the 5% discount multiplier
In New South Wales, if you claim a lump sum for future losses then the law requires the value of the lump sum to be reduced by reference to a ‘5% multiplier’.
Let’s say, for example, you claim that you will need to spend $15 per week purchasing medication, for the next 20 years. Your claim would be formulated as follows:
$15 per week x 666.4 (5% multiplier for 20 years) = $9,996.00
Compare this to $15 per week x 52 weeks x 20 years = $15,600.00 and you see that the 5% multiplier, in this example, reduces the size of the lump sum by over one-third.
The lump sum compensation is discounted to reflect the fact that there is a benefit to the recipient of the funds to receive the money now, as a lump sum, rather than being paid $15 per week over a 20 year period.
The 5% multiplier is such that it is theoretically possible to place the lump sum of $9,996.00 into a bank account returning an interest rate of 5% per annum, withdraw $15 per week for 20 years, and by the end of the period (20 years) there will be exactly $15.00 left for the final weekly withdrawal.
In other words, the 5% multiplier prevents the plaintiff from being over-compensated on the basis that it is assumed that the plaintiff will earn 5% per annum interest on their lump sum.
The issue, and the case for change
In reality, this multiplier designed to prevent over-compensation will almost always result in under-compensation, simply because it is difficult to attain an interest rate of 5% per annum over a 20 year period without adopting an aggressive (and therefore, risky) investment approach.
The 5% discount multiplier was adopted at a time when interest rates were historically higher than they are today. In 2017, common ‘safe’ investments such as term deposits rarely attract interest returns of more than 2-3% per annum at best.
Additionally, the 5% multiplier does not factor in any increases in the consumer price index (CPI). Historical CPI statistics in Australia demonstrate that the price of goods and services usually increase by between 1-3% per annum. This means that whilst you pay $15 per week for your medication in 2017, you might be paying significantly more than that for the same items by 2037. The monetary amount you receive in 2017 invariably will have much less purchasing power by the end of the 20 year period.
For these reasons, and despite the fact that recent developments in compensation law trends towards reigning in rather than increasing compensation payments, I believe that consideration ought to be given to adopting a lower discount multiplier than 5% – which sets an unreasonably high investment target for the injured claimant who depends on his or her compensation payment to get by.
If you or someone you care about has been injured in an accident, you may be entitled to compensation. To arrange a free, no-obligation assessment of your claim, please call Stacks Goudkamp on 1800 25 1800, or alternatively, make an online enquiry.
Written by Brett Watts.