Retirement savers should heed judge's compensation ruling

Landmark ruling was based on the assumption that short-term investors should avoid equities

PUBLISHED : Tuesday, 19 March, 2013, 12:00am
UPDATED : Tuesday, 19 March, 2013, 4:16am

A recent court case was a warning to people saving for their retirement that they should invest at least part of their portfolio in equities instead of putting all the money in bank deposits or bonds.

In January, we mentioned that two patients sought damages from the Hospital Authority after they were left paralysed following alleged mistaken medical procedures. The authority had insurance in place so the insurers were keeping a close eye on the compensation amount to be decided by the court.

A key issue in the landmark court case was whether the judge would apply the standard 4.5 per cent deemed investment return on any compensation sum awarded. Many believe this rate is not realistic due to the low bank deposit rate as well as the volatile stock markets.

Judge Mohan Bharwaney ruled that a higher level of compensation would be needed due to the low interest-rate environment which is expected to continue for some years.

The Hospital Authority has appealed against the ruling and it is not yet clear whether there will be any change to insurance policies related to personal injures following the decision.

The judge made the ruling based on the investment assumption that the victims should not buy equities if they will be investing it for just the next 10 years.

If they invest for longer than 10 years, then they should put 10 per cent in time deposits, 70 per cent in high quality bonds, and 20 per cent in high quality blue chips that qualify as "widows and orphans" stocks. HSBC is one such blue chip.

But the judge warned that even though the stock qualifies as a "widows and orphans" blue chip, it has seen its share price drop from HK$120 in 2007 to HK$40 in 2009 after the financial crisis, before bouncing back to over HK$84 recently.

As such, the judge considered that the victims with an investment time frame of less than 10 years should not invest any part of their award in the stock market but should put it in deposits and bonds.

However, they should invest part of their portfolio in stocks if they plan to hold the stocks for more than 10 years. This is because if they invest only in bonds for more than 10 years, they are likely to face a higher risk of having their investment eroded by inflation.

Those who invest for their retirement or other long-term needs may take this as a good reference.