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Revised method to value fund management costs
Introduction
Serious injury claimants are often entitled to damages to cover the cost of investment fees that would be incurred upon the long-term management of their settlement funds. The method for valuing such damages has been a source of contention; in particular the decision in Rottenbury by his tutor Wren v Rottenbury [2007] NSWSC 215 (13 March 2007), seemed to dismiss our previous method of explicitly projecting fund earnings, capital gains and taxation in favour of a simpler discounted cash flow approach. We have revised our method to address these matters.
Life expectancy
Where fund management is expected to continue throughout the plaintiff's life, it is necessary to determine the plaintiff's life expectancy. Consequent upon the decision in Zhang v Golden Eagle International Trading Pty Ltd & Ors [2006] NSWCA 25 (22 February 2006) ABS prospective life tables are used to establish standard life expectancy.
Fund drawdown and earnings rate
In accordance with the case of Willett v Futcher [2005] HCA 47; 221 CLR 627; 221 ALR 16; 79 ALJR 1523 (7 September 2005), our revised calculation method assumes that the fund will decline to a zero balance over a term equal to the individual's life expectancy.
Although paragraph 53 of Rottenbury v Rottenbury states:
"In calculating the present value of the cost of fund management one does not take into account as a separate item the fact that the fund will earn income"
as the statutory discount rate represents the after-tax, real investment earnings rate that an individual is able to achieve, we have interpreted this to mean that the fund will earn income equal to the statutory discount rate. This results in:
- a more realistic declining fund balance
- drawings consistent with the principles of standard earnings losses (i.e. the present value of total drawings at the statutory discount rate is equal to the initial fund balance)
- inclusion of all fees, including fees charged on fund income (i.e. OPC supervision fees)
Class of services fees allowable as damages
Paragraph 45 of Willet v Futcher states:
"[I]t may not be easy to distinguish between fees charged for the management of a sum awarded as damages to a person unable to manage his or her own financial affairs and fees charged for "investment advice"...[F]ees for the latter class of service were not allowable as damages"
Our revised methodology calculates each component of fees separately and so allows for exclusion of any particular class(es).
Fees on fees
Any additional award for fees that is invested with the initial fund balance will incur fees upon itself. Our calculation method allows for a recursive adjustment in order to include or exclude such fees on fees
More information
For more information regarding our revised fund management calculation method, please contact Corey Plover.
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