Recent indications that ACC may be considering “investing” in Kiwi Bank and the proposed Ruataniwha dam project in Hawkes Bay raises interesting legal questions about the nature and purpose of ACC, how the scheme is being administered and whether the investment of surplus levies is justified.

ACC is a statutory legal system covering all personal injury suffered by accident in New Zealand. It is not an insurance scheme. Cover and entitlements under the ACC scheme are not dependent on payment of a premium as would be the case under a contract of insurance.

The Accident Compensation Act 1972 came into operation on 1 April 1974. It abolished the common law right of an accident victim to sue to recover damages for personal injury and established the three-person Accident Compensation Commission to manage the statutory scheme.

Section 6(4) of the Act required that either the chair or one of the Commissioners must be a lawyer of not less than seven years’ standing. This structure recognised that the scheme was a new statutory legal system which needed to be managed by a Commission and that at least one Commissioner must have legal qualification equivalent to that of a judge.

Amended law

On 1 April 1983 the 1982 AC Amendment Act came into effect and established the Accident Compensation Corporation with a six-person Board of Directors and a Managing Director, none of whom required any form of legal qualification.

This structure, which reflects the type of organisation common in the insurance industry, has been repeated in subsequent legislation. Over the years the ACC has been organised, managed and operated as if it was a large national insurance company. For example, the AC Act s 190 allows a shareholder-employee, s 208 a self-employed persons and s 223 an earner, to purchase weekly compensation.

One of the features of any insurance which is committed to providing long-term ongoing benefits or entitlements, is the need to provide reserves to meet future liabilities. This is made necessary because, for any number of reasons, insurance companies sometimes go out of business. Outstanding liabilities then become a major problem and often have to be picked up by the State (see for example the background to the introduction of Workcover schemes in Victoria and South Australia in the mid-1980s).

However, a scheme established by statute and funded from levies under statutory administration as part of the legal system, will not fail because governments don’t “go out of business”. There is therefore no need to build up reserves by imposing levies in excess of the amount required to meet immediate annual costs for the year in which the costs arise and possibly some extra costs which might arise from a major national catastrophe.

Even the Christchurch earthquake did not impose an unmanageable burden on the ACC’s resources requiring an increase in levies.

Under Part 6 of the AC Act 2001, the ACC is tasked with managing the scheme. It provides for the application and source of funds. Levies are payable by employers, the self-employed and private domestic workers and are held in the Work Account. Section 167(3) provides that the funds in that account must be applied to meet the costs of entitlements, administering the account and audits and assessments referred to in s 175 and any other expenditure authorised by the Act.

On 24 September 2015 an amendment (s 166A) declared “Principles of financial responsibility in relation to Accounts” and provided “(1) The cost of all claims under the levied Accounts are to be fully funded by meeting the outstanding claims liability in respect of the claims by offsetting an adequate level of assets to fund the cost of those claims”.

ACC reserves

This insurance principle has been in the legislation for some years, enabling the ACC to build up reserves in excess of $30 billion. Levies are a form of a compulsory tax and the requirement for full funding of the ACC levy Accounts means that tax is being paid in advance to meet prospective future liability. Such a system does not apply in any other legal area administered by a government authority and is hard to justify in the ACC scheme.

It is interesting that while it is funded on insurance principles, the ACC is prohibited from providing insurance by s 262 which says “(2) To avoid doubt, it is not a function of the Corporation or any Crown entity subsidiary of the Corporation to provide insurance, but it may provide insurance related services in accordance with section 263 (injury prevention) or section 265 (provision of ancillary services)”.

ACC is a Crown entity for the purposes of s 7 of the Crown Entities Act 2004 (which relates to capital expenditure under a specified Vote) and a Local Authority for the purposes of s 73 of the Public Finance Act 1989 (which relates to the imposition of fines and penalties).

Large investor

The $30 billion reserves built up over the years by ACC can hardly be called “capital” as it is made up of levies paid in advance.

Those levies do not belong to the ACC or the government and can only be expended in accordance with s 167 (3) to meet the costs of entitlements, administering the accounts and audits and assessments referred to in s 175 (risk assessment adjustments) and other expenditure authorised by the Act.

With $30 billion in reserves and a regular annual injection of millions of dollars in levies managed by the ACC investment committee, it is no wonder that the ACC is one of the largest investors in the New Zealand Stock Exchange and with its highly successful record is one of the “darlings” of the exchange.

Those reserves are, no doubt, very attractive to the government to help balance the budget but they are protected by statute and cannot be used for purposes outside the Accident Compensation Act. It is not “government money” in the sense of useful taxation.

The Woodhouse Report examined a number of alternative methods for funding the scheme and made recommendations which no government has ever followed or even considered. Adoption of any of the alternatives offered by Woodhouse would result in a substantial reduction in current administrative costs to the ACC and a significant reduction in levies payable.

While there have been a number of reviews of the ACC over the years, there has never been a review of the fundamental principles of the scheme or the means of funding it as a statutory legal system and part of the fabric of New Zealand law.

Don Rennie is the convenor of the New Zealand Law Society’s ACC Committee. Mr Rennie has been involved in ACC since the days of its establishment and was a special consultant to the three commissioners who set up the ACC, established by the 1972 legislation.