Author: Tyler Bond

KiwiSaver Market Review – 2022

Posted on by Tyler Bond

Executive Summary

Introduction and contents

We are pleased to present our report into the KiwiSaver market as it stands in 2022.

Our report begins with an assessment of the KiwiSaver Universe. In this section, we look at the overall statistics of the market and draw conclusions on the direction KiwiSaver as a whole is taking. We then delve into Assets and Membership in more detail, uncovering the largest providers and those which are growing the fastest.

In our section on Fees and Expenses, we examine costs within the system. Next, Performance is examined (on an after-fee basis, since this is the result that is most important to members). Finally, we analyse Competitiveness. Is KiwiSaver an oligopoly or is it relatively competitive?

In the appendices, we include individual KiwiSaver Provider Profiles and further information on Investment Returns and Asset Allocation.

Key conclusions

The KiwiSaver market underwent dramatic change this year. The reallocation of default members saw several providers make significant moves up or down the league tables. Member engagement appears to be improving too, with the number of default members falling at the fastest pace on record.

The following table summarises key statistics of the system:

KiwiSaver membership has reached 3.17 million, up about 450,000 from five years ago. Over the same period assets have more than doubled from $40.8 billion to $89.8 billion. While fees and expenses have also increased – $229 per member last year, compared to $140 in 2017 – the average expense rate has fallen 0.16 percentage points to 0.84%. More than half of this reduction came in the last year alone. The average member balance is $28,300, up from $15,000 five years ago. However, demographic studies have shown that big disparities exist between males and females.

Turning to the analysis in the body of this report, we see that the KiwiSaver market remains skewed with just three companies (ANZ, ASB and Westpac) accounting for half of all members. However, several smaller providers have shown that they are able to carve out success stories by focusing on particular niches, be it socially responsible investing, lower fees, member engagement and advice, or strong investment performance. Overall, competitiveness measures continue to improve.

Finally, corporate activity abounds. The Aurora KiwiSaver Scheme launched this year, while the Aon KiwiSaver Scheme was purchased by Fisher Funds. Additionally, after balance date, Fisher Funds announced the purchase of Kiwi Wealth and the Kernel Wealth KiwiSaver Scheme launched.

Authors

For further information, please contact:

Ben Trollip, FNZSA, FIAA
+64-9-300-7315
Ben.Trollip@mjw.co.nz		 Tyler Bond
+64-9-300-7156
Tyler.Bond@mjw.co.nz

The authors wish to acknowledge the work of David Chaplin, of Investment News NZ, who has for many years maintained a database on the KiwiSaver marketplace. This was instrumental in backfilling prior years for this analysis.

Use of this report

The contents of this document may be reproduced, provided Melville Jessup Weaver is acknowledged as the source.

Melville Jessup Weaver has taken every care in preparing this report. However, we are not able to guarantee the accuracy of the information contained within and strongly recommend that appropriate professional advice be obtained before any investment activity is undertaken.

Data has been sourced from KiwiSaver providers’ annual reports, financial statements, and other public sources. Investment News NZ’s database has been used for historical figures. Some figures have been rounded. Data has been aggregated at the provider level and in some cases does not match industry statistics. However, the differences are not significant. While quality control checks have been performed, Melville Jessup Weaver is unable to certify the accuracy of the analysis presented in this report. Melville Jessup Weaver is not liable for any action taken as a result of this report.

This document may be updated when information is made available after publication. For the latest version, please visit the library section of our website.

About Melville Jessup Weaver

Melville Jessup Weaver is a New Zealand firm of consulting actuaries. The areas in which we provide advice include investments, superannuation, employee benefits, life insurance, general insurance, health insurance, and accident insurance. The firm, established in 1992, has offices in Auckland and Wellington.

The firm is an alliance partner of WTW, a leading global professional services company that helps organisations improve performance through effective people, risk, and financial management.

Our investment consulting services include:

  • Establishing robust investment governance structures.
  • Setting investment objectives and determining long-term investment strategies.
  • Providing quantitative and qualitative analysis of investment performance.
  • Performance monitoring against investment objectives and competitors.
  • Investment manager research and selection.

As independent advisors, we consult with institutional investors, helping them achieve superior investment results, manage risk, and demonstrate value for money for their clients.

