As we recently reported, the Arthurs Report, formally titled Funding Fairness: A Report on Ontario's Workplace Safety and Insurance System, has been released and is available online.
The 188 page report covers a lot of ground and so we have decided to review it in a series of blog entries.
We will begin with a brief overview of the Funding Review, the scope of its mandate and the central driving force behind it, the Workplace Safety and Insurance Board’s (WSIB) Unfunded Liability (UFL).
As noted in the Arthurs Report, the Funding Review "was clearly triggered by the 2009 Annual Report of the Auditor General of Ontario, which challenged the WSIB’s funding policies and performance". More to the point, "the Auditor General's report expressed concern about the long-term financial viability of the WSIB given its apparent inability to reduce or eliminate its unfunded liability".
In September 2010, at the WSIB’s request, Professor Harry Arthurs was appointed to carry out the Funding Review along with a panel consisting of Maureen Farrow, Buzz Hargrove, John O'Grady and John Tory, who were appointed to advise and assist him. Arthurs was further assisted by other resources including WSIB officials, technical staff, researchers and the actuarial firm of Morneau Shepell.
The Funding Review was specifically mandated to consider the following six issues:
- The WSIB’s UFL;
- Premium rate setting;
- Rate groups and apportionment of financial responsibility among employers;
- Employer incentives and experience rating;
- Funding occupational disease claims; and,
- Indexation of benefits for partially disabled workers.
The Funding Review involved extensive stakeholder consultation and, in that process, Arthurs took note of several issues that they raised, which are canvassed in his Report even if they were not formally part of the Funding Review’s mandate. Most of the stakeholder submissions received during the consultation process are available online at www.wsibfundingreview.ca/submissions.php.
As further background, in parallel with the Funding Review, the Government of Ontario enacted two significant statutes touching on the Funding Review’s mandate. The first, Bill 135, is concerned with the WSIB’s UFL, among other things, although much of this legislation has not yet been proclaimed in force.
The second, Bill 160, which has been in force since June 2011, transferred responsibility for accident prevention and health and safety education from the WSIB to the Ministry of Labour. (For more in-depth coverage of Bill 160 click this link).
As the Arthurs Report also notes, the WSIB has been engaged in a number of other activities in parallel with the Funding Review, including adopting new policies and administrative changes, conducting a value-for-money audit and writing or commissioning policy papers touching on issues within the mandate of the Funding Review.
Let`s now move on from this brief background to the WSIB’s UFL, which Arthurs defined in this way:
The UFL may be defined as the extent to which the WSIB’s estimated and projected liabilities (the cost of paying for awarded claims, administering the system and meeting other responsibilities mandated by the statute) exceed its estimated and projected assets (the cash, investments and other resources it has available to meet that cost).
As to the scope of the UFL, the WSIB and Auditor General estimated this as being approximately $11.7 billion at the end of 2009 and $12.4 billion at the end of 2010.
However, the Funding Review determined that these estimates were too low because they were based on assumed annual investment returns of 7%, which led the WSIB to use a "discount rate" of 7% to estimate the capitalized cost of its future obligations. The Funding Review indicates that in early 2011 it was thought that a discount rate of 6% would be more realistic and, as time goes on in the current economic climate, it appears that even lower assumed rates of return would be more realistic.
The upshot of this was that in the context of the Funding Review, actuarial firm Morneau Shepell estimated the present UFL at $14.5 billion, with the potential to go even higher as the assumed discount rate is lowered or if the WSIB is otherwise unable to improve its ability to cover the costs of new claims.
As we will also see in a future blog entry, if full indexation (inflation protection) for partially disabled workers were granted on a go-forward basis, this would lead to an increase in the WSIB’s long-term liabilities of about $1.7 billion, which would bring the current estimate of the UFL to $16.2 billion.
Using the WSIB’s estimate as to the UFL, its ratio of assets to liabilities was 54% in 2009 and only slightly higher in 2010. Taking Morneau Shepell's estimate into account, a 50% ratio is involved. To put this in perspective, the workers’ compensation systems of most other Canadian jurisdictions have no unfunded liability. They are typically in surplus, fully funded or almost fully funded.
As to how we got here, Arthurs notes a complex confluence of factors.
He places primary responsibility on the "determinative role played by successive governments in either reducing the WSIB’s revenue or increasing its liabilities without addressing the consequences for its UFL". Arthurs concludes that governments have made a significant contribution to the UFL by legislating a standard of "sufficient" rather than full funding and by interfering in the rate setting process to keep rates below the level needed to achieve full or even sufficient funding.
However, he also points out that a "considerable portion of the responsibility resides with the WSIB itself". Among the problems he lists at that level are the following:
- The WSIB’s failure to adequately price new claims costs;
- The WSIB’s permitting experience rating programs to produce a $2.5 billion excess in premium rebates over surcharges;
- The use of unrealistic discount rates, as noted earlier;
- The WSIB’s adoption of "excessively generous, even improvident, policies for determining entitlements as well as loose claims management practices"; and,
- The WSIB’s failure to police employer registration, payroll reporting and premium payments.
Among other external influences on the UFL beyond the control of the government and the WSIB, Arthurs lists:
- The financial crash of 2008, which inflicted heavy losses on investors including the WSIB;
- Steadily rising costs of medical care and drugs;
- Increased longevity of injured workers and their survivors and the increased incidence of occupational diseases; and,
- Changes in labour markets, notably: persistent high levels of unemployment; the rise in short-term and part-time employment; and, the shift in employment from high-premium-revenue industries like mining and manufacturing to other sectors.
As Arthurs points out, the significance of the UFL at its current level is that the WSIB is at risk of "tipping", meaning that it may ultimately be unable to meet its commitments to provide injured workers with the benefits to which they are entitled.
Arthurs fairly notes that for virtually its entire history, the workers’ compensation system in Ontario has been funded at levels below 100%, and sometimes below the current level of funding, yet it has never failed to meet its obligations as they came due. However, Arthurs also recognizes that the past does not guarantee the future and it is possible that the WSIB could eventually find itself at the tipping point.
In fact, Arthurs finds that at current levels of funding the WSIB is at a 5% risk of "tipping", meaning that in one year over the course of the next 20 it may not be able to meet its obligations as they come due "unless it takes radical and rapid steps to bring its revenues and expenses into line".
Arthurs further states that this possibility "cannot be shrugged off, especially since it assumes, not an unprecedented catastrophe, but simply the recurrence of one or more adverse events that the WSIB has actually experienced during the past decade".
The problem of the UFL as outlined in the Arthurs Report is therefore a serious and pressing one. So much so that Arthurs suggests a new funding strategy is in order for the WSIB, among other recommendations, which we will review in upcoming entries.