The Government has now explained how its proposed Discount Rate will be reviewed, and has opened the door for other changes to how claimants in personal injury and clinical negligence claims will be compensated.
It is intended that two principles will underpin the review.
First, at present the Discount Rate is based on the assumption that claimants will generally invest their awards in very low risk investments (namely Index Linked Gilts). The Government believes that this assumption is unrealistic and produces over-compensation of claimants. It estimates the present Discount Rate of -0.75% results in awards for future losses which are 20 – 35% larger than needed to meet the principle of 100% compensation. This represents a very significant windfall to claimants and in the NHS setting is a significant drain on resources at a time when it is essential that maximum resource is available to provide care services.
Second, the Government reiterates its commitment to ensure that claimants receive 100% compensation. In its Response to the Report of the Justice Select Committee, the Government stresses that claimants' expected needs should be met "fully and fairly".
Shortly after the passage of the Bill into law the Lord Chancellor will undertake a review of the Discount Rate. Subsequently, reviews are to take place at least once every three years.
Evidence will be gathered about the actual investment behaviour of claimants, as far as this can be obtained. This evidence will be gathered during the passage of the Bill through Parliament and will provide guidance on the expected rates of return on which the Discount Rate should be based.
The Lord Chancellor will also establish an independent panel of experts for the first review and for each subsequent review. The panel will provide advice to the Lord Chancellor and all or part their advice will be published at the time the decision is announced.
When reviewing the Discount Rate the Lord Chancellor may consider whether to set different discount rates for different classes of case. The types of case may be distinguished by reference to different heads of loss, or different durations of loss. In all cases account will be taken of the effect of tax and (potentially) investment costs.
When reviewing the Discount Rate the Lord Chancellor will publish impact assessments on the effect of the Discount Rate, which are to include changes to clinical negligence payments and insurance premiums. However, in its Response to the Report of Justice Select Committee, the Government expressly states that the impact of any change will "[not] be taken into account in the setting of the rate…."
Outside of the Discount Rate review process, the Government will investigate whether adequate use is being made of Periodical Payment Orders (PPOs), i.e. a mode of settlement whereby a claimant receives an agreed sum annually for an agreed period, usually for life. Resolving claims on this basis ensures that the larger heads of future loss (particularly care) are ring-fenced and are protected against inflation. It is unclear whether claimants are, in general, being properly advised as to the implications of PPOs as against lump sums and the Government may provide or endorse guidance on this. It remains open to organisations to explore their favoured form of award, and we note that for many years NHS Resolution has favoured the use of annual payments for claims with significant future losses. Indeed, an increase in the Discount Rate may also increase claimants' appetite for PPOs in clinical negligence claims.
The Government also intends to investigate (either directly or via a third party) whether the recovery of ongoing investment advice costs should be allowed as a separate head of damages. It acknowledges, however, that such costs are currently allowed for in the discount rate itself.
The first review must start within 90 days of the legislation coming into force and must conclude within 180 days. In practice those time limits are seen as maximum periods and the review is likely to start and finish more quickly. Some steps outlined above will prepare the way for the first review during the Bill's passage through Parliament.
Whilst we cannot say with certainty that the Discount Rate will change, the Government is clear that a shift to a more realistic assessment of investment behaviour based on a low risk portfolio should result in the Discount Rate increasing, presumably into positive territory.
The proposal to consider whether investment advice costs might be allowed as a head of damages will no doubt prompt calls from claimant advisers for an early change. The current practice (expressly covered in the Bill) of including an allowance when setting the discount rate is a more effective control on such costs and any calls for change should be resisted.
The level of these costs must also reflect the reality that there are many easily accessible low-risk investment schemes available and that in the scheme of things, claimants' awards are relatively small in terms of the range of investments on which professional advice is given. Subject to the Government's research, this type of investment scheme may provide a guide for expected rates of return in low risk investment portfolios (as distinct from the very low/no risk approach currently used).