Further information can be found on our website: https://mjw.co.nz/

KiwiSaver Universe

Assets

We begin with analysis of the entire KiwiSaver universe. This “top-down” section looks at the KiwiSaver system as a whole and the trends over time. Our first chart shows the total assets under management as at 31 March in each of the last 15 years.

Assets in KiwiSaver have grown to about $90 billion as at 31 March 2022. While a lower rate of growth (10%) compared with last year’s (32%), this is an impressive result given the lower returns from financial markets over the period: the average balanced fund returned about 2% before tax in the year to March (see Appendix B).

In the following chart, we show the rate of growth in recent years in percentage terms.

Members

The following chart shows members in KiwiSaver (left hand side) and how this translates as a proportion of the New Zealand population (right hand side).

The number of members continues to grow, and in recent years has approximated a linear trend. The change over the last year was a gain of 77,000 members, as shown in the following chart.

Unlike the similar asset growth chart, this chart is unaffected by changes in the value of investments, instead correlating more closely with people entering the workforce. Both 2021 and 2022 have been below the level of previous years, perhaps due to New Zealand’s borders being closed for much of those periods.

Average member balance

Like total assets in the system, the average member balance continues to rise. As of 31 March 2022, the average KiwiSaver member had $28,300 in their account.

This has not been without volatility, of course. Our study of KiwiSaver demographics found the average balance as at 31 December 2021 – a mere three months earlier than this report – was $29,000. That is, despite ongoing contributions, the average balance had gone backwards 2.5% in the first three months of calendar year 2022.

Financial markets have continued to tumble since 31 March 2022, so it remains to be seen whether the figures charted above can continue to rise.

 

 

Contribution rates

The following chart shows the contribution ratio. That is, the proportion of members who made some contribution over the financial year.

While the contribution ratio has climbed somewhat over the last decade, there remains a high proportion not contributing on a regular basis (about 37%). Moreover, captured above would be those members just making a single contribution of $1,042.86 each year to qualify for the Government contribution of $521.43.

Additionally, as indicated by the relatively low average member balance, it is likely that the minimum contribution rate of 3% is often selected (and that many members are taking advantage of the first home withdrawal option or have taken savings suspensions).

Employers match the first 3% of an employee’s contributions, or between 1.8% and 2.7% after ESCT. For someone earning the average salary, the after tax employer contribution rate is 2.1% and the Government contribution works out to be about 0.7%.

In aggregate, then, the contribution rate for KiwiSaver equates to perhaps 5% to 6% after tax for many New Zealanders. In contrast, the superannuation contribution rate in Australia is currently 8.9% (after tax), set to rise to 10.2% by 2025.

Default members

The next chart shows the breakdown of membership between “default” members and “active” members. The former group has not made any active decision and are therefore invested in a default fund through a default provider.

The number of default members fell from 356,000 to 298,000 over the year, the biggest reduction on record. This may reflect campaigns by the outgoing default providers to contact and convert their default members to active members.

As at 31 March 2022, less than 10% of members were classified as default. This is down from almost one in four in 2011.

Default providers

From 1 December 2021, the default provider cohort changed, as shown in the following table.

The following charts show how dramatic the change was. Large providers (such as AMP and ASB) lost default provider status, while the relatively small Simplicity and SuperLife were appointed. This means that the default provider cohort is now a minority of the assets in the system.

Default providers now account for $28.5 billion. However, not all the default providers’ assets relate to default members. The following charts show that the amount in default funds is much smaller. (Note that both charts are as at 31 March 2022.)

It is interesting that there are 300,000 members in default funds, but only 298,000 default members. That is, some 2,000 members appear to have actively opted into these low cost balanced funds.

Assets

The following table shows each provider’s assets and asset growth over the last year, ranked. The top five in each category are shown as bold text, the top two are shaded.

1 ANZ, OneAnswer and ANZ Default.

2 Fisher Funds, Fisher Funds Two and, in 2022, Aon.

3 Craigs and QuayStreet.

This year, the ANZ KiwiSaver Scheme overtook ASB to become the single largest scheme. It grew almost $1 billion over the year, although this was partially offset by losses in the ANZ Default KiwiSaver Scheme. Overall, ANZ added $586 million to reach $18.5 billion across its three schemes.

