The Government has announced that it will publish the result of its review into the discount rate for personal injury compensation by 31 January 2017. Stratos Gatzouris considers what a change to the discount rate will mean for personal injury claims.
What is the discount rate?
In claims for personal injury, damages are awarded to compensate claimants for any losses that they have suffered as a result of wrongful actions. The concept of full compensation is to return a claimant, as far as possible, to the position they would have been in but for the wrongful action. When claimants receive an award for future pecuniary loss, they are expected to invest it and the sum they are awarded is discounted to reflect this additional income.
The current discount rate of 2.5% was set by the Lord Chancellor in 2001, under s.1(1) of the Damages Act 1996. The rate was based on a three-year average of index-linked government stock (ILGS). However, while the rate of return from ILGS has steadily dropped, the discount rate has stayed the same.
The Government opened a consultation to review the discount rate in 2013. Frustrated with the subsequent delay, the Association of Personal Injury Lawyers (APIL) commenced legal action in October 2016 to elicit a decision.
Proponents of the review submit that the rate should be reduced to reflect the lower rate of return. They propose that the rate should be based on risk-free index-linked government investment bonds returns net of income tax.
However, opponents submit that in reality, claimants do not tend to put all their damages in low risk investments but invest the money in a mixed portfolio that achieves a higher rate of return. A reduction in rate could therefore lead to over-compensation. In addition, if the rate is reduced then lump sum payments may become more attractive and this will discourage settlement by periodical payment order. Furthermore, as the Government is the largest injury claims compensator through public bodies and the NHS, any reduction in rate will significantly affect public funds.
What this means to compensators
It remains to be seen what the Government’s decision will be, but it is anticipated that the rate will be reduced and this will result in higher damages awards. In large value claims, the difference of even 0.5% can be considerable. Compensators will therefore need to consider the economic repercussions of a rate change. They will need to review current reserves, and consider any offers that have or should be made to ensure that they provide sufficient costs protection.