Sara Fowler sees a solution to the old chestnut of PI multipliers. Sara Fowler is a senior manager at Ernst & Young.

The debate over multipliers in personal injury cases focuses on the investment by a plaintiff of his damages award, in particular the merits of different investments such as equities and index linked government stocks (ILGS).

The assumption implicit in the traditional approach to multipliers is that the real rate of return is 4-5 per cent. This was challenged with the publication of the Ogden tables in 1994, which advised that, with ILGS, it was possible to match the receipts from the investment of damages almost precisely with the loss the plaintiff was being compensated for. Basing multipliers on the real return of 2.5-3.5 per cent of investing in ILGS will have a significant effect on the level of damages awarded.

A recent Law Commission study found that plaintiffs "chose the more conventional and safer means of investing their money". This is consistent with the assumption, on which the calculation of damages is based, that the sum awarded will be prudently invested. The question is what should be considered a prudent investment.

Studies have shown that the long-term return on equities out performs cash and gilts. But prudent investment may not be achieved for a substantial investment in equities because the plaintiff is not in the position of an investor building wealth but will have to sell a proportion of investments to provide an income. This means the income and capital sum is depleted over time and the plaintiff is exposed to market risk for each sell.

Risk can measured by the extent to which returns fluctuate. For equities, while average annual real return was 10 per cent from 1991-95, returns varied from a negative return of 18 per cent to a positive return of over 44 per cent. If the plaintiff was to invest substantially in ILGS, this risk is removed. The portfolio can be made of a series of separate investments, each maturing at different times throughout the plaintiff's lifetime.

There are 13 ILGS, with a range of maturity dates spread over the next 35 years, and matching plaintiff income lost to the return from a basket of ILGS is straightforward. Over the long term, equities show a higher return than ILGS or cash, although there is a risk. This balance between risk and return is the nub of the debate which, hopefully for all involved, will soon be resolved.