In terms of asset growth, Milford stands out with a gain of $1.5 billion. It moved up two spots in the rankings, trading places with Fisher Funds.

In aggregate, Fisher Funds accounts for $7.7 billion, having taken over the Aon KiwiSaver Scheme which added about $760 million to its total. In August 2022, it was announced that Fisher Funds would purchase Kiwi Wealth. The addition of this scheme will almost double Fisher Funds’ KiwiSaver assets, bringing it into line with the ASB and ANZ schemes.

Strong growth was also seen by providers retaining or gaining default status. BNZ, Booster, Kiwi Wealth, and Simplicity each saw assets rise $840-990 million. SuperLife and Westpac lagged a bit with increases of $550 million and $740 million respectively. However, in the case of SuperLife, this represented a significant 45% growth in its asset base.

The percentage growth figures are skewed towards smaller providers coming off low bases. The one new entrant this year, Aurora, hit almost $50 million from a standing start – an impressive result. (The previous best effort was Juno which had reached $34 million by its first reporting date.)

Growth in assets under management

The following chart shows the ten providers with the highest growth in the last five years. The black diamonds give the growth rates measured on the right-hand side.

The largest providers – ANZ, ASB, and Westpac – have seen the greatest growth in assets, each at a rate of around 15% per annum. By contrast, Milford has added around $4 billion but at a more considerable 40% per annum. Generate and Simplicity have similarly high growth rates of 53% and 90% per annum respectively.

Other default providers – Kiwi Wealth, BNZ, Booster – also feature in the top ten, although SuperLife missed out (it was 12th, behind AMP).

Fisher Funds rounds out the top ten with a gain of $2.4 billion in its primary KiwiSaver scheme over the five year period. (In addition, the Fisher Funds Two Scheme added $1.1 billion.)

Membership

The following table shows each provider’s members and membership growth over the last year, ranked. The top five in each category are shown as bold text, the top two are shaded.

1 ANZ, OneAnswer and ANZ Default.

2 Fisher Funds, Fisher Funds Two and, in 2022, Aon.

3 Craigs and QuayStreet.

4 Net change is the change in the total membership figure year on year. That is, it comprises joining members, less exiting members.

Unsurprisingly, the biggest gains came from the six default providers. These six saw their membership numbers rise by between 35,600 (Westpac) and 54,200 (Simplicity). SuperLife added 41,400 members, more than doubling its membership.

The outgoing default schemes saw the biggest drops. However, Fisher Funds’ acquisition of the Aon KiwiSaver Scheme gave it 19,000 members – partially offsetting the loss of 35,900 members from the Fisher Funds Two KiwiSaver Scheme.

Ranked seventh and eighth, Milford and Generate added 22,000 and 15,700 members respectively. Next was Juno with 5,100 more members; a growth rate of 37%.

 Membership growth

The following chart shows the ten providers with the highest growth in the last five years. The black diamonds give the growth rates.[1]

All six default providers are in the top ten – no doubt helped by the redistribution of members in late 2021. Of the six, Simplicity stands out with a growth rate of 96% per annum (Simplicity launched in 2016 and as of 31 March 2017, when this calculation begins, it had only 4,251 members).

Westpac and ANZ feature in the top ten, possibly due to being large banks. However, both have growth rates of only about 2% per annum.

Generate and Milford are notable success stories outside of the default (or previously default) providers, adding 84,000 and 52,000 members respectively. Juno, too, features with a gain of 19,000 members, after launching in August 2018.

Notable funds missing from the top ten were Fisher Funds (11th), NZ Funds (12th) and Pathfinder (13th).

Membership profile

The following charts show the size of the average member’s account and the contribution ratio. We show the top ten and bottom five providers for each.

KiwiWRAP stands out, although at just under 200 members it is one of the smaller providers. Default providers tend to have smaller average member balances. Indeed, the average balance of members in the default funds is even lower – around $8,500.

There is some overlap of the providers with high contribution ratios and those with the high average member balances – especially for restricted schemes (e.g. Maritime, Supereasy). This perhaps reflects good engagement with the segment of the population that these providers target.

[1] Juno has existed for less than five years and therefore there is no growth rate charted.

