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Update - September 2017

Background

Since the start of the year, we have been reporting on changes to the discount rate for personal injury claims and the government’s consultation paper on how, when and by whom the discount rate should be set in future.

The consultation closed in May 2017 and this month, the government announced its intention to change the basis on which the rate is calculated as set out below.

The government announcement

According to the government, analysis of the feedback, along with other research, has indicated that claimants often take more investment risk than the law currently assumes.

As a result, the government intends to change the law so that, in future, the discount rate will be set by reference to expected rates of return on a ‘low risk’ diversified portfolio of investments rather than ‘very low risk’ investments as at present. This is likely to result in the current discount rate of -0.75% being adjusted to somewhere between 0% and 1%.

The discount rate will be set by the Lord Chancellor following consultation with the Treasury and with advice from an independent expert panel.

The rate will be reviewed at least every 3 years and each review will be completed within 180 days.

Next steps

A bill will be placed before Parliament. Once the bill becomes law, the discount rate will be reviewed within 90 days and a new rate will be set by the Lord Chancellor if appropriate.

Comment

The involvement of an expert independent panel and the system of regular reviews of the discount rate should be welcomed by claimants and compensators. The new methodology of calculating the discount rate will reflect the actual investment habits of claimants and the prescribed review period will make changes to the rate more predictable and avoid sudden peaks or troughs, as happened in March 2017.

 

3 April 2017 - Update

The discount rate debate continues. On 30 March, the Government issued a consultation paper to consider the possibilities for how, when and by whom the discount rate should be set in future.

The consultation will consider what investment returns should be taken into account when settling the rate, whether the review of the discount rate should be left open (as it is currently) or whether a set periodical review would be preferable and whether the power to amend the discount rate should remain with the Lord Chancellor or be set by an expert panel. No specific proposals are made.

The aim of the paper is:

  • to obtain evidence of how claimants actually invest awards of damages for future financial loss and how they are advised to invest;
  • to invite views on what (if anything) should be done to make the system for the setting of the personal injury discount rate better and fairer; and  
  • to obtain evidence on the use of periodical payment orders and to invite views on whether, and if so how, their use instead of lump sum awards of damages for future financial loss should be encouraged.

The consultation closes on 11 May.


27 February 2017 - Update

It has been announced this morning that the discount rate to be applied to personal injury compensation payments is to be reduced from 2.5% to -0.75% with effect from 20 March 2017.

The announcement will be welcomed by claimants who will see a rise in their compensation payments. However, it is likely to have a significant impact on the insurance industry and public services with large personal injury liabilities – particularly the NHS. The government has also pledged today to ensure that the NHS Litigation Authority has appropriate funding to cover increased clinical negligence costs.


31st January 2017

It was reported on 27 January that the Ministry of Justice will not publish its plans for changes to the discount rate for personal injury claims this week, as previously announced.

In a statement to the London Stock Exchange last Friday, the Lord Chancellor said the review of the rate had taken ‘longer than anticipated’ and she was not in a position to make an announcement by 31 January. She ‘remains committed to making an announcement in February’.

The Lord Chancellor, Liz Truss, is expected to announce the results of the government’s review into the discount rate for personal injury claims by the end of January 2017 – 4 years after its consolation on this issue ended.

The discount rate is the amount deducted from a claimant’s personal injury damages to reflect the income he can expect to receive from investing those damages. The current discount rate of 2.5% was set in 2001 and was based on yields generated by index-linked government stock (ILGS). Since then, such yields have declined and claimant practitioners argue that claimants are being under compensated because the discount rate is too high.

However, it is reported that research undertaken by the Ministry of Justice revealed that claimants do not simply put their damages into low-risk investments but tend to select a mixed portfolio which achieves return rates in excess of 2.5%. There is therefore a counter argument that, if the discount rate was set on the basis of ILGS yields only, claimants will be over compensated and that public sector defendants (such as the NHS and local authorities) who are already working under tight budgets will be particularly adversely affected.


19th December 2016

The Lord Chancellor, Liz Truss, is expected to announce the results of the government’s review into the discount rate for personal injury claims by the end of January 2017 – 4 years after its consultation on this issue ended.

The discount rate is the amount deducted from a claimant’s personal injury damages to reflect the income he can expect to receive from investing those damages. The current discount rate of 2.5% was set in 2001 and was based on yields generated by index-linked government stock (ILGS). Since then, such yields have declined and claimant practitioners argue that claimants are being under compensated because the discount rate is too high.

However, it is reported that research undertaken by the Ministry of Justice revealed that claimants do not simply put their damages into low-risk investments but tend to select a mixed portfolio which achieves return rates in excess of 2.5%. There is therefore a counter argument that, if the discount rate was set on the basis of ILGS yields only, claimants will be over compensated and that public sector defendants (such as the NHS and local authorities) who are already working under tight budgets will be particularly adversely affected.

Further information & Legal Advice

If you would like to discuss the issues raised in this article in more detail or if you have any queries, please contact a member of our Corporate Risk & Insurance Team.

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