It is interesting to look at what has been happening to the NSW Scheme and it will be interesting to see if SA follows the NSW lead, writes John Walsh in an enlightening article.

Workcover all smoke and fire

In the years 2006 to 2008 the NSW Scheme was fully funded but we now know that result was achieved by windfall investments prior to the global financial crisis and not through any structural changes in the Scheme.

In October 2011 the NSW Finance & Services Minister was reported as saying that he was “very concerned” about the Scheme’s $1.583 billion deficit.

A few weeks later in early November 2011 the deficit was acknowledged to be $2.36 billion.

In February 2012 the Chairman of NSW WorkCover, Greg McCarthy, resigned citing “continued frustration” at being “constantly ignored” when warning successive ministers about the structural problems in the Scheme. At that time he predicted that the Scheme would be in a $4 billion deficit by the time the December 2011 evaluation was finished and he warned of a blowout to $5 billion by June 2012.

In April 2012 the NSW government announced a review of the Scheme because it was in deficit by $4.1 billion and the government warned that without reform premiums were predicted to rise by about 28%.

A parliamentary inquiry reported in mid June 2012 and amongst the 28 recommendations to overhaul the Scheme it called for the introduction of a “Victorian style step-down of benefits to 95% pre injury earnings in the first 13 weeks, to 80% from 14 weeks onwards replacing the current system of 100% payout for 26 weeks” as reported in InDaily News on 14/6/12.

Legislation was passed on 22/6/12 introducing the step-downs as well as restrictions upon journey claims with the amendments modelled on the current law in South Australia and capping weekly benefits at five years unless the claimant is assessed as having a 30% whole person impairment.

Interestingly, while Rob Thomson was General Manager of the Workers Compensation Division of WorkCover NSW a ban was imposed on the payment of a lump sum to commute weekly payments of income maintenance.

That ban is now considered to have contributed to rising claim durations and increased pressure on common law, both of which are prime drivers of the blow out in liabilities. The NSW ban was formally lifted by statutory amendment last month.

In the SA Scheme the legislation allows for the payment of a lump sum to redeem weekly payments of income maintenance and medical and like expenses but WorkCover SA have effectively imposed an administrative ban upon such payments.

It will be interesting to see if SA follows the NSW lead and lifts the administrative ban so that judicious use of redemptions is mandated as a useful method of controlling claim durations in appropriate circumstances.

What can we take out of the New South Wales experience?

Firstly, investment income camouflaged the structural deficits in the NSW Scheme in the period 2006 to 2008. Those structural deficits have seen the Scheme deteriorate at an alarming rate despite “the reform of the premium system in the period 2005 to 2009”.

Secondly, a $175 million loss in the SA Scheme’s investment portfolio in the six months to December 2011 does not bode well for an improved scheme funding ratio when the end of financial year results are publicised in the annual report later this year.

When announcing the financial results for the six months to 31 December 2011 WorkCover SA Chairman Philip Bentley made the point that:

“It is important to remember the long term nature of the Scheme and that it is not designed to adjust automatically to the sorts of changes we are currently experiencing in global financial markets. We are yet to see the full impact of the 2008 legislative reforms, in part as a result of a staggered implementation”.

The problem as I see it is that investment income will likely remain subdued and, “the sorts of changes we are currently experiencing in global financial markets” are part of the new normal.

In previous reports I [Mr Walsh] have expressed scepticism that we will ever see, “the full impact of the 2008 legislative reforms”.

The most recent data available makes it clear that income maintenance claims which remain active beyond two years post injury are still high and so the “tail” still exists and the impact of the 2008 legislative amendments designed to remove all but the most seriously injured claimants from the Scheme remains muted. The ill conceived administrative ban on redemptions will likely extend claim durations as it did in NSW and help to maintain the numbers in the “tail”.

I think that anyone predicting that the average levy rate will fall “within the next couple of years” is being very hopeful indeed!

The uncertainty which remains in the Scheme will continue to make it attractive for large employers to seriously consider the viability of self-insurance.

Self-insurance remains the ultimate form of experience rating and provides the only true method of controlling risk, costs and claims administration.

Read the entire article by John Walsh here

To read John Walsh’s (Managing Partner, Donaldson Walsh Lawyers- based in SA) full July Update and the August, March & May 2011 Special Reports on the WorkCover Scheme please visit http://www.donaldsonwalsh.com.au.

[post pre-entered by T on behalf of WCV]

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