 Fees and Expenses

Introduction

In this section, we have gathered fees and expenses from financial statements (but excluded brokerage, which is not always disclosed and, by market convention, is usually omitted in these discussions).

Caution needs to be applied here because the fees disclosed in the financial statements may not tell the full story. For example, there may be fees implicit within the investment products in use. There may also be commission or fee-rebating arrangements.

Overall, because brokerage is excluded and some providers do not disclose fees in the underlying investment vehicles, the figures in this section at least partially understate the overall costs in the KiwiSaver system. Investors should consult Product Disclosure Statements and Fund Updates for detail on specific products or providers.

Total fees and expenses

We begin by showing the progression in total fees and expenses over time.

Since a large component of fees is usually determined by a rate applied to a member’s balance, these figures rise over time in line with the assets in the system.

The total fees and expenses in the KiwiSaver system passed $700 million this year.

Fees and expenses per member

Dividing the total fees and expenses by the average number of members gives us the average per member.

Note that where membership has changed significantly over the year this calculation can be distorted – especially when the change did not occur evenly over the year. This is potentially an issue this year because there was a large reallocation of default members.

This measure tracks upward over time as members’ balances have grown. In 2022, the average member paid $229 in fees and expenses.

It is interesting to note the difference between the default and non-default providers. The default providers have, on average, $157 in fees and expenses per member, while non-default providers are $270. (Note that not all members within a default provider’s scheme are default members.)

Fee and expense rates

We next move to considering fees and expenses as a percentage of assets. This is the typical way that fees are expressed. The following chart shows how this has changed over time.

Again, because the percentage is calculated by dividing total fees and expenses by average assets, there is a degree of distortion where assets have changed significantly throughout the year.

When we consider all providers in aggregate, there has been a significant downward trend over time. In 2009, the average fee and expense rate was 1.56%. Today it is 0.84%.

Default providers are even lower on average – just 0.68% in 2022.

Performance

Due to the large amount of different investment funds across many providers, the analysis has been limited to largest sixteen providers. Between them, these providers accounted for $84 billion, or 94% of the entire system.

We have not shown all the funds available from each provider. Instead, we show the flagship diversified funds, categorised based on the funds’ strategic weighting to growth assets.[2]

  • Growth: 66-85% growth assets.
  • Balanced: 50-65% growth assets.
  • Moderate: 30-49% growth assets.
  • Conservative: 15-29% growth assets.

Performance is shown after deductions for fund charges but before tax. Full details of this survey universe are included in Appendix B.

We show the data in a “risk return” chart for the ten years ended 31 March 2022. This chart shows the trade-off between return (vertical axis) and volatility (horizontal axis). Volatility is a measure of how much the value of the investments fluctuate.

As one would expect, there is a positive relationship between risk and return. Conservative funds have been more stable, but have realised lower returns.

The best returning fund in this group has been Milford’s growth fund. In fact, Milford’s balanced fund has outperformed most other large providers’ growth funds over this period.

[2] These accord with the groupings used in our quarterly investment survey, and differ slightly from the FMA’s guidance on this matter.

https://www.fma.govt.nz/assets/Guidance/Guidance-note-on-risk-indicators-and-description-of-managed-funds.pdf

Competitiveness

Introduction

In this section, we examine competitiveness. We begin by simply charting the number of providers.

This shows that, following a period of consolidation, the number of options available to consumers has expanded. In the year to 31 March 2022, one more scheme launched (Aurora), taking the total to 37. Since then, the Kernel Wealth KiwiSaver Scheme has launched.

Herfindahl-Hirschman Index

A formal measure of competitiveness is the Herfindahl-Hirschman Index (HHI). The HHI is a score which ranges up to a maximum of 10,000, which would indicate a monopoly. It is defined as the sum of the squares of market shares. For example, a market with two participants, each with 50% market share, would have a HHI of 5,000 (being 502 + 502). If the second participant split into two, the HHI would drop to 3,750 (being 502 + 252 + 252).

The US Department of Justice and the Federal Trade Commission have given the following descriptors in general:[3]

  • Unconcentrated markets: HHI below 1,000.
  • Moderately concentrated markets: HHI between 1,000 and 1,800.
  • Highly concentrated markets: HHI above 1,800.

