When the government came out with a new discount rate for personal injury compensation payments in February some in the insurance industry branded it “crazy”.
That was hardly surprising given the rate was set at -0.75 per cent.
We were warned that car insurance premiums could soar by up to £1,000 a year for younger drivers and £300 for old ones, with an average of £50 to £75 a year. The basis for calculating the rate, using purely index-linked gilts, is antiquated and, the ABI argues, does not reflect how compensation money is usually invested.
Back in December 2010, the Law Society published an analysis by Felix Chan, associate dean of law at the University of Hong Kong, Wai-Sum Chan, professor of finance at the Chinese University of Hong Kong and Johnny Li, Fairfax chair of risk management at the University of Waterloo.
This pointed out that yields on index-linked gilts had been sliding since the rate was set at 2.5 per cent in June 2001. It suggested that younger victims in particular could suffer from serious under-compensation as a result.
You may not have noticed the ABI declaiming the unfairness of the discount rate then even though those paid compensation should be as much its concern as those paying premiums and its members’ shareholders.
Clearly a middle way is needed.
The ABI has suggested that an allowance should be made to reflect that claimants tend to invest in a mix of low-risk assets.
Alternatively the compensator could bear the investment risk via a periodic payment order.
Most interesting is the suggestion for two rates to reflect different investment periods. Those likely to be investing over a longer period would bear a greater discount to reflect the likelihood of their better returns.
The ABI also suggests a panel of experts should be set up to assist the Secretary of State in setting any new rates.
I find it inconceivable that any Secretary of State would make such a decision without consulting experts – but perhaps the key thing is from where the “experts” are drawn.
These are all positive suggestions. But in all of this we must never forget that we are talking about money being paid to real people who will often have suffered life-changing events.
That money is to help them try to rebuild their lives and struggle for some semblance of normality.
They must remain the priority no matter how much it hurts the rest of us.
Meaningless manifestos
Squillions of column inches have been used over the past couple of weeks discussing the Labour manifesto and, in particular, its tax plans.
I have a message for those analysing it. Stop! You are wasting your time and your shareholders’ money. They are not going to be elected.
Among them is to enhance the pensions triple lock with a padlock for those who feel their savings are safer at home than in the bank. At 20p per padlock it sounds like a goer to me.
Cheaper investing
Welcome Vanguard. More competition is sorely needed in the fund platform arena where a few have dominated for rather too long.
Hargreaves Lansdown’s profit margins at its last half-year results were a jaw-dropping 70 per cent.
To call these places fund supermarkets is having a laugh. Supermarkets compete to push prices down and operate on margins in low single figures.
Fund supermarkets set their prices and stick to them. They’re more like old style corner grocers with their take it or leave it attitude.
Vanguard is promising a maximum fee of £375 a year and a base charge of 0.15 per cent on top of fund charges. That undercuts HL’s maximum 0.45 per cent by a full 0.3 percentage points and is also cheaper than Fidelity Investing.
Potential savings are more than £5,000 on a £100,000 portfolio held over 10 years earning about 6 per cent. For now, the choice of investments and the service offering is limited.
But if Vanguard can deliver on customer service and broaden its offering then the next few years might at last become cheaper and more competitive for direct investors.
Tony Hazell writes for the Daily Mail's Money Mail section
