for the Work and Earners’ Accounts, and 30 June 2012 for the Motor Vehicle Account. The Inland Revenue Department’s (IRD) processes require decisions on any changes to the Earners’ Account by early December 2011.

Background

ACC is a Crown Agency providing comprehensive, no-fault personal injury cover to all New Zealand residents and visitors to New Zealand. ACC coverage is managed under five separate Accounts. The source of funding and a general description of what these Accounts fund is listed below.

The Work Account is funded from levies on employers and self-employed and is used to meet the costs of entitlements for work-related personal injuries.
The Earners’ Account is funded from levies on earners through PAYE (or invoiced directly by ACC for self-employed people), and is used to meet the costs of entitlements for earners’ non-work injuries (that is, personal injuries other than work-related injuries, motor vehicle injuries, and treatment injuries).
The Motor Vehicle Account is financed from levies on motor vehicle owners and users and is used to meet the costs of entitlements for motor vehicle injuries.
The Non-Earners’ Account is funded from appropriation and is used to meet the costs of entitlements for non-earners’ personal injuries.
The Treatment Injury Account is funded from the Non-Earners’ and Earners’ Accounts and is used to meet the costs of entitlements for personal injury caused by treatment by, or at the direction of, a registered health practitioner.

The ACC levy setting process is as follows:

the ACC Board consults with levy payers,
the ACC Board makes recommendations to the Minister for ACC,
the Department provides the Minister with advice following an independent actuarial review,
the Minister considers the Board’s recommendations and presents his or her advice to Cabinet for decision,
the Cabinet decision is set in regulations.

Changes to levy rates must be set in regulation by 31 March 2012 for the Work and Earners’ Accounts. The IRD’s processes require decisions on any changes to the Earners’ Account by early December 2011. Regulations for the Motor Vehicle Account must be in place by 30 June 2012.

Principles underlying levy setting

The Accident Compensation Act 2001 (the AC Act) requires levies to be set so that each Account achieves full-funding, having regard to levy stability over time and forecast uncertainty.

The broad principles for levy setting for ACC include that:

the Scheme is sustainable in the long-term and is therefore adequately funded,
levies are relatively stable to allow businesses to plan with certainty,
there are incentives on employers and individuals to prevent injuries and support rehabilitation,
the principles of community and individual responsibility are appropriately balanced.

At a broad level, the Scheme is also premised on cost recovery, and over time levies should be responsive to changes in funding requirements to ensure fairness.

Comment

Levy rates

The following table summarises: ACC’s current 2011/12 levy rates, ACC’s recommended levy rates, the Department’s advice on levy rates, and my recommendations on levy rates for 2012/13. All rates in this paper are GST-exclusive unless specified.

	Work Account Average levy per $100 of liable earnings	Earners’ Account Levy per $100 of liable earnings (GST-inclusive)	Motor Vehicle Account Average levy per vehicle
Current 2011/12 Rate	$1.47	$2.04	$334.52
Department’s recommended rate	$1.15	$1.51	$334.52
Consultation and ACC recommended rate for 2012/13	$1.15	$1.70	$334.52
My proposed rate	$1.15	$1.70	$334.52

For the Work and Motor Vehicle Accounts, the levy rates I have proposed are those that were consulted on by ACC and were recommended by both the Department and ACC.

For the Earners’ Account, the Department considers that the levy could be reduced even further. The reason for this is that the Department considers that the target range for ACC’s new funding policy is too high.

Funding policy

The Department and ACC agree on the assumptions that go into the levy setting and on ACC’s current financial position. The difference in levies is due to a difference of opinion and legislative interpretation about the level at which the Accounts should be funded, as below:

The Department considers that the midpoint of ACC’s funding bands should be 100% using a 50% probability of sufficiency.
ACC considers that the midpoint of its funding bands should be between 115.5% and 117.5% using a 75% probability of sufficiency.

The difference between these two mid points is approximately 30% (depending on Account).

Using the Department’s proposed funding policy, the Earners’ Account is 108% funded. The Department therefore recommends removing the entire funding adjustment for the Earners’ Account and setting the levy to only cover the cost of claims for the upcoming year, expenses, and the residual amount.

While the Department’s recommended policy would mean that it would be possible to reduce levies for the Motor Vehicle Account, this Account is significantly underfunded, and the Department recommends not changing the Motor Vehicle Account levies in order to continue to build up reserves and to be sure that improvements in performance are sustainable.

