The Ministry of Justice has published a consultation into the methodology used by the Lord Chancellor in setting the Discount Rate for personal injury damages. A second consultation is to be published in the autumn to review the present legal basis for setting the Discount Rate.
Any reduction in the Discount Rate will significantly increase the payment of damages by defendants, particularly in catastrophic injury claims with large future losses.
Whilst the consultation will not take into account the consequences on those paying damages, a move away from Index Linked Government Stocks (ILGS) as the methodology for setting the Discount Rate is likely to be good news for defendants. If the Lord Chancellor will continue to be guided by the principles set out in Wells v Wells, he will need to ensure any alternative mixed investment portfolio is low risk to the "claimant investor". "Low risk" should not mean "no risk".
Any reduction in the Discount Rate will lead to an increase in claimant' damages and vice versa. The Consultation is not intended to assess the level of the current Discount Rate of 2.5% but is focussed on considering two broad methodology options when setting the Discount Rate. It asks whether ILGS is the appropriate methodology or should the return on a mixed portfolio of appropriate investments be the starting point?
Whichever methodology is selected, the aim is to produce a Discount Rate which gives effect to the full compensation principle "on the basis of investments that would be made under an appropriate low risk investment strategy".
A number of portfolio types are identified as potential options for "claimant investors", including mixed investment 0%-35% shares, sterling fixed interest and money markets. The option of 100% ILGS held to redemption appear to be considered risk free - providing a return at or above inflation and with no risk to capital value. However, some risks are unavoidable even to this investment vehicle, for example, it may not be possible to construct a portfolio of ILGS which mature when the claimant’s financial needs arise.