In March of this year we wrote an update on the revision from the discount rate of 2.5% to -0.75% (link here). Since then the Ministry of Justice (MOJ) carried out a consultation and has published the response: “The Personal Injury Discount Rate: How It Should Be Set in the Future.” in which it is proposed that the Discount Rate will be reviewed ‘more regularly’ than it has been in the past. The new proposal is for reviews to take place at least every three years.
The MOJ has also suggested that an expert panel should be appointed to assist the Lord Chancellor in reviewing the Discount Rate. It has been noted that no investigations have been carried out on how claimants in receipt of damages actually invest those damages. The suggestion is, if this is carried out it may make it easier to make the rate better reflect the reality of claimant investments.
The MOJ’s response paper speculates that the new system would create a rate in the region of 0% to 1%. However, that does not appear to reflect the realities of current investment.
The response makes clear that any new framework will only apply once law is enacted and will not operate retrospectively and so until any alterations are made the current rate of -0.75% continues to apply. The suggestion has been that any alteration to the rate will not take place for at least 12 months, so the alteration can be expected in October 2018.
One key alteration proposed is the ‘risk level’ which is to be assumed of investor-claimants; the response sets out that there should be an assumption that ‘relevant damages will be invested using an approach that involves more risk than a very low level of risk but less risk than would ordinarily be accepted by a prudent and properly advised individual investor who has different financial aims’. It is not clear how this risk level has been selected or why vulnerable claimants, who are likely to rely wholly on any damages sum for the rest of their lives, would opt to take a higher risk investment strategy. Once the relevant legislation is available for scrutiny a clearer picture will emerge as to how the rate is likely to be set along with the frequency of its revisions.
What this means for you
There are no immediate changes afoot. However, given the lobbying and eagerness with which both insurers and the government have approached the revision of the discount rate, it is likely that any draft legislation would be put before parliament and approved swiftly. In the meantime the rate remains at -0.75% and reserves should continue to reflect this.