Turn the tables

Using the Ogden tables or, to give them their proper title, ‘actuarial tables with explanatory notes for use in personal injury and fatal accident cases in determining personal injury settlements’, is well established.

The tables work by calculating the current value of the future annual loss or expense. This figure is known as the ‘multiplicand’ and is then multiplied by the relevant ‘multiplier’ found in the appropriate table. The result is the present capital value of the future loss, i.e. the compensation required.

While Ogden tables are in wide use and hopefully understood by solicitors, this approach does have major failings.

Perhaps the most important one is that, in regard to any lump-sum compensation award for a lifetime loss, the Ogden table figures are designed only to last an ‘average’ life expectancy. For those clients lucky or unlucky enough to succeed this who have taken a lump-sum payment rather than periodical payments, there is no protection for longevity.

Also, the lord chancellor’s current prescribed 2.5 per cent discount rate in the Damages (Personal Injury) Order 2001 relies on a primarily equity-based investment strategy. This is certainly unrealistic for most clients, many of whom will look to the perceived security of deposits rather than risky stock market-based investments.

Take a 60-year-old woman requiring lifetime care of £250 per week. The Ogden tables using the prescribed 2.5 per cent discount rate would generate a present capital value of the loss of £257,790. This is calculated as £250 x 52 weeks, meaning a multiplicand of £13,000, with the Ogden table 1 giving a multiplier of 19.83, i.e. £13,000 x 19.83 = £257,790.

If this client is unhappy with the equity-based investment approach assumed by the 2.5 per cent discount rate and instead relied on deposits (currently yielding approximately 1 per cent below RPI), she would face exhausting her capital by age 77. This is eight years short of her average life expectancy.

This example is a simplistic calculation to illustrate the potential pitfalls for clients having to rely purely on the Ogden tables calculations.

Finally, although certain losses such as income have historically risen higher than prices, Cooke v United Bristol Health Care [2003] established that this principle could not be used in deciding compensation amounts as it would be seen as an attack on the lord chancellor’s prescribed 2.5 per cent discount rate.

Unfortunately, while the court has the power to apply a lower discount rate if appropriate, e.g. Warriner v Warriner [2002], case law about possibilities of enhancing the compensation payment by arguing for this would only see it happen in exceptional cases.

While solicitors working in this area know this, it is doubtful that clients have that same level of understanding. Consequently, I suggest lifetime cashflow modelling is vital to helping them deal sensibly with their compensation award.

Lifetime cashflow modelling can easily illustrate that:

• their compensation is intended to last an ‘average’ life expectancy

• one-off purchases not provided for in the original settlement (caravan, conservatory, etc) do have a significant impact on how long that compensation will last them; and

• pursuing a lower-risk investment approach,
  e.g. relying on deposits, is likely to mean that
  their compensation will not last as long as originally intended.

Additionally, in this increasingly litigious world, having a lifetime cashflow modelling report on file may be a sensible compliance idea for the solicitor to illustrate that their clients understand the above.

Chartered financial planners should be able to put together a lifetime cashflow modelling report for clients for an hourly or fixed rate. Alternatively, many will fully incorporate lifetime cashflow modelling into their advice process and may be able to provide the above in their usual investment recommendation costs.

Scott Gallacher is a director at Rowley Turton

He writes the regular IFA comment in Private Client Adviser