updated on 24 January 2017
QuestionWill the government review into the discount rate for personal injury claims bring fairer compensation for claimants?
On 31 January the government is to announce its long-awaited review into the discount rate used for future losses in personal injury; a review that has been serially delayed and is mired in controversy.
Compensation in personal injury cases is there to put the claimant back in the position they would have been, but for the injury. The claimant should not be under-compensated, nor should they be over-compensated.
The discount rate is applied to lump-sum payments paid out in personal injury cases for future losses. At the conclusion of a case, a claimant can either choose to receive a lump sum payment for all losses, including future losses, or they can opt for a periodical payment order. The effect of a periodical payment order is that the defendant will pay the claimant an agreed sum on an annual basis for the remainder of the claimant’s life. This is done to ensure that sufficient funds are available to the claimant to meet their long-term needs and future expenses. This will only apply to future losses that are yet to be incurred at the time of settlement, and can comprise of heads of loss such as care, treatment or prosthetics.
However, if a claimant opts for a lump-sum payment for future losses rather than periodical payments, it is subject to the discount rate. When calculating the future losses, solicitors generally adopt the multiplicand/multiplier approach, for example, lost earnings claimed at £20,000 pa (multiplicand) x 10 (multiplier). When determining the multiplier (an actuarial figure which represents future years), solicitors have to take into account the net rate of return expected from a sensible investment of the lump sum.
As the claimant is expected to invest this lump sum in order to benefit from the yield the money would earn, paying the claimant the gross amount they claim would be over-compensating them as the claimant would benefit from having the entirety of the sum as well as earning interest on their damages. As a result, the money paid out to the claimant is subject to a discount or reduction to reflect that the claimant is receiving the money early and will be in a position to invest and receive a return on it.
The rate is currently set at 2.5%, and is set by the lord chancellor as per section 1 of the Damages Act 1996. It has been unchanged since 2001. The rate was set with reference to the three-year average of the gross redemption yields of index-linked government gilts.
This means that when solicitors calculate damages to be awarded for future losses, they take into account this discount and reduce the future losses section of a claimant’s schedule of loss accordingly.
The rate of 2.5% has been a bone of contention between claimant and defendant lawyers for some time now. The change in the country’s economic situation since the last review was conducted means that the present 2.5% discount rate seemingly favours defendants and insurers, given that a projected 2.5% return on an investment is simply not reflective of reality.
Claimant solicitors have been calling for a review to be conducted for some time. The yield from index-linked government gilts has been dipping to less than 1% for several years now and recently fell below 0.5%. Claimant lawyers argue that this has led to Claimants being undercompensated for over a decade as a result of the government’s failure to review the rate following economic upheaval. Claimants have also pointed to the fact that those who are most likely to receive payments for future losses are those who have been most seriously injured, meaning they are the ones who have lost out the most as a result of the rate being set at such a high level for such a long period.
In November 2010 Kenneth Clarke, the then lord chancellor, announced that a review into the discount rate would take place. The process started in August 2012 and in August 2014 a panel of experts was selected to provide expert investment advice to assist the review. The panel sat in earnest in March 2015 and reported to the Ministry of Justice (MoJ).
In the meantime the MoJ has had an internal team researching how to improve the quality of advice given to ministers over the potential impact from a change of the discount rate.
It was not until 7 December 2016 that the current lord chancellor, Liz Truss, announced that she would be “undertaking to review the discount rate for personal injury damages awards, and to announce the result of the review by 31 January 2017”; an announcement which only took place following a threat of legal action from The Association of Personal Injury Lawyers.
However, this is now at risk due to an attempt to judicially review the decision. Insurers, led by the Association of British Insurers (ABI), have taken the step of mounting a legal challenge of the decision to review the rate prior to the decision being announced. The rationale the ABI has taken is that it wants a proper consultation to be completed and for the government to alter the methodology used to calculate the rate before moving forward. The ABI has argued that by using the yields of index-linked government gilts “the review will take a flawed approach based on a fundamental misunderstanding of how people invest their compensation”. Presumably the ABI believes that it has some insight to offer the government on how claimants invest their compensation.
The hearing was due to take place on 19 January 2017, with the lord chancellor giving an undertaking that no announcement would be made until the ABI’s hearing took place. If the ABI’s application is refused, the announcement should go ahead as planned on 31 January. Otherwise a fresh review may need to be undertaken.
No doubt the thinking behind this challenge was for the ABI to show its displeasure at the prospect of the rate being lowered to something that reflects current interest rates, which will harm their members’ financial interests, alongside perhaps being a convenient delaying tactic.
We have yet to see what rate will be announced on 31 January, assuming a change to the rate is announced, rather than a further delay. Given that we have a Conservative government, which traditionally favours big business (and those that typically pay in big claims such as insurers) and with the government being one of the largest defendants of all, there is skepticism amongst claimant groups that there will be any change at all. If the government follows its traditional methodology as per the Damages Act, it seems inevitable that the rate will fall, allowing claimants to be correctly compensated for their losses. However given the noises the government is making on a range of issues such as raising the small claims threshold, abolition of general damages for soft-tissue claims and the ever-looming prospect of further fixed costs, it would be no surprise if the discount rate were to stay the same, or even rise.
Aman Thakar is a first-year trainee solicitor at Leigh Day. His current seat is in the firm’s personal injury department.