The Aged Care Quality and Safety Commission has updated the minimum liquidity formula to allow for the lower risk profile of retirement village and independent living unit refundable deposits, this week’s summary report on the public consultation on the incoming Financial and Prudential Standards shows.
The proposed formula for minimum liquidity was equivalent to 35 per cent of cash expenses for the previous quarter, and 10 per cent of refundable deposit liabilities for residential aged care and retirement and independent living providers alike.
During the March consultation process, provider peak body Ageing Australia and aged care financial benchmarking service StewartBrown raised concerns the universal 10 per cent standard for deposits failed to recognise the lower risk associated with ILUs and retirement village operators.
At the time, StewartBrown recommended settings of 25 per cent of quarterly cash expenses, 5 per cent of aged care refundable accommodation deposits liability and 2 per cent of independent living units liability, while Ageing Australia agreed with the 25/5 suggestion for aged care but recommended omitting refundable ILU and retirement village payment amounts.
The 11-page Public consultation summary report: The new Financial and Prudential Standards shows the commission has decided to reduce the liquidity amount a provider needs to hold for ILUs and retirement village refundable liabilities – where these operate under the same corporate structure as a residential aged care service – to 2 per cent. They have also decided to include trade receivables in the calculation, but said there will be no more changes to the formula.
Ageing Australia general manager of policy and advocacy Roald Versteeg has welcomed the reduction to 2 per cent, saying the original figure of 10 per cent would have “strangled investment in the sector.”
StewartBrown senior partner Grant Corderoy told Australian Ageing Agenda they were not surprised by the commission’s announcement “to reduce the ILUs component to 2 per cent [from 10 per cent] and to include trade receivables in the liquidity calculation.”
“Bearing this in mind, StewartBrown remains of the opinion that the ratios are too high and will potentially restrict capital development through enforcing a higher liquidity threshold,” he said.
“We note the comment that the revised liquidity ratios will be met by 84 per cent of providers and a further 6 per cent will be able to be met through alternate assurance. This is not in dispute, however, meeting the liquidity standard ratios and having an enforced liquidity are separate issues when considering ensuring that sufficient liquidity remains for investment and necessary residential aged care builds and major refurbishment of existing homes.”
Mr Corderoy pointed to the stress testing that accompanied the modelling being based on the financial years 2018 to 2022, because that included the Covid-19 peak period and the financial circumstances for residential aged care have “changed somewhat significantly” since then.
Higher margins through the AN-ACC subsidy, occupancy percentages increasing substantially and the impact of the funding reforms commencing from 1 November 2025 will further improve the financial performance, he added.
“We also note that the provider failure as a result of the Covid pandemic was not much greater than before or since, which highlights the underlying equity strength of the sector,” Mr Corderoy told AAA.
Alternative method of assurance offered
The commission also responded positively to feedback on providing an alternative assurance of compliance. It intends to develop additional guidance to help providers understand they can comply by either holding the minimum liquidity amount based on the formula set out in the liquidity standard, or by providing assurance that they have other ways to meet their financial obligations.
This can include refunding any deposited amounts and continuing to deliver safe, high-quality care to individuals accessing their services.
Mr Versteeg said Ageing Australia had advocated for a clearer alternative method for providers to demonstrate compliance against the standard to avoid situations where hundreds of millions of dollars – intended to build more beds – is tied up. The commission responding to these concerns and clarifying an alternative method is “a win for providers and older Australians alike,” he added.
Grant Corderoy told AAA that allowing providers to submit alternate liquidity assurance was a “very positive initiative.”
“We suggest that the basis required for alternative liquidity assurance eliminate subjectivity as much as possible. As this is a liquidity-based assessment, the alternatives should be based on cash flow forecasts supported by reliable assumptions over a period of no more than 12 months.”
He added that introducing a further cost will be detrimental as the cost of compliance is already significant.
“If the quality commission seeks further assurance, this may be provided by the independent auditors, noting that the audited annual financial statements already include a declaration by the governing body that the provider can meets their obligations as and when they are due and payable,” said Mr Corderoy to AAA.
Mr Versteeg said: “The sector needs settings that are future-focused, supporting our capacity to meet the needs of a growing ageing population in coming decades.”
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