Summary

The UK Government has undertaken to consult on whether there is a fair way to set the “discount rate”. The discount rate is the rate by which lump sum damages for pecuniary loss in personal injury claims are discounted to reflect the expected returns on the investment of that lump sum. Having initially moved the discount rate from 2.5% to -0.75%, the UK Government’s expectation is that the rate might be in the region of 0 to 1%, with the rate to be reviewed at least every three years. A mechanism for the review is to be established to prevent the perceived injustice to claimants caused by movements in the rates of return on long term investments.

Background

Where a claimant seeks an award of damages for future loss, the Court requires to take into account any benefit from accelerated receipt of a lump sum. The Court applies a “discount rate” to take account of this.

The discount rate was fixed at 2.5% in June of 2001. The Lord Chancellor announced a review of the discount rate in December 2016, as a result of pressure from bodies representing claimants’ solicitors, who argued that the prescribed rate was penalising claimants investing in risk-free investment vehicles. Following review, the then Lord Chancellor announced a reduction in the discount rate from 2.5% to -0.75%, effective from 20 March 2017.

Impact of the reduction in the discount rate

The insurance industry and large self-insureds, such as the government and the medical defence organisations, have faced the brunt of the reduction of the discount rate. The Association of British Insurers argues that the reduction assumes that claimants will only invest their compensation in Index Linked Government Securities, and that this is factually and legally wrong. Whilst the insurance industry is committed to full compensation for claimants, it believes that the reduction in the discount rate will result in over-compensation.

The change in the discount rate materially affects ongoing claims, particularly those with long-term needs. The longer the period of loss, the greater the impact of the discount rate change. Those claimants with a life expectancy or around 40 years could expect an increase in their awards of 50% on average. Our own assessment in higher value claims, of more than £1 million, dependent on the extent and duration of the loss, would see damages increase by a third to a half, due to the change in the discount rate to -0.75%.

Review

The Lord Chancellor has reviewed the reduction in the discount rate, following a full consultation launched in March of this year. It is proposed to set the rate by reference to “low risk” rather than “very low risk” investments, to better reflect the actual investment habits of claimants. It is anticipated that the revised discount rate will now sit at somewhere between 0 - 1%. It is also proposed to review the discount rate more regularly in future and to appoint an independent expert panel to advise on that review.

Comment

The suggested revision to the discount rate by the Lord Chancellor will be welcomed by the insurance industry and defendants, who believe this will be a fairer reflection on the actual investments made by those compensated for future losses. Those acting on behalf of claimants will no doubt welcome the commitment to more regular reviews, which should hopefully avoid such a significant change in the discount rate, which has no doubt given rise to the greater focus on the change in the discount rate at the beginning of this year. A return to a true “discount” rate should not result in a departure from the principle that a claimant should be fully compensated, if they are suitably advised on appropriate investment of the sums compensated.