Liabilities
Total Crown liabilities were $180.5 billion as at 30 June 2012, an increase of $16.2 billion (9.9%) from the previous year (table 23).
The increase in liabilities was mainly a result of the Crown's increased borrowing[6], which was $10.3 billion (11.4%) higher than in 2011 (figure 17). Within borrowings, gross debt increased $7.2 billion (as previously discussed) and Kiwibank’s deposits increased by $1.0 billion from the prior year, mirroring the increase in their mortgage book.
- Figure 17 - Total Crown liabilities
- Source: The Treasury
The rest of the increase in total liabilities was largely due to the increase in the present value of the Crown's long-term obligations for ACC insurance ($3.7 billion) and the GSF retirement plan ($3.4 billion). More detail about these liabilities is provided on the next page.
| Year ended 30 June | |||
|---|---|---|---|
| 2011 total Crown liabilities | 164.3 | ||
| Increase in borrowings | 10.3 | ||
| Increase in actuarial obligations (ACC and GSF) | 7.1 | ||
| Recution in EQC insurance liability | (1.7) | ||
| Recution in weathertight homes provision | (0.4) | ||
| Increase in accounts payable | 0.6 | ||
| Other movements | 0.3 | ||
| 2012 total Crown liabilities | 180.5 | ||
Excluding borrowings and the ACC and GSF liabilities, total Crown liabilities were $1.2 billion less than last year. The two major components of this were that:
- EQC's insurance liability decreased $1.7 billion reflecting that claims have been settled during the year, and
- the provision for the weathertight homes financial assistance package decreased by $0.4 billion as less homeowners are expected to take-up the scheme.
Long-term liabilities
The Crown has two significant long-term liabilities, the ACC insurance obligations and the retirement plan obligations for the members' of the Government Superannuation Fund (GSF). Outside borrowings, these obligations make up a large portion of the Crown's total liabilities and fluctuations in these liabilities can have significant impacts on the Crown's operating balance. Given the size and complexity of these liabilities, both are subject to independent actuarial valuations. Notes 25 and 26 of the financial statements include more detailed analysis.
How are these liabilities measured?
These two liabilities represent future cash payments that are spread out across a number of years (around 80 years for ACC and 50 years for GSF). The financial statements estimate what those future payments are worth in today's dollars (the “present value”). Table 24 compares these future cash flows to the present value (representing the value of the liability at 30 June 2012). The present value is calculated by “discounting” the future cash flows using projections of future interest rates (commonly referred to as “discount rates”).
|
Year ended 30 June 2012 $ million |
Future cash flows |
Present value |
|---|---|---|
| ACC claims liability | 73,151 | 25,154 |
| GSF retirement obligation | 33,187 | 16,557 |
Why are discount rates so important?
The longer a liability's life, the more important discounting becomes. In the case of ACC and GSF a 1% change in discount rates can increase or decrease the liability up to $5 billion and $2.2 billion respectively. When the discount rate falls the present value of the liability increases. When discount rates rise, the present value of the liability falls.
How will these liabilities change?
In addition to changes in discount rates, the value of the liabilities will also be affected by movements in the future cash flows. For example, reductions in rehabilitation costs will decrease the ACC liability while improvements in life expectancy will increase the GSF liability. Changes to these liabilities over the year are outlined in figures 18 and 19.
- Figure 18 - Change in GSF liability
- Source: The Treasury
- Figure 19 - Change in the ACC liability
- Source: The Treasury
What was the impact on the operating balance?
Movements in the ACC and GSF liability are largely reflected in “actuarial gains and losses” which are not part of OBEGAL. This year both liabilities recorded actuarial losses, $2.9 billion and $3.9 billion respectively. These losses primarily consisted of:
- reduction in discount rates (ACC $5.1 billion, GSF $2.8 billion)
- changes in demographics such as mortality (GSF $0.9 billion).
ACC's reduction in discount rates was partially offset by reductions in the projections of underlying claims costs such as weekly compensation and rehabilitation ($1.9 billion).
Notes
- [6]Borrowings are a combination of gross debt, the financial liabilities of Crown entities and SOE's, and liabilities associated with the Reserve Bank's settlement cash and bank bills.
