Damages for fund management fees can be awarded where the incapacity to manage the funds awarded arises from the negligence of the defendant. Case precedents – especially Gray V Richards [2014] HCA 40 – holds that no allowance should be made for the cost of managing the fund’s predicted future income. This blog considers how these damages can be calculated.
An example will help illustrate the points made. Let us consider a $5m settlement where fees are 1% of the opening balance. Actual fees will be a lot more complex and probably higher, but this simple case shows the issues. Further, I have assumed inflation is 2% p.a. and investment returns are 5% p.a. The statutory discount rate is 3% p.a. The full realistic
model would have: the closing balance calculated from the opening balance; drawings allowing for yearly cost of living increases; fees; and interest earned. On this basis, the present value needed for fund management costs is $753,053.
These are not the calculations needed for the Court. Here no allowance should be made for the cost of managing the fund’s predicted future income. The fees on balances are from the linear rundown of the primary award with drawing spread uniformly over anticipated pre-injury life expectancy. This is a lower amount than the realistic model. A linear rundown is far faster than the realistic model of funds management costs. If the statutory discount rate is lower than the nominal investment earnings rate, a partial offset occurs. On this basis, the value calculated is $712,836 i.e. $40,217 less. Where States have increased the statutory rate to 5 or 6% to achieve cost savings the difference will be even bigger. For example, the award would be $584,560 i.e. $168,493 less than the realistic model for a 5% p.a. statutory discount rate.
I observe other calculations where no allowance is made for future earnings, but allowance is made for fees on the funds set aside for fees. I am not a lawyer and would need guidance, but it seems to me that this involves funds management on funds management, and so should not be the calculation approach adopted. However, if you need it quantified then it is possible via a reiterative method to calculate it.
NetActuary is always willing to explain the ramifications of various methodologies. A challenge of this area is that legal precedent doesn’t always follow a realistic model. Also, where rates and factors are mandated, they can be out of step with current economic conditions.
Brian Bendzulla