Lessons from €30M HSE settlement

Duke of Marmalade

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This thread is not intended to discuss the appropriateness of these mega awards but to reflect on the very pertinent aspect of the long term rate of return which is so key in evaluating them.
Apparently back in 2014 the High Court deemed +1.5% p.a. to be appropriate. In this latest award the plaintiffs seem to have successfully argued that the appropriate figure is -1.5% p.a. Now you do not need to be an actuary to appreciate that this 3% p.a. difference has a huge impact over a lifetime.

And both figures can be argued. -1.5% p.a. is the figure obtained from index inked sovereign € bonds. +1.5% p.a. would be the return on an equity based portfolio if we assume an Equity Risk Premium of 3% p.a. which is well within the range of expert opinion.

The long term real rate of return is of course crucial to pension funding. The Government's "strawman" for its auto enrolment proposal condemns members to the -1.5% p.a. real return for the bulk of their funding. Wealthy individuals would never resign themselves to that; for them it is equity investment with +1.5% real return.
For lower income people naked equity investment would be an intolerably anxious and indeed risky experience, especially approaching and during retirement.

That is why the UK are heavily engaged in a debate about how Defined Contribution members can somehow pool the short term volatility risks of equity investment. Here in Ireland, Colm Fagan has proposed a smoothing scheme which achieves this goal in a systematically transparent fashion.
 
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