Following more than four years after closing a consultation on the issue, the government is finally set to announce the result of its review of the discount rate for injury claims. We are told that by 31 January 2017 the Lord Chancellor will declare whether the discount rate will be changed from the existing rate of 2.5%.
What is the discount rate
The discount rate is used to calculate damages for future losses in claims, taking into account the income a lump sum might produce. It is meant to reflect the assumed net real return on the investment of damages after allowing for inflation, tax, and any investment related charges.
The current discount rate
The current discount rate set in 2001 by the then Lord Chancellor was based on yields generated by index-linked government stock (ILGS). At that time interest was around 4.5%, a government 10 year bond had a yield of 5% and RPI was 2.9%. However, since 2001 the rate of return on ILGS have reduced significantly (ILGS yields have never been higher than 2%) which suggests that the discount rate should be significantly lower.
Effect of the current rate
The impact on lump sum settlements is significant. This current discount rate can potentially leave people with permanent injuries significantly out of pocket, so at present claimants are not getting proper compensation. The Association of Personal Injury Lawyers (APIL) has campaigned for many years the current rate is too high and penalises those that have been injured through negligence. The president of APIL commented “People with lifelong injuries are continuing to be undercompensated, in some cases, by hundreds of thousands of pounds, because successive governments have dragged their heels and failed to review the discount rate to reflect changes in the economy”.
Given the current economic climate, it would be unfair if the Lord Chancellor’s review does not result in a reduction of the discount rate. However, opposing interests including the insurance industry are likely to make a reduction to one per cent or less unlikely. It is also possible that the Lord Chancellor may consider applying different discount rates to particular heads of loss (as in the Jersey case of Helmot v Simon where a discount rate of -1.5% was applied to future losses related to earnings and 0.5% for non-earning related losses).