Present Day Value vs Actual Value: Two Approaches to Fund Management Costs Explained

After a large personal injury settlement, one of the least visible but most significant costs a plaintiff faces is the ongoing expense of having their award professionally managed.

Compensation for this cost is a recognised head of damage, and it can represent a substantial sum in its own right. But how that cost is calculated is not universally agreed upon.

Two distinct approaches exist: the Present Day Value approach and the Actual Value approach. Both are in current use, and both can produce materially different figures from the same underlying award.

Understanding the difference between them matters, both for ensuring accurate reporting and for managing client expectations.

The Background: Gray v Richards

The High Court's decision in Gray v Richards [2014] HCA 40 confirmed that fund management costs, including the cost of managing the fund management costs themselves, are a compensable head of damage.

However, the court did not prescribe a specific methodology for calculating those costs. This left practitioners with discretion, and as a result two approaches have developed.

The Present Day Value Approach

The Present Day Value approach calculates fund management fees based on the present-day value of the damages award.

In simple terms, it asks: if the plaintiff receives a lump sum today, how much will the NSWT&G or equivalent trustee charge to manage that amount each year for the expected management period, expressed as a present value?

The calculation uses the current award value as the starting point, applies the applicable fee structure to that amount year by year, and then discounts those future fee payments back to a single present value using the chosen discount rate.

This approach is straightforward and easy to follow, which is one reason it was used in earlier professional handbooks.

The Actual Value Approach

The Actual Value approach takes a different perspective. It calculates fund management fees based on the actual future value of the fund, rather than its present-day value.

The reasoning is that a lump sum invested today will grow in nominal terms over time, at least in the early years of the management period, before drawdowns reduce the fund. The fees charged by a trustee are based on the value of the fund at the time fees are assessed, not on what it was worth at the outset.

This means that in the early years of management, when the fund is at or near its maximum value, the fees calculated under the Actual Value approach are higher than under the Present Day Value approach.

Over the full management period, the Actual Value approach typically produces a larger fund management cost figure than the Present Day Value approach.

Which Approach Produces a Higher Result

In most scenarios, the Actual Value approach produces a higher fund management cost than the Present Day Value approach, sometimes by a significant margin.

The difference depends on:

• The size of the initial award

• The length of the management period

• The discount rate applied

For large awards managed over long periods, the gap between the two approaches can be substantial.

How Reports Should Handle This

Because neither approach has been definitively mandated by legislation or binding authority, it is good practice to present calculations under both methods and at both common discount rates.

This allows legal teams and courts to understand the range of potential outcomes and apply the approach that is considered most appropriate in the circumstances.

At DB Forensic, we routinely prepare fund management calculations under both the Present Day Value and Actual Value approaches, at 3% and 5% discount rates, and present them in a way that makes the difference between the two approaches clear and easy to understand.

Questions About Fund Management in a Serious Injury Matter

If you are preparing or reviewing a damages report and want to ensure the fund management component is correctly and comprehensively assessed, DB Forensic can help.

Get in Touch With DB Forensic