RAF Amendment Bill Some questions relating to: Cash flow implications Financial Sustainability...

RAF Amendment Bill

Some questions relating to:

•Cash flow implications

•Financial Sustainability

•Practicalities of implementation

Awards for General Damages

• Proposal is to pay 40% damages as a lump sum

• 60% in 7 equal annual installments adjusted for inflation

• The cash flow implications are as follows

R100 000 Award for Generals

• Current: R100 000 paid immediately

• Proposed: – R40 000 paid immediately,– 15.5% per year interest payable on

balance,– Annual installments start at R12 200

immediately increasing with inflation to R18 600 at the end of 7th year (assuming inflation at 7.3% per year)

– Total of R146 700 paid over 7 years

Generals: Cash Flow & DeficitRAF - R mil

  2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Current R 1,229 R 1,319 R 1,416 R 1,519 R 1,630 R 1,750 R 1,878 R 2,015 R 2,162 R 2,321

Proposed

- Lump Sums R 492 R 528 R 566 R 608 R 652 R 700 R 751 R 806 R 865 R 928

- Installments R 0 R 150 R 322 R 519 R 742 R 995 R 1,282 R 1,605 R 1,722 R 1,848

- Total R 492 R 678 R 888 R 1,126 R 1,394 R 1,695 R 2,033 R 2,411 R 2,587 R 2,776

Liability R 1,311 R 2,569 R 3,757 R 4,859 R 5,857 R 6,728 R 7,450 R 7,995 R 8,580 R 9,207

Cash Flow Saving R 737 R 641 R 527 R 393 R 236 R 55 -R 155 -R 396 -R 425 -R 456

Addition to Deficit R 574 R 1,927 R 3,230 R 4,466 R 5,620 R 6,674 R 7,605 R 8,390 R 9,004 R 9,663

NOTE: The figure for 2004 is based on the RAF 2003 estimates.

General Damages Comment • The change results in a cash flow saving for only the

first 6 years• The cash flow crisis is thus only delayed, but made

more serious• The reported RAF deficit increases very significantly

even in the first year

Possible alternative interpretation:• Pay 10% of award, adjusted for inflation, for 7 years• If inflation is 7.3% interest paid is 11.6%• If inflation is 11% interest paid is 15.5%

Awards for Loss of Income & Loss of Support

• Bill states that installments will not be taxed, hence assume after tax income paid as installment

• Recipients therefore will not benefit from future tax reforms

• If tax-free status not obtained, then cost to RAF is even higher than illustrated

• As there are virtually no assets, there can be no discounting for interest earned on assets

R4 000 per month lostAged 60: 5 years income lost

Age Monthly Income

After tax Monthly

Chance of living Full Year

Discount factor

Present Value

60 R 4,144 R 3,665 99.1% R 43,610 95.3% R 41,580

R4 000 per month lostAged 60: 5 years income lost

Age Mly Income Net Mly Chance of

living Full Year Discount

factor Present Value

60 R 4,144 R 3,665 99.1% R 43,610 95.3% R 41,580

61 R 4,447 R 3,934 97.4% R 45,966 86.7% R 39,843

62 R 4,772 R 4,222 95.4% R 48,349 78.8% R 38,098

63 R 5,122 R 4,530 93.3% R 50,715 71.6% R 36,330

64 R 5,496 R 4,862 91.0% R 53,085 65.1% R 34,570 Totals R 287,771 R 254,557 R 241,725 R 190,421

NOTE: The expected payout of installments is 127% of the Present Value

ULTIMATE COST IMPLICATIONSInstallments paid over next 5 years

Current

Value of Lost Income R 190,421 R 190,421 R 190,421 Less: Contingencies 10% 25% 50%

Net Current Award R 171,379 R 142,816 R 95,211

Proposed

Total installments R 241,725 R 241,725 R 241,725

As percentage of current 141% 169% 254%

R4 000 per month lostAged 20: 5 years income from age 60 lost

Age Mly income Net mly Chance of living Full year

Discount factor

Present Value

60 R 69,847 R 61,785 79.4% R 588,862 2.1% R 12,405 61 R 74,958 R 66,306 78.0% R 620,685 1.9% R 11,887

62 R 80,442 R 71,158 76.5% R 652,855 1.7% R 11,367 63 R 86,328 R 76,365 74.7% R 684,807 1.6% R 10,839

64 R 92,645 R 81,952 72.9% R 716,807 1.4% R 10,314

Totals R 4,850,645 R 4,290,800 R 3,264,015 R 56,812

Questions & Comments

• What installments be paid and when?