To relate this to New Zealand, Productivity Commission data showed that as at 2016:[4]

  • “Rail, Water, Air and Other Transport” had a HHI of 2,169 (a highly concentrated market).
  • “Telecommunications, Internet and Library Services” had a HHI 1,612 (a moderately concentrated market).
  • “Financial and Insurance Services” had a HHI of 713 (an unconcentrated market).

We have calculated the HHI for KiwiSaver on three different metrics: the proportion of assets, members and fees/expenses. This is shown, over time, in the following chart.

As of 31 March 2022, KiwiSaver appears “unconcentrated”, with all figures below the critical 1,000 level (the membership HHI is 996). However, if we consider KiwiSaver on the basis of combined ownership (e.g., combining Fisher Funds and Fisher Funds Two), it is a different picture.

On this basis, the industry looks “moderately concentrated”. The membership HHI, in particular, peaked at 1,500 in 2015.

However, the trend downwards is also evident here. All three measures are closing in on the 1,000 level. Additionally, in the last year the membership HHI has fallen significantly – partially driven by the reallocation of default members.

Default provider share

Finally, we consider default providers’ market share. (This considers default providers’ total assets and membership; not just default members.)

Default providers had held the majority of assets and members since 2015. However, following the reallocation in the 2021 review, the share of all three measures has dropped to its lowest level on record.

 

[3] https://www.justice.gov/atr/horizontal-merger-guidelines-0

[4] https://www.productivity.govt.nz/competition_explorer/

Appendices

The appendices are available in the PDF format of the report, available here.

 

September 2021 Investment Survey

Posted on by Tyler Bond

 

Market commentary

As we write this, the direction of New Zealand’s response to Covid-19 appears to be changing. The elimination of the delta strain seems to be unachievable for the Auckland region, with case numbers steadily trending upwards since the end of September. It may only be a matter of time until the rest of New Zealand follows a similar trajectory. However, the vaccination uptake has been good, with two doses administered to 57% of the population (67% of the eligible population). The evidence is clear that vaccination materially reduces rates of hospitalisation and death, and therefore there is a growing light at the end of the tunnel. Many will be turning their gaze across the Tasman for clues as to what New Zealand’s eventual re-opening might look like.

This latest lockdown is expected to hit Gross Domestic Product (perhaps to the tune of -7.0% in the September quarter), however the New Zealand economy has otherwise been strong. GDP  increased 2.8% in the June quarter, smashing the Reserve Bank’s prediction of 0.7%. After backing away from its anticipated interest rate hike on the eve of the delta lockdown, the Bank raised the Official Cash Rate for the first time in seven years on 6 October. With prices rising 2.2% in the September quarter (4.9% for the twelve months), a pathway of “considered steps” upwards to an OCR of 1.5% to 2.0% looks likely over the next couple of years. Longer-term Government bond yields continue to trend upwards reflecting this.

Following a tepid June quarter the New Zealand equity market accelerated in September, returning over 5% in the three months. Mainfreight and Ryman, which are among the largest constituents of the S&P/NZX 50 Index, were up 26% and 15% respectively. Z Energy also had a good quarter, up
25%.

The local market was, therefore, well ahead of international equity markets which ended the quarter more or less where they began. Concerns over the US debt ceiling and accelerating inflation weighed on developed markets. Meanwhile emerging markets had a torrid quarter which began with the Chinese government’s crackdown on private education and technology companies, and ended with burgeoning concerns over Evergrande Group. These concerns particularly hurt Asian markets and those with exposure to materials. (The Australian share market was particularly weak due to its exposure to iron ore.)

Evergrande is China’s second largest property developer and has historically leveraged itself significantly. As a result of the Chinese government’s “three red lines” announcement in 2020 (limiting borrowing based on debt-to-cash, debt-to equity and debt-to-assets metrics), fears have been increasing over the company’s creditworthiness. Given its size, many fear a disorderly default could lead to a “Lehman Brothers moment” for global financial markets. So far, these fears have yet to materialise, although leverage across the world remains at high levels, portending a level of fragility.