The Department’s policy would also mean that Work Account levies could be reduced. However, there is an outstanding issue about whether the current funding method for post-1999 work-related gradual process, disease, or infection (WRGPDI) claims complies with the requirements of the AC Act. The Department recommends not reducing levies any further than ACC has recommended until this issue is resolved.

Previous decisions about ACC levies have concentrated on the path to returning to full-funding. Because of significant improvements in ACC’s performance and therefore its funding position, ACC’s levied Accounts are now approaching or have reached, full-funding. This means that the question of the appropriate target funding level will need to be addressed.

The funding targets proposed by ACC include two margins^[1] that cover not only the outstanding claims liability risks, but also risks relating to investment returns, first year costs, claims frequency and pricing assessment. When ACC calculates its liabilities, it does this at a 75% probability of sufficiency. This adds approximately 13% over and above the central estimate of liabilities. ACC then targets funding 15.5% to 17% above this. Together these margins add approximately 30% to the central estimate to cover the risks overall.

The key difference between the funding targets recommended by ACC and the funding targets recommended by the Department and the Treasury is whether the Accounts should aim to be fully-funded (i.e. sometimes over, and sometimes under, but approximately fully-funded) or whether the Accounts should aim to always be fully-funded (i.e. hold a buffer of funds so that the Accounts do not go below full-funding except in extreme situations).

This buffer would involve ACC holding an additional approximately $5 billion in levy payer funds. This would be built up over several years; the difference between the funding targets equates to approximately $800 million in levies across all Accounts in the 2012/13 year. However given the circumstances in the Motor Vehicle and Work Accounts discussed above, the Department only recommends additional levy reductions to those proposed by ACC in the Earners’ Account. The difference in the two recommended approaches to that account amounts to about $200 million in levies for 2012/13.

The graph below shows a higher and a lower targeted funding position, and how ACC’s funding level would vary around these points. It also shows that having a higher funding position does not affect the level of volatility or smoothing of ACC’s financial position, it simply means that ACC holds more funds.

Because of the improved financial position of ACC there is now an issue about what the medium term funding policy should be for ACC accounts which are fully solvent. This will be an on-going issue from now on. In the short term, recent volatility and continuing uncertainty in world financial markets suggest that we should take a prudent and careful approach to fixing levy rates for 2012/13.

I therefore recommend following ACC’s recommended levy rates, including the higher levy rate for the Earners’ Account.

Breakdown of current levies

The following charts show the breakdown of the levy for each Account compared with 2011/12 (based on the actual breakdown of the levy rather than what was projected when levies were set last year).

The most significant difference between the 2011/12 and 2012/13 levy rates for the Work Account is the overall reduction in rate, which has come from reducing the funding adjustment to zero and reducing the residual portion.

The key difference between 2011/12 and 2012/13 levy rates for the Earners’ Account is the overall reduction in rate, which has come from reducing the funding adjustment (this graph excludes GST).

There has been little change between 2011/12 and 2012/13 levy rates for the Motor Vehicle Account, with a small increase in claims costs reflecting inflation, a reduction in the residual portion, and an increase in the funding adjustment.

Other Policy Issues

Proportion of the levy apportioned to the Residual Amount

ACC has proposed collecting all of the administration and levy collection costs on the current portion of the levy because it considers that this is easier to explain to employers. The Department considers that the administration and levy collection costs for the residual portion should be charged on the residual portion because it is more equitable for the costs to be paid by the group who incur the costs.

This is a minor issue, because the administration and levy collection costs are only a small part of the levy. I propose that the administration and levy collection costs for the residual portion should be charged on the current portion.

Options for increasing the composite Motor Vehicle Levy for petrol powered vehicles: petrol levy or annual licence fee levy?

ACC consulted on, and recommends, no change to the petrol levy portion of the composite Motor Vehicle Account. The Department recommends increasing the petrol levy by $0.03 per litre, from $0.099 to $0.129.

The main benefits of charging the levy on the licence fee are that:

petrol is only a rough proxy for risk;
a relatively flat licence fee brings in an element of community responsibility;
a fuel-efficient vehicle is not necessarily safer, but it would pay less petrol levy, which is not fair to less fuel-efficient vehicles;
it avoids the possibility of a reduced levy intake due to a decrease in petrol consumption.

