In matrimonial proceedings, a spouse may demand that the other party financially contributes towards his / her monthly income needs (i.e. spousal maintenance). Such spousal maintenance is usually provided by way of periodical payments. The paying party may sometimes offer to pay a lump sum, as an alternative to providing monthly periodical payments.
Although this lump sum may seem a significant payment at the outset, the payor may nevertheless find this alternative attractive as it completely severs all financial ties between the parties and avoids future disputes. On the other hand, the payee spouse may also find a lump sum attractive as there is absolute financial freedom in however way he / she deals with this sum of money. Though in practice, the payee spouse is expected to use this lump sum, together with its interests and investment returns, to provide for his / her periodical needs. The goal is that the entire lump sum shall be exhausted at the end of the recipient’s life or after a fixed time period.
This lump sum is calculated by using the Duxbury calculation (named after the seminal case of Duxbury v Duxbury [1987] 1 FLR 7 (CA).
With reference to the recipient’s level of expenditure, the 3 most critical elements affecting the calculation of the lump sum will be: (1) the recipient’s life expectancy; (2) the inflation rate; and (3) the expected rate of return.
Life Expectancy
Estimating the recipient’s life expectancy is comparatively more straight forward that the other 2 factors, as the Hong Kong Census and Status Bureau regularly estimates and publishes life expectancies of Hong Kong residents (i.e. the Hong Kong Life Tables).
Discount Rate
The difference between the rate of return and the inflation rate is commonly referred to as the ‘discount rate’. Usually the discount rate will be positive. However, estimating the discount rate has been increasingly difficult since the 2020 COVID pandemic.
Prior to 2020 (i.e. the COVID pandemic), global inflation rate had remained below 3% p.a. The world has since experienced significant global inflations as high as 13.4% even in highly developed economies such as the UK. On the other hand, the rate of return will depend on a variety of factors, including the expected pay out period, the composition of the investment portfolio, the historical performance of such investment portfolio, etc. One recent market report suggests that professionally managed investment portfolios have all (low, medium and high risk portfolios) suffered various losses in the past year[1].
With a view to streamlining and promote judicial economy, past decided cases in Hong Kong has recommended setting up a judicial Duxbury Committee in Hong Kong to publish and update multiplier tables for the purposes of calculating the Duxbury lump sum. This Hong Kong based Duxbury Committee is currently still work in progress. In the meantime, and particularly having regard to the recent negative discount rates, parties should consider engaging professional advice in the calculation of Duxbury lump sums.
[1] STEP Managed Portfolio Indices, published in Q1 2023