Setting the Personal Injury Discount Rate - A Call for Evidence

Yesterday, the Ministry of Justice published “Setting the Personal Injury Discount Rate - A Call for Evidence”.

The purpose of this call for evidence is to assist the Lord Chancellor and Secretary of State for Justice, the RT HON DAVID GAUKE MP in deciding where the discount rate should be set following his first review of it by providing him with the most recent data and information regarding a wide range of topics relevant to the setting of the rate.

The call for evidence sets out a list of questions that respondents are asked to consider and then answer those they feel able to. There is no requirement to answer all of the questions asked.

To read the full document, please click here. 

The discount rate will be reviewed under the terms of the Civil Liability Bill which has now completed its passage through Parliament and is awaiting Royal Assent. When enacted it will