The main benefits of charging the levy on petrol are:

increasing affordability, particularly for those on low incomes (for whom the lumpy cost of licensing fees has a greater impact than the small variable cost of a petrol levy); Warrant of Fitness compliance is also associated with licence fee compliance and therefore there are implications for vehicle safety if licence fees are higher;
minimising cross-subsidisation of those who do not register their vehicles (because the petrol levy is unavoidable);
reducing the level of cross-subsidisation for owners of two or more vehicles who do not use more than one vehicle at a time;
allowing people, particularly those on fixed income such as retirees, to alter their behaviour to reduce their levy payment.

I propose leaving the motor spirit levy at the current rate because:

The Government’s Accident Compensation work programme includes exploring wider reform options in the Motor Vehicle Account, including contestability and compatibility with any introduction of compulsory third party insurance. Any shift to contestability in the Motor Vehicle Account would mean a greater proportion of the levy/premium would be paid in a lump sum, similar to the licence fee levy, rather than through the motor spirit levy.
One of the biggest misconceptions that the public has about the Motor Vehicle Account is that diesel vehicles pay more than petrol vehicles. This misunderstanding occurs because the licence fee levy for non-petrol powered vehicles is much higher than for petrol powered vehicles, and people do not consider the levy on petrol (currently $0.099 per litre). Increasing the motor spirit levy would exacerbate this situation. Any changes to the levy apportionment between petrol levy and licence fee levy should wait until the work on charging a levy on road user charges (as mentioned below) is completed.

The levy for diesel vehicles is paid entirely on the licence fee and is not affected by changes to the petrol levy. Work to introduce a levy for diesel vehicles based on distance travelled is a separate project being discussed with the Ministry of Transport.

Changes to the petrol levy

ACC is currently required to collect a levy on all classes of petrol as set out in the Customs and Excise Act 1996.

ACC consulted on changes to the fuels that the motor spirit (petrol) levy applies to. It was suggested that, although some of these classes of fuels are not currently imported into or produced in New Zealand (for example, biodiesel blended with motor spirit), if they were to be imported into or produced in New Zealand for use in a non-petrol powered motor vehicle or in a marine craft, there is a possibility that there could be an inequitable collection of the petrol levy on these blended fuels.

The Department of Labour has worked with the New Zealand Customs Service and concluded that because it is not possible to predict future developments in fuel technology, regulations cannot be made that would completely rule out the possibility of an inequitable collection of the petrol levy. Officials consider that there should be no changes to the current classifications of fuel that the petrol levy is charged on until more information is available. The Department of Labour in conjunction with Customs New Zealand will monitor whether any of these fuel varieties are imported, or produced.

Increasing the maximum liable earnings entry criteria for the Workplace Safety Discount Programme

The Workplace Safety Discount Programme is designed for employers with ten or fewer employees. The liable earnings criteria are a proxy for the number of staff (as ACC does not have records of the number of staff working for each employer, but it does have liable earnings information).

I agree with ACC’s recommendation to update the maximum liable earnings criteria from $499,000 to $519,000 to reflect average earnings.

Increase in maximum liable earnings

Due to indexation, the maximum weekly compensation entitlements for earners have increased in line with the increase in the Labour Cost Index (LCI).

So that people are not paying levies on income that is not taken into consideration when calculating weekly compensation, the maximum liable earnings that levies are paid on is based on the maximum weekly compensation.

In line with the increases to the maximum weekly compensation entitlements, the following maximum liable earnings should be applied:

to self-employed people under the Work and Earners’ Accounts, an increase from $110,018 to $111,669 for 2012/13;
to employees, Private Domestic Workers (PDWs), and earners under the Work Account (for calculating the current portion) and the Earners’ Account, an increase from $111,669 to $113,768 for 2012/13;
to employees and PDWs, for calculating the residual portion, an increase from $110,018 to $111,669 for 2012/13.

This would require a change to the levy regulations for the Work and Earners’ Accounts to specify these amounts.

Minimum liable earnings for self-employed

On 1 April 2011 the Minimum Wage Order 2011 increased the minimum wage to $13.00 per hour for all people except trainees and New Entrants.

In line with these changes, the minimum liable earnings for self-employed people should increase from $26,520 to $27,040 for all self-employed people.

This would require a change to the levy regulations for the Work and Earners’ Accounts to specify these amounts.

Classification unit changes in the Work Account

ACC has recommended that a new classification unit be added in order to provide a suitable classification for entities that do not fit well within the current definitions, as below.

Proposed classification unit number	Proposed classification unit name	Proposed levy risk group	Reason for introduction
2195	Horticultural contracting and labour supply services	010	To provide an appropriate classification for horticultural contracting separate from other contracting

ACC has recommended that an existing classification unit be altered in order to more appropriately reflect the current risk of marina operators, as below.