• If from age 60: Current adjusted for inflation, or actual in 59th year?

• 50% chance of early retirement

• If plaintiff shown to be able to continue working to age 65, saving for RAF

• If now: Doesn’t make sense

Financial Implications

• There may be some cash flow saving for a short period, but longer term costs and the deficit are much higher

• May imply additional investigations far in the future i.e. no closure on cases, and unforeseeable consequences

• Financial implications for RAF of giving “undertakings to pay”

More complex settlements(Relatively simple example)

Child now age 8Would have had tertiary education, now only

Grade 8 or 9.

UNINJURED• 2020 Paterson C• 2027 Paterson D• Retires at 65

INJURED• 2011 Paterson A• 2030 Paterson B• Retires at 60

Cash Flow AnalysisMonthly After tax Incomes & Losses (2003 values)

UNINJURED INJURED LOSS

2011 - 2016 R 3,292 -R 3,2922016 - 2026 R 9,958 R 3,292 R 6,6672027 - 2029 R 22,250 R 3,292 R 18,9582030 - 2054 R 22,250 R 5,000 R 17,2502055 - 2059 R 22,250 R 0 R 22,250

NOTE: If I increased these figures for inflation overthe period, they would also become very large.

ComparisonCurrent: Capital values: • UNINJURED: R3.2 mil• INJURED: R1.2 mil• LOSS: R2.0 mil

Proposed: Total installments over 40 years:• UNINJURED: R117 mil• INJURED: R23 mil (R0.5 mil early gain not offset)• COST: R94 mil

NOTE: This example extends over a long period and hence discounting reduces the current capital values and inflation massively increases the installments paid.

Comments & Questions

ASSUMED UNINJURED INCOME

• What increases? “Awarded” plus CPI or then current (From remuneration experts)

INJURED INCOME

• Actual or “awarded” plus increases

Comments re last example• Insufficient detail to reliably assess the

proposals– A balance needs to be achieved between simplicity

of payment and the complexity of compensating for the loss

– Certain that no existing IT system could cope (UK Government development cost 500 million pounds)

• Personally doubt that an acceptable balance can be achieved at reasonable cost, even if appropriately skilled personnel were available. (Could guarantee full future employment for actuaries!)

“Wild guess” at Cash Flow Savings

2004 2007 2010LoI & LoS R 711 R 713 R 281 -R 194 -R 808 -R 1,660 -R 2,850 -R 4,491Generals R 737 R 641 R 527 R 393 R 236 R 55 -R 155 -R 396Total Savings R 1,449 R 1,354 R 808 R 199 -R 572 -R 1,606 -R 3,006 -R 4,887

Health warnings:•Many possible negatives for the Fund have been ignored•My assumptions may be very wrong as I have insufficient data on the RAF

NOTE: I have not attempted to estimate the very substantial additional “deficit” that would arise each year from the change to payment by installments.

Conclusions 1

IMMEDIATE CASH FLOW

• Implementation of the current proposals may result in a quite significant cash flow savings in the first couple of years

• These disappear within the next 5 – 10 years

• They must be adjusted for the significant extra IT and administration costs

Conclusions 2

SUSTAINABILITY

• Proposals increase the total long term costs very significantly

• The cash flow cost will very soon exceed the short term annual savings

• I do not believe the proposed system is sustainable without very large future increases in the fuel levy

Conclusions 3

PRACTICAL FEASABILITY• Proposals imply significant and complex

administrative capabilities• A truly unique IT administration & payment

system is needed• Proposals imply an extension in the life-time of

the current RAF from about 10 years to about 50 years

• In light of Satchwell, investing in a new complex “temporary” procedure does not make financial sense.