An investment approach to welfare applying traditional actuarial techniques in new fields

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2 An investment approach to welfare applying traditional actuarial techniques in new fields Mike Clough & Rosi Winn 2017 PricewaterhouseCoopers. All rights reserved. PwC refers to the Australian member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details. Liability limited by a scheme approved under Professional Standards Legislation This presentation has been prepared for the Actuaries Institute 2017 Injury & Disability Schemes Seminar. The Institute Council wishes it to be understood that opinions put forward herein are not necessarily those of the Institute and the Council is not responsible for those opinions.

3 Introduction a new flexible social support system that is simpler, sustainable, coherent and outcomes focused, with investments directed towards achieving clear, measurable improvements for people at risk of income support reliance McClure Review, 2015 Funding and Provision of Services Understand Needs Deliver Outcomes

4 The Investment Approach Aims: reducing welfare dependence and improving the lifetime wellbeing of people and families Premise: the idea that there are some segments of the population for whom investment / early interventions can deliver positive changes in their life trajectories, helping them achieve better outcomes and become more self-sufficient Goals: Identifying the segments where there is potential to deliver positive changes in people s life trajectories. Investing to move people away from being at risk to leading productive, happy and fulfilling lives. Reducing avoidable spend.

5 Australian resident population of 23.9m at 30 June 2015 Welfare in Australia In 2014/15 DSS provided $109bn* of entitlements Age pension is the largest 12% spend by payment type 2% 3.91m previous welfare recipients 2% 3% 4% 2% 2% 3% 4% 12% 34% 34% 4% 11.95m non welfare recipients 5% 4% 5% 8% 8% 13% 13% 8.0m current welfare recipients (incl. 0.1m overseas residents) * Note 2014/15 data is not fully mature 13% 13% Age Pension Age Pension Family Tax Benefit Family Parenting Tax Payments Benefit Parenting Rent Assistance Payments Youth Allowance Rent Assistance Other Youth Allowance Other Disability Support Pension Disability Support Pension Newstart Carer Newstart Payment Child Carer Benefit Payment Carer Allowance Child Care Benefit Carer Allowance

6 Supporting data How actuaries are involved Australian Priority Investment Approach Supporting data Actuarial valuation Identification of target groups Design, development of programs and interventions Monitoring of experience Monitoring and evaluation of outcomes Ongoing development and refinement

7 Males Contains record for each person in population (23.9m). Developed using administrative data for current and previous welfare recipients and census derived synthetic data for rest of 90 Model population population m 0.1 m 0.0 m 0.1 m 0.2 m Males People by year of age Females m 0.1 m 0.0 m 0.1 m 0.2 m People by year of age Females Studying Working Age Studying Working Age Parents Carers Parents Carers Disability support Pension Age Disability support Pension Age Non IS Family Non IS Family Non IS Carer Non IS Carer Non IS Other Non IS Other Previous Welfare Recipient Previous Welfare Recipient Rest of Aust. Population Rest of Aust. Population

8 Actuarial model - overview Historic population data up to valuation date Longitudinal data reflecting the full population to the valuation date. Statistical analysis of past experience Initial valuation using simple foundation assumptions Enhanced using statistically derived risk-based assumptions Simulation engine Projects the path of each individual through their lifetime. Projections of peoples lifetime path, service usage, and characteristics Adjustments Module e.g. allowance for current policy settings Results Module Summarises & presents lifetime results Supporting analysis: Historic expenditure Population segmentation & analysis Changes in policy settings Supporting data: Longitudinal data development of population of interest

9 Actuarial model simulation cycle Starting population For each person: What are their current demographic characteristics? (e.g. age, gender, indigenous status) What is their current and past interaction with the system? (e.g. age at entry to system, recent payments) Starting population at valuation date (t) Update step Update data items to reflect position at the end of the year (which then becomes the start of the next year) E.g. update duration in system Service/payment category amounts For each service or payment category the person utilises: What amount do they receive each year? Update population dataset to year t+1 Simulate payment or service $ amount Ageing Annual projection cycle Simulate agency interactions (utilisation) Mortality Simulate demographics and life circumstances Simulate class or wellbeing Partner status Children Level of highest educational attainment Class / wellbeing Does the person s class or wellbeing/vulnerability change during the year? Agency interaction How does person interact with the agency and which services do they utilise?

10 A few results total lifetime costs The total lifetime cost is estimated to be $4,764bn. Largest payment category is Aged Pension (51% of total cost, $2,451bn). Second largest is Disability Support Pension (12% of total cost, $573bn). >1% 8% 1% 13% 7% 2% A - Studying payments 5% B - Working age payments 51% 12% C - Parenting payment D - Carer payment E - Disability support pension F - Aged pension G - Dependant pensions H - Family tax benefit All other

11 A few results average lifetime costs The average lifetime cost across the 24m people in Australia is $200,000. Wide variation between lifetime cost for different groups. Non welfare recipients Disability support pension recipients

12 Proportion In Welfare Class A few results transitions from studying payment 392,000 studying payment recipients in 2015 average lifetime cost $250, % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Class key: 1 Studying 2 Working Age 3 Parents 4 Carers 5 Disability Support 6 Pension Age 7 Non IS Family 8 Non IS Carer 9 Non IS Other 10 Previous Welfare Recipient 11 Dead 12 Rest of Aust. Population Age profile Year

13 How the model is being used Individual person model provides facility for detailed consideration of population and groups within it. Macro uses Micro uses budget announced Try, Test and Learn Fund. $96.1m fund to trial new or innovative approaches 389 ideas received for first tranche Shortlist being developed for trial

14 Observations Approach Multi-state transition model Individual person level Assumptions developed from both DSS and external data sources Design Scope which people? Which payments? Outcomes to model Payments? Wellbeing? Other? Which explanatory variables to include? Implementation Require longitudinal data to underpin assumptions Model is only as good as your data Very detailed assumptions care in choosing where to focus modelling effort Big datasets => Storage and processing considerations

15 Beyond welfare? Australia Welfare since 2015 Models under consideration by a number of states NZ Welfare - since 2011 NZ Social housing since 2015 NZ Justice development commenced 2016 NZ Vulnerable Children development commenced 2016

16 Questions? Link to PwC baseline valuation report 2_july_2016_2pwc._2.pdf