Classification unit number	Current classification unit name	Proposed new name	Reason for change
66230	Port and water transport terminal and marina operators	Port and water transport terminal operators	It is more appropriate to move ‘marina operations for recreational boating’ from CU66230 to CU93120

These changes would require amendments to the Accident Compensation (Work Account Levies) regulations. I support these changes as they will provide more accurate pricing to businesses.

Proposed changes to the Work Safety Management Practices Programme

ACC proposes enabling the Workplace Safety Management Practices programme to take account of other industry-based compliance audit results (i.e. cross crediting). ACC considers that this would reduce the barriers to participation and the compliance costs faced by employers.

I support this approach, and note that the legislation requires that any changes to audit tools would require my approval.

Capping in the Work Account

In the Work Account, ACC has proposed capping the changes for any levy payer resulting from movements in classification units to +10% or 2 cents, whichever is the greater, or -25% (in addition to the change in the average rate). If the calculated change in levies is outside this range then ACC spreads the cost difference over all other classification units. Last year capping was reduced from +/-25% to +/- 15% so that the effects of experience rating would be easier to see.

Capping helps reduce the impact of changes in levies on individual employers, and the ability to smooth rates is a potential advantage of ACC being a monopoly provider of workers’ compensation insurance. However, industry relativities are intended to signal high claims cost to employers, and so capping rates can reduce the effectiveness of these signals. In addition, the resulting smoothing required by capping results in a cross subsidy between levy payers, since smoothing prevents levies reflecting relative claim costs.

While capping distorts pricing signals I consider that a cap is beneficial, and support ACC’s proposal.

Minimum liable earnings for Experience rating

Experience rating regulations need to be updated to reflect updates to the minimum wage for the year from 1 April 2010 to 31 March 2011. Whether a business has liable earnings above the level of the minimum wage over the three-year experience period determines whether it is eligible for the no-claims discount programme or not.

Experience Period/Levy year	Minimum liable earnings for experience period
1 April 2008 – 31 March 2011 2012/13 levy year	1 April 2008 to 31 March 2009	$21,320
	1 April 2009 to 31 March 2010	$23,400
	1 April 2010 to 31 March 2011	$26,000

The change would require an amendment to the Accident Compensation (Experience Rating) regulations.

Consultation

Section 331 of the AC Act requires that ACC undertakes public consultation on proposed levy rates for each of its levied Accounts prior to recommending rates to the Minister for ACC.

ACC completed public consultation over 28 days from 19 July to 16 August 2011, and received the numbers of submissions shown below:

Account	Number of submissions
Work	28
Earners’	5
Motor Vehicle	18
TOTAL	51

A summary of the submissions is included in the attached Regulatory Impact Analysis.

The ACC Board provided its recommendations to me on 26 August 2011. These recommendations must be advertised and gazetted, and I have asked the Board to do this in line with my announcements of the 2012/13 levy rates.

ACC, the New Zealand Customs Service and the Treasury have been consulted on this paper; the Inland Revenue Department, NZ Transport Agency (NZTA), Department of the Prime Minister and Cabinet, Te Puni Kokiri and the Ministries of Social Development, Transport, Womens’ Affairs and Pacific Island Affairs were informed of this paper.

Financial implications

ACC’s proposed decreases in levy rates would have the following effect on the economy:

The proposed decrease in the Earners’ Account levy rate from $2.04 to $1.70 per $100 of liable earnings (including GST) would increase in-the-hand earnings for people earning under approximately $110,000 by 0.34%. This would leave an extra approximately $350 million in earners’ pockets compared with the 2011/12 year.
The proposed $0.32 decrease in the average Work Account levy from $1.47 to $1.15 per $100 of liable earnings (excluding GST) would leave an extra $278 million in businesses’ pockets compared with the 2011/12 year.

The Treasury has run the changes to the Earner’s Account through their tax models and believes that the proposed changes to levy rates have no discernable distributional effect.

Human rights

These proposals are consistent with the New Zealand Bill of Rights Act 1990 and the Human Rights Act 1993.

Legislative implications

For the Work and Earners’ Accounts, changes to levy rates and the introduction of experience rating are required to be set in Regulations by 31 March 2012.

The Inland Revenue Department’s processes require approved Earners’ Account rates by early December 2011 so that Payroll software developers can update, test, and distribute their systems updates.

