This article is the last in a series of three articles about the change in the discount rate. Part 1 looked at the history of the discount rate, how it has changed and the reasons why this change was needed and Part 2 looked at the impact that the recent changes make to the value of claims.
What is the discount rate?
The discount rate is a percentage used by lawyers to calculate future losses in a personal injury and fatal accident claims. It is designed to discount a lump sum for future losses on the assumption that that money can be invested and earn interest for the future.
More information can be found in Part 2.
When was the rate set?
The rate of 2.5% was set by the (then) Lord Chancellor in 2001 (16 years ago). As of 20 March the new rate is -0.75%.
What has changed?
On 27 February 2017, the Lord Chancellor, Liz Truss, announced a change in the discount rate from 2.5% to -0.75%. The announcement was covered in an article by Cari Sowden-Taylor that can be found here.
Why has it changed?
The discount rate of 2.5% was set 16 years ago in 2001. It is calculated with reference to Index Linked Gilts. However, following 2001 there has been a stark decrease in interest rates and securing a safe investment with a return of 2.5% is virtually impossible. The real yield on Index Linked Gilts has also fallen. However, the discount rate has remained at 2.5%.
The rate was out of date and was not adequately compensating seriously injured people for their future losses leaving them out of pocket and reliant on the NHS.
More information can be found in Part 1.
What difference will this make to my claim?
The change only affects future losses. Any claim for past loss will be unaffected. In a claim that includes significant future losses, such as a loss of earnings or care requirements, the new discount rate will have the effect of increasing the value of these losses.
Any schedules of loss that have been prepared in cases that have not reached settlement will need to be revised and re-calculated. If you are concerned about the impact on your case, please do not hesitate to contact the lawyer dealing with your case directly.
How much money will claimant lawyers make from the change?
None. The calculation of lawyers’ costs and a claimant’s damages are dealt with entirely separately. In most cases, legal fees in pursuing a personal injury claim on a claimant’s behalf are set in budgets by the court or are fixed fees in lower value claims. The change of the discount rate will increase damages for injured people with future losses but will have no impact on the level of fees recovered by lawyers or the hourly rates charged.
What is the future of the discount rate?
It is likely that there will be further consultation between government, the insurance industry and lawyers over how the discount rate should be calculated. It is not expected to remain at the level of -0.75% for the next 16 years! However, do not expect a further change to the discount rate in the immediate future.