Rebuilding the NSW Workers Compensation System

by Ian Watson and Jim Stanford

Workers compensation benefits in New South Wales were dramatically reduced in 2012 by a newly-elected state government, citing an alleged financial crisis in the system.  Benefit payments (adjusted for inflation) declined 25 percent in just five years – and some cuts are still being imposed on injured workers and their families (including some losing benefits entirely).  But even as injured workers suffered the consequences of these benefit cuts, the financial position of the workers compensation system suddenly transformed from “famine to feast”: the supposedly dire deficit which justified the cutbacks disappeared entirely within one year, and by mid-2013 the fund was already back in surplus.  The system’s total surplus now exceeds $4 billion.

This report reveals the artificial nature of the supposed crisis which justified the 2012 cuts, and highlights the continuing positive financial trends that are generating ever larger surpluses.  It proposes a five-year timetable for restoring benefits to injured workers in NSW, without increasing average premium levels or incurring funding deficits.

There is no fiscal or moral justification for injured workers to continue to suffer reduced benefits, while the workers compensation system carries a multi-billion dollar surplus – poised to get even bigger in the years ahead.  Unions NSW commissioned the Centre for Future Work to conduct an independent review of the system’s financial position.  Our full 95-page report, Restoring Dignity and Respect: Rebuilding NSW’s Workers Compensation System, reviews the system’s roller-coaster ride over the past decade, and highlights the artificial and temporary nature of the financial circumstances which were invoked to justify cuts in 2012.  It documents and explains the improvements in injury rates, premium revenue, and financial markets that underpin the continued surplus-generating capacity of the system. 

The report confirms that ample resources are available to fund a gradual but ambitious repair in benefit entitlements for injured workers in the years ahead, centred around Unions NSW’s 12-point vision for a fair, effective, and sustainable workers compensation system. The report makes 10 core recommendations to the state government and icare directors, including:

  1. Maintain overall effective average premium rates at current level.
  2. Simplify and make more transparent the formulae for calculating premiums for specific employers.
  3. Undertake an independent actuarial review of the cost of reversing specific components of the 2012 policy changes, and otherwise improving benefits (including the twelve reform principles outlined by Unions NSW).
  4. Develop a staged timetable for restoring and enhancing benefits, with liabilities increased by $1 billion annually over the next five years.
  5. Impose a moratorium on the cessation of monthly benefits under Section 39, and restore benefits for injured workers who have been cut off.
  6. Revise capital funding policy to target full funding (100 percent) of adjusted present value liabilities (including a cushion to reflect an 80-percent probability risk margin).
  7. Monitor financial balances of the system, and adjust the timing of benefit improvements accordingly.
  8. Release terms of the contract with EML (now monopoly private provider of core insurance and clams management services to the system), and investigate the potential for in-sourcing its services.
  9. Detailed evaluation of the performance of icare’s investment program to explain fully the recent underperformance of its investment income.
  10. Implement a meaningful tripartite system of consultation and governance.

Under the five-year timetable, benefits for injured workers would be repaired in several stages, with no increase in average effective premium rates, and still exceeding full funding of obligations (including a $2 billion cushion for risk margin).  There is no fiscal excuse for treating injured workers with the callous disrespect they have endured since 2012.  That legacy cannot be reversed overnight, but it can be reversed with a significant and responsible commitment to rebuild the integrity of the program over the coming years.

Relative to total labour costs and to NSW’s economy, workers compensation premiums have never been lower: down 60 percent since 2009.  When workplace injuries occur, society has an obligation to provide workers with compensation they can count on.  This report confirms that NSW is fully capable of meeting this responsibility.  It is simply a matter of political and fiscal priority on the part of the state government, to ensure it happens.

Full report