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RAF Amendment Bill

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

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RAF Amendment Bill

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  1. RAF Amendment Bill Some questions relating to: Cash flow implications Financial Sustainability Practicalities of implementation

  2. 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

  3. 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

  4. Generals: Cash Flow & DeficitRAF - R mil NOTE: The figure for 2004 is based on the RAF 2003 estimates.

  5. 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%

  6. 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

  7. R4 000 per month lostAged 60: 5 years income lost

  8. R4 000 per month lostAged 60: 5 years income lost NOTE: The expected payout of installments is 127% of the Present Value

  9. ULTIMATE COST IMPLICATIONSInstallments paid over next 5 years

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

  11. 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

  12. 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”

  13. UNINJURED 2020 Paterson C 2027 Paterson D Retires at 65 INJURED 2011 Paterson A 2030 Paterson B Retires at 60 More complex settlements(Relatively simple example)Child now age 8Would have had tertiary education, now only Grade 8 or 9.

  14. Cash Flow AnalysisMonthly After tax Incomes & Losses (2003 values) NOTE: If I increased these figures for inflation over the period, they would also become very large.

  15. Comparison Current: 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.

  16. Comments & Questions ASSUMED UNINJURED INCOME • What increases? “Awarded” plus CPI or then current (From remuneration experts) INJURED INCOME • Actual or “awarded” plus increases

  17. 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!)

  18. “Wild guess” at Cash Flow Savings • 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.

  19. 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

  20. 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

  21. 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.

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