Nevertheless, bulls are running rampant in various corners of the market. The number of initial public offerings (IPOs) in the first nine months of the calendar year is the highest since the dotcom bubble of 2000. More than 2,000 IPOs have raised US$421 billion in the year to date. This includes almost 500 special purpose acquisition companies (SPACs) which have together raised US$128 billion. SPACs are so-called “blank cheque” companies, since investors back (often well-known) portfolio managers to find and merge with a private company without knowing what the target is at the outset. The attraction to the target company is that it does not need to go through the same level of public disclosure as it would were it to list as an IPO itself.

Likewise, interest in cryptocurrency is again on the wax with our own Reserve Bank releasing a consultation on the “future of money” in September. The Bank is seeking input on areas such as digital currency at the same time as market interest in “crypto” is heating up again. Bitcoin recently passed US$62,000, doubling from its July level, albeit after halving from its all-time high reached in April. (Astute readers will note the flagship cryptocurrency is living up to its reputation for extreme volatility.)

Optimism abounds then. The International Monetary Fund released its World Economic Outlook in October, and this dramatically revised up its prediction for global growth in 2022 from 4.4% (in its previous April report) to 4.9%. As shown in the following chart, this has almost entirely come from a brightening outlook for developed economies. (The US, in particular, is now forecast to grow 5.2% next year.) The outlook for emerging economies, while better, is little changed.

Turning to bond markets, September was another meagre quarter. New Zealand fixed income indices again posted negative results in the wake of rising interest rates. This brings the twelve month return for the S&P/NZX New Zealand Government Bond Index to -7.2%, while the broader Bloomberg NZBond Composite Index returned -6.1%, its fall softened due to its lower level of duration and higher running yield.

Longer term figures for bond market indices now look more in line with the running yields. In prior years, the long-term figures incorporated substantial mark-to-market gains; returns were high despite relatively low yields. With these mark-to-market gains reversing, the medium-term returns now reflect a more modest return profile from fixed income of 2-3% per annum.

Global bond investors are yet to feel the same level of pain. The Bloomberg Barclays Global Aggregate was about flat for the quarter, although it too is now showing a negative result for the trailing twelve months.

As at the time of writing, the yield on 10 year government bonds had risen to 2.4% in New Zealand and 1.7% in the United States. While still undeniably low, some prospects for positive returns are returning to bond portfolios – especially after allowing for credit exposure and active management.

Therefore, we are left with an ebullient equity market and a dour fixed income market. It will be interesting to see whether this sentiment continues to dominate in coming months. However, it is at times like these that Warren Buffett’s quote comes to mind: “Be fearful when others are greedy, and greedy when others are fearful.”

KiwiSaver

This month we released our in-depth review of the KiwiSaver market. With a massive shakeup in default providers under way, this report examines the health of the industry in detail, delving into assets, membership, and fees.

While KiwiSaver remains dominated by several large providers, some smaller providers have shown that they are able to carve out success stories by focussing on particular niches, be it socially responsible investing, lower fees, member engagement/advice, or strong investment performance.

Our report uses market share metrics to examine the competitiveness of the KiwiSaver market. We find little evidence for an overly concentrated market; indeed, current trends point to a more diverse and competitive landscape within KiwiSaver in the near future.

The full paper KiwiSaver Market Review paper is available here.

– Ben Trollip

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Storm clouds gathering

Posted on by Tyler Bond

ACC levies set to increase

Introduction

This Topix looks at the proposed changes to levy rates for the three levied ACC accounts. There are small increases proposed for the Earners’ and Motor accounts and a reduction for the Work account. However, not all is what it seems…

Intro to ACC’s accounts

The ACC administers New Zealand’s no-fault accidental injury compensation scheme. The scheme provides financial compensation and support to all people who suffer personal injuries in New Zealand.

There are four main ACC accounts:

The motor vehicle levy is a fixed levy per vehicle and the earners’ levy is a fixed percentage of income (up to a limit).

The levies charged in respect of the Work account depend on the industry classification (and assessed risk) that the employees are assigned to. For example, the levy rate for construction workers will be different (and higher) than the levy rate for office workers.

The levies are determined by ACC on a regular basis. The most recent levy setting exercise has just completed its consultation period and the rates are due to take effect in the year beginning 1 April 2022.

Proposed levy rates

The changes noted above do not appear to be particularly noteworthy and the Work account change is a decrease. Good news, right?