Any changes to the Motor Vehicle Account are required to be set in regulations by 30 June 2012.

The NZTA and Customs require any proposed changes to Motor Vehicle Account levies by the end of March 2012.

Regulatory impact and business compliance cost statement

Quality of impact analysis of the 2011/12 levies

The Regulatory Impact Analysis (RIA) requirements apply to the proposal in this paper and a Regulatory Impact Statement (RIS) has been prepared and is attached.

The Regulatory Impact Analysis Team (RIAT) has reviewed the RIS prepared by the Department for Labour, and considers that the information and analysis summarised in the RIS meets the quality assurance criteria.

Consistency with the Government Statement on Regulation

I have considered the analysis and advice of my officials, as summarised in the attached Regulatory Impact Statement, and I am satisfied that, aside from the risks, uncertainties, and caveats already noted in this Cabinet paper, the regulatory proposals recommended in this paper:

are required in the public interest,
are consistent with our commitments in the Government statement “Better Regulation, Less Regulation”.

Gender implications

There are no gender implications for the changes to ACC levies and the related policy.

Disability perspective

The ACC levies and related policy have no implications for disabled people.

Publicity

The ACC Board will publish advertisements in the major daily newspapers and a notice in the Gazette advising the levy rates that they have recommended to me. ACC and NZTA will undertake a joint communications programme to advise levy payers of any changes to the Motor Vehicle Account.

Recommendations

It is recommended that Cabinet:

agree to set the following ACC levy rates for 2012/13;

Average Work Account levy Average levy per $100 of liable earnings	Earners’ Account levy Levy per $100 of liable earnings (GST-inclusive)
$1.15	$1.70

note that no changes are proposed to the average Motor Vehicle Account levy of $334.52;

agree to set the residual portions (which are included in the rates in recommendation 1 and 2) at the following rates:

Work Account Average residual portion per $100 of liable earnings	Earners’ Account Average residual portion per $100 of liable earnings	Motor Vehicle Account Average residual portion per vehicle
$0.31	$0.04	$77.07

agree to cap the changes in levies resulting from changes in classification units at +10% or 2 cents, whichever is the greater, or -25% (in addition to the change in the average rate);

agree to increase the maximum liable earnings in response to indexed increases to maximum weekly compensation payments:

for self-employed people under the Work and Earners’ Accounts, an increase from $110,018 to $111,669 for 2012/13;
for employees, private domestic workers, and earners under the Work Account (for calculating the current portion) and the Earners’ Account, an increase from $111,669 to $113,768 for 2012/13;
for employees and private domestic workers, for calculating the residual portion, an increase from $110,018 to $111,669 for 2012/13;

agree that, in response to increases in minimum weekly compensation, the minimum liable earnings of self-employed workers increase from $26,520 to $27,040;

agree to increase the maximum liable earnings entry criteria for the Workplace Safety Discount Programme from $499,000 to $519,000;

agree to create the following classification unit in the Work Account to provide a suitable classification for existing levy payers that do not fit well within the current definitions, as below;

Proposed classification unit number	Proposed classification unit name	Proposed levy risk group
2195	Horticultural contracting and labour supply services	010

agree to change the following classification unit in the Work Account to more appropriately reflect the current risk of marina operators, as below;

Classification unit number	Current classification unit name	Proposed new name
66230	Port and water transport terminal and marina operators	Port and water transport terminal operators

agree to update the Accident Compensation (Experience Rating) Regulations 2011 to reflect updates to the minimum wage as follows:

Experience Period/Levy year	Minimum liable earnings for experience period
1 April 2008 – 31 March 2011 2012/13 levy year	1 April 2008 to 31 March 2009	$21,320
	1 April 2009 to 31 March 2010	$23,400
	1 April 2010 to 31 March 2011	$26,000

invite the Minister for ACC to announce these decisions and to release this paper in the week of 10 October 2011;

invite the Minister for ACC to issue drafting instructions to Parliamentary Counsel to draft the proposed regulations required to set ACC levies, and to make the other amendments necessary to implement the decisions in the recommendations above.

Hon Dr Nick Smith

Minister for ACC

...... / ...... / ......

Footnote

^[1] Under the International Financial Reporting Standards ACC must include a risk margin in its outstanding claim liability provision. ACC has chosen a risk margin that provides a 75% probability that there will be sufficient funds to pay for the claims. International reporting standards require this additional risk margin due to the inherent ongoing volatility of insurance. ACC considers it prudent to fully-fund this risk margin.

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