RAF Amendment Bill Some questions relating to: Cash flow implications Financial Sustainability...
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Transcript of RAF Amendment Bill Some questions relating to: Cash flow implications Financial Sustainability...
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RAF Amendment Bill
Some questions relating to:
•Cash flow implications
•Financial Sustainability
•Practicalities of implementation
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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
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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
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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.
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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%
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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
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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
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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
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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%
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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
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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
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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”
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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
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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.
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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.
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Comments & Questions
ASSUMED UNINJURED INCOME
• What increases? “Awarded” plus CPI or then current (From remuneration experts)
INJURED INCOME
• Actual or “awarded” plus increases
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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!)
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“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.
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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
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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
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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.