The problem is that these changes include the funding position / policy that have offset much of the true cost of funding claims. The proposed levy rates are determined on the following lines:

  • Calculate the lifetime costs expected to arise from the coming year (the New Year Rate)
  • Determine the current funding position surplus / deficit of the account (assets / liabilities) i.e. how much under/overfunding remains from prior years?
  • Use any funding surplus or deficit to adjust levy rates to target a funding position of 100% over ten years.
  • Limit any increases in levies to 5% per year

The chart below shows the proposed levy rate for the three accounts in the 2022/23 year with the New Year Rate (i.e. before application of caps and funding positions).

In all three accounts there is a significant gap between the proposed 2022/23 levy rate and the unadjusted New Year rates. This gap is currently being bridged by the funding position of each account and the limitation on levy increases being 5% per year.

There is therefore a projected long term increase in the levy rates for each of these accounts. In respect of the Earner’s and Motor Vehicle accounts there is little that the individual can do to mitigate these increases. However, for Employers with moderate to large workforces, there are a number of avenues available. More on this later. But first, why the projected increases?

Claims experience

ACC’s performance across all accounts is deteriorating and has been for a while, caused primarily by the deteriorating experience of weekly compensation claims. These are the most significant type of ACC claim, potentially costing many hundreds of thousands of dollars. The following charts show the change in the severity and frequency of weekly compensation claims from 2011 to 2027 (projected). The 2011 cost figures have been adjusted for wage inflation.

In all three cases, there has been a large increase in the frequency of claims while the average cost has remained steady or slightly increasing. ACC has projected a stable move over the next six years but this will simply reflect ACC’s desire to halt the increasing costs. We will have to wait and see what actually occurs.

Actions to mitigate

Claims experience has been deteriorating and levies are projected to rise significantly over the medium term. What can be done by the individual or employer? In the case of the individual, levies are based on earnings and the number of motor vehicles owned / fuel consumed. While it is possible to reduce these two factors (earning less or owning fewer cars), this is probably not desirable. There is some benefit in owning an electric vehicle (paying no levies through fuel charges) although presumably ACC will need to consider how to incorporate these vehicles into its charging structure as the e-fleet grows.

Employers, on the other hand, do have some options available to them to mitigate ACC costs. That is, so long as you are not a small employer.

Standard levy experience rating

For employers with annual levies that are greater than $10,000, the standard levy may be adjusted based on the claims experience of the entity. The adjustment may be as much as -50% / +100% from 2022. That is, you may be able to halve the standard levy with sufficiently good claims experience but you could pay as much as double for poor experience. The experience rating factor depends upon:

  • the duration of weekly compensation claims,
  • the number of claims with medical costs over $500, and
  • the number of fatal claims during the experience period.

There is therefore scope to affect these by reducing the frequency of accidents and by effective management of staff back to work after an accident occurs. The management of staff getting back to work can effectively be addressed via dedicated claims management (refer Accredited Employers Programme below).

Accredited Employers programme (AEP)

For large employers, there is the option of joining the AEP which allows the employer to pay a reduced levy for the responsibility of managing and bearing the financial responsibility of workplace accidents. There are two plans within the AEP:

  • Partnership Discount Plan (PDP) – where the employer pays a reduced levy, manages and pays claims for a period of 1-2 years, and then passes responsibility to ACC.
  • Full Self Cover Plan (FSCP) – where the employer pays an administration fee only, manages claims for a period of 4-5 years but is financial liable for the lifetime of all claims.

Under the AEP the employer bears the financial risk of its employees work related accidents which can be significant. However, many large employers are already members of the AEP (currently there are over 140 such employers, representing 23% of the workforce). There are many benefits, even for moderate sized employers, including:

Return to work: Studies have shown that return-to-work rates are superior for employers that manage their own claims. Thus, the employee returns to work more quickly than if managed by ACC. This leads to lower ACC claims costs, lower staff replacement costs and better work outcomes for the employee.

Experience rating: ACC applies discounts and penalties to the standard levy depending on the claims experience of the employer. The maximum penalty is 100% from April 2022 (up from 75% in the current year) which means that a poor year of claims experience could result in the employer paying 200% of the standard levy in the following year. An Accredited Employer is exempt from experience rating.

