The Government has now published the response to the consultation process on how the discount rate should be set in the future and what is to happen next.
Whilst the approach of 100% compensation is preserved, it is clear from the responses received that claimants invest in low risk diversified portfolios and not in "very low risk" investments, such as ILGS alone.
As a result, the law as it currently stands produces awards that provide more than 100% compensation with the inevitable ripple effects across compensators and consumers alike. In summary;
- The government has acknowledged that calculating awards for future loss is an inexact science and that setting the rate is not straight-forward. However, it has sought to adopt a technically correct, accurate and workable solution that is fair, understandable and transparent with the objective of providing full compensation, neither more nor less.
- The draft legislation only applies to England and Wales; the Scottish government has already announced that it will be introducing its own legislation in a Damages Bill.
- The government does appear to want to retain the current balance between lump sum awards and PPO awards, which was the general consensus in the consultation responses, as no changes are proposed to the PPO legislation.
- The new framework for setting the discount rate is set out in a schedule. This is to be incorporated into the Damages Act by a new section A1, which (ignoring some slight rewording) otherwise remains unchanged (as the requirement to consult with the Government Actuary and HM Treasury is now contained in the schedule).
- The rate is to continue to be set by the Lord Chancellor who will commence an initial review within 90 days of the enactment of the legislation and, subsequently, within 3 years of the conclusion of each review.
- Each review must be concluded within 180 days of its commencement.
- During the initial review, the Lord Chancellor must consult with the Government Actuary and HM Treasury.
- During all subsequent reviews, the Lord Chancellor must consult with HM Treasury and an expert panel, which is chaired by the Government Actuary (or his deputy if that positon is vacant). This panel will also include four other members who will be appointed by the Lord Chancellor on each review: an actuary, an investment manager, an economist and an expert in consumer investment affairs. In the event of a tied vote on any decision (the quorum is 3) the Government Actuary has the casting vote. The panel may invite other persons to attend their meetings and also take into account information submitted by other persons (whether or not it has been commissioned by the panel).
- When determining the rate, the Lord Chancellor must:(a) base this on the rate of return that a claimant receiving damages for future loss could reasonably be expected to achieve when investing them, to meet those losses when they are expected to arise, with the damages being exhausted at the end of the period for which they are awarded.(b) assume that (i) the damages are payable in a lump sum (rather than a PPO), (ii) the claimant receives proper investment advice, (iii) the claimant invests in a diversified portfolio of investments and (iv) those investments involve 'more risk than a very low level of risk, but less risk that would ordinarily be accepted by a prudent and properly advised individual investor who has different financial aims', i.e. a low risk portfolio. Low risk is said not to be a precise term and covers a range of possibilities, i.e. different mixes of investments rather than a prescribed one.(c) have regard to (i) the actual returns that are available and (ii) the actual investments made by claimants, i.e. to real world investment.(d) make appropriate allowances for taxation, inflation and investment management costs.(e) must give reasons for the decisions he makes on those allowances.
- The government has invited comments on the draft legislation without setting a time limit for those comments, but time is short as it intends to introduce the legislation to Parliament as soon as parliamentary time permits.
- Once enacted, the legislation will be brought into force on a date specified by the Lord Chancellor in a commencement order, i.e. by statutory instrument.
- The rate will continue to be prescribed by an order made by the Lord Chancellor, i.e. by statutory instrument.
- Any change in the rate will not affect the awards of damages that have already been made, i.e. will not have retrospective effect, but will apply to any claim settled on or after the new rate comes into force.
- The government would expect that, if a single rate were set today under the new approach, it would fall between 0% and 1%, based on the expected returns over longer award periods, although it is stressed that this is not to prejudge the rate which would be set following the first review.
- The draft legislation leaves open the option of setting different rates for different classes of case, including cases with different durations of loss, but it appears that this approach is unlikely to be adopted during the initial review.
- If the draft legislation is enacted, the link with ILGS will be broken and the setting of the discount rate will be placed on a fairer footing.
- The draft legislation is as favourable as compensators could realistically have hoped for and, therefore, should largely be supported in its current form.
- If all goes to plan, the rate will be reviewed in spring/early summer 2018 and a new rate set by this time next year. The initial review should not take as long as has been allowed, as the groundwork has already been done, but it will take some time to pass the legislation through Parliament.
- In the meantime, the current rate of -0.75% will still apply, although in any case not listed for trial by summer 2018 claimants will have to be realistic about what the rate would be by the time of trial. Where the court is required to assess damages, the current rate will continue to be implemented.
- Claimants are perhaps even more likely to seek an early trial date and compensators will want to assess the risk of this.
- Settlements at JSMs in cases which are not due to go to trial before the rate changes are likely to be based on the expected outcome from next year's review.
The clarity from government is welcome and will enable both claimants and defendants to adopt a pragmatic approach to settlement of claims. There continues to be an advantage in dialogue and JSMs and other discussions should not be delayed.
The 3 year cycle of reviews (that may be more frequent) will also have some impact on claims handling in the future as parties try to second guess what the outcome will be and potentially seek to expedite or delay claims on what they think will be in their clients' best interests. However, it is anticipated that the significant change of rate that we saw last time is less likely to occur in circumstances where the review is regular, unless there has been any significant and unanticipated change in the economic climate in the intervening period.
There remain unanswered questions in relation to accommodation claims and the application of Roberts v Johnstone using the current rate. The appeal in the case of JR v Sheffield Teaching Hospitals NHS Foundation Trust will be heard soon.
For more information and the full publication of the Governments response, please click here.