Suitability of the 2.5% net discount rate for quantum of damage calculations in South Africa

Abstract

This study is on the 2.5% real discount rate used to calculate the lump sum payment in the event of a compensation claim. The aptness of this 2.5% real discount rate is assessed through a statistical analysis of government bonds and inflation data over the past 59 years. The investigation yields evidence that the discount rate over the last 59 years may be mean reverting and would be a good approximation to use in the future. Also, an interesting relationship was found between the introduction of inflation targeting in the year 2000 and the stationarity of the series. It must be considered that the timing and duration of variation from the 2.5% cannot be predicted, but reversion to the series mean seems to always occur. The practice of using the 2.5% in the South African context is also compared to other practices globally. Finally, circumstances for the departure from the 2.5% discount rate are investigated, with some suggestions.