Insurance options – High Cost Claims Cover: Under the AEP employers may purchase HCCC to limit their exposure to single events to as low as $250k. A single event could result in one claim or multiple claims.

Insurance options – Stop Loss: Employers may also purchase Stop Loss insurance which will limit their total costs from a cover year to as low as 141% of the standard levy – considerably lower than the 200% worst outcome under the standard levy.

Financial risk exposure: Under the AEP, poor claim experience affects that year of cover only. Under the standard levy, bad events or bad years may contribute to penalties being applied for the following three-year period.

Summary

ACC’s recent claims experience has been worse than expected and this is projected to increase levy rates across its three main accounts. Under the Work account, moderate to large sized employers have the ability to try and mitigate these projected cost increases.

There are a number of non-financial reasons why this may be beneficial to the company including the ability to manage staff back to work and as a commitment to staff welfare.

Any employer considering this should seek qualified professional advice to ensure that this will be an appropriate solution.

Further information

If you want to find out more information about this note or how MJW can help you with your participation in the AEP, then please contact either of the authors below.

Authors

Craig Lough

Jeremy Holmes

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New Zealand Mortality

Posted on by Tyler Bond

This year is on course to be one of the least deadly in recent history for New Zealand

2020 has been an interesting year

COVID-19 and the related lockdowns have put a huge strain financially and mentally on many. However, flying under the radar is a little-acknowledged fact: fewer New Zealanders are dying.

This chart shows the rolling annual number of deaths in New Zealand since 2012. Looking at a rolling annual figure is critical because it removes seasonality (many more people tend to die in the winter months).

As of 27 September 2020, fewer people had died over the preceding year than at any time since July 2017. If we stabilise at these levels, 2020 will see almost 2,000 fewer Kiwis die than would ordinarily have been expected.

Growth and rates

This is even more interesting when we consider that New Zealand’s population has been growing.

Thus, if we consider the rate of deaths per capita, the picture looks even clearer. The next chart shows that the mortality rate is at its lowest for as far back as we have collected data.

Analysis

We obviously do not know for sure why fewer people are dying but a plausible hypothesis is that lockdown has led to fewer respiratory diseases, such as influenza and the common cold, circulating in the community.

Looking at the weekly data, we can see the effect of a much lighter flu season this year. The typical peak in deaths seen in the winter months is almost non-existent. (The bad 2017 flu season is also prominent.)

Along the same lines, there may have been a general improvement in health practices given the prominence of COVID-19 in the media. For example, greater numbers of people getting flu vaccinations.

(Another hypothesis is that there have been fewer car accidents. Whilst true, this is not a big driver of the reduction in deaths: as of 12 October, the 2020 road toll is only 20 lower than at the same time last year.)

Seasonality

Another way to look at the data is by overlaying each year. The following chart shows the weekly deaths for the past nine years in grey (darker lines for more recent years), the average, and how 2020 is tracking.

The trend of higher deaths in winter is again evident.

The mortality rate in 2020, which began in line with the average, has been relatively stable over the year, with no notable rise in the winter months.

(Also evident is the spike in deaths in February 2011 when the Canterbury earthquake struck.)

Analysis by age

We can dig into the data by breaking it down by age group. Note that the vertical axis differs greatly across the following charts.

These charts make several points. First, the mortality rate is significantly higher at the older age groups. Note, for example, the average mortality rate in the last chart runs between 8% and 12%, whereas the average mortality rate in the first chart is around 0.05%.

Second, the winter season most heavily impacts our oldest. There is very little change throughout the year in the first charts, but the final chart shows an obvious rise in the winter months.

Finally, the mortality rate in 2020 has been the most different for the older ages. The younger age groups are seeing a mortality rate around the same level as previous years. However, for the over 80 year olds in particular, there has been a distinctly lower mortality rate in 2020.

Conclusion

New Zealand’s mortality rate has been trending downwards for decades. By and large, this has come from improvements in healthcare. Even so, it is evident that lockdowns, social distancing, and improved hygiene practices (e.g. hand-washing and facial coverings) appear to be having an observable effect on mortality.

Authors

Ben Trollip

Jeremy Holmes

Data sources:

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