The Cost of Fund Management: Why a Large Compensation Award Isn't Worth Its Face Value

When a plaintiff receives a large personal injury settlement or court award, it is tempting to assume that the figure represents the full value of their financial position from that point forward.

In reality, that is not quite right.

A significant lump sum award will often be placed under formal management, either through a trustee arrangement or with a funds management service. Managing those funds costs money. And in cases involving large, long-term compensation payments, the cost of fund management can itself be a significant financial burden.

Compensation for this cost is a recognised head of damage, and it is one that deserves careful analysis.

Why Fund Management Is Required

In serious injury matters, particularly those involving a plaintiff who lacks legal capacity or who has received a very large award, the court may order that the funds be managed by an external trustee. In NSW, this is commonly the NSW Trustee and Guardian, known as the NSWT&G.

Even for plaintiffs who retain capacity, professional fund management may be strongly advisable given the scale of the award and the complexity of managing investments over a lifetime.

Either way, fees are charged for this service. Those fees represent a real cost to the plaintiff that they would not have incurred but for their injury.

How Fund Management Fees Work

The NSWT&G charges fees based on the value of the funds under management. As at 1 January 2022, the fee structure involves an annual management fee as a percentage of the fund, subject to a cap.

The annual management fee cap is $15,000. Six-monthly reviews of management fees are undertaken, in December and June each year.

An investment fee of 0.35% per annum also applies where funds are held in the NSWT&G Financial Management Growth Fund, which is typically assumed in assessments because injured parties with a longer investment horizon are generally directed toward the growth fund.

Two Approaches to Calculating Fund Management Costs

Following the High Court's decision in Gray v Richards [2014] HCA 40, it was confirmed that the cost of fund management on fund management costs can itself be claimed. However, the methodology for calculating these costs was not definitively settled.

As a result, two approaches have developed in practice.

The first is the Present Day Value approach, which calculates fund management costs based on the present-day value of the damages award. This was the approach used in earlier editions of professional assessment handbooks.

The second is the Actual Value approach, which calculates fund management costs on the actual future values of the fund as it is drawn down over time. This approach reflects the fact that the fund will generally be larger in nominal terms in future years.

Both approaches are in use, and the choice can produce meaningfully different results. For this reason, reports sometimes present calculations under both approaches.

How the Numbers Work in Practice

Fund management costs are typically presented as a lump sum present value, indexed to the value of the damages award and the expected management period.

For a damages award of $2 million managed over a period of 30 years at a 3% discount rate, the fund management cost under the Present Day Value approach is a substantial sum. Under the Actual Value approach, the figure is higher still.

This is why fund management costs can represent hundreds of thousands of dollars in serious injury matters and must not be overlooked.

The Role of Forensic Accounting

At DB Forensic, we prepare fund management cost assessments using both the Present Day Value and Actual Value approaches, at both 3% and 5% discount rates. We set out the applicable fee structure clearly and explain the assumptions underlying each calculation.

Where the applicable approach is contested between parties, we can present both sets of figures to allow legal teams and courts to compare the outcomes under each methodology.

Dealing With a Large Personal Injury Award

If you are working on a matter involving a significant lump sum award and want to ensure fund management costs have been properly considered and calculated, DB Forensic can assist.

Contact DB Forensic About Fund Management Costs