The Rules Governing Calculation of Commuted Values have Changed
This week, the South Carolina Workers’ Compensation Commission (Commission) voted to change the way commuted values of awards in South Carolina are calculated. At its monthly business meeting on Monday, April 15, 2013, the Commission unanimously accepted the recommendation of the majority of the Commuted Value Advisory Committee to discontinue the 5% discount rate for awards from 101 weeks to 500 weeks and, instead, to discount those
|Post by Founding Partner Stan Lacy|
awards at the yield-to-maturity of the Five Year U.S. Treasury Note published by the United States Treasury Department on the first business day after January 1st each year. This means, for the foreseeable future, carriers will be paying more for lump sum awards, but there are some limits.
Lump sums are governed by S.C. Code §42-9-301, which provides the discount rate cannot be lower than 2% or higher than 6%. Presently, yields on Five Year Treasury Notes are below 1%, so the applicable discount rate as of this writing is 2%, the same as awards for 1 to 100 weeks. The discount rate for these smaller awards will remain at the minimum statutory rate as it has in the past.
The Advisory Committee, which was composed of claimant attorneys, defense attorneys (of which I was one), an insurance representative, representatives from the Commission, a professor from the Moore School of Business, and a representative of labor, was split on the recommendation to the Commission. The vote was 5 to 4. The minority wanted the Commission to recognize the reality that insurance companies’ return on investments historically exceeded the yield on Five Year Treasury Notes and some consideration should be given to the impact commuting to present value using very low discount rates would have on carriers’ reserves. The minority suggested the standard be the yield on Five Year Treasury Notes plus one or two points. The minority was given time to speak at the hearing and voice its views, but after all had had their say, the Commission unanimously adopted the majority view.
The current discount rates of 2% for commuting awards under 100 weeks and 5% for awards 101 weeks and higher are set forth in the South Carolina Workers’ Compensation Regulations 67-1605E(5). Changing the method for calculating commuted value will require a change in the regulations, which will take months. The regulation must be drafted, published, and the public must be given the opportunity to comment. The regulation must then be approved by the General Assembly. The process is long and involved. If you’re interested in learning about the details of the process, look at S.C. Code Ann. §§1-23-110 to 120.
Remember, however, the General Assembly adjourns the end of June 2013 and does not convene again until January 2014. It appears there is not enough time to get anything approved this year, so the earliest we can expect to see the new calculation method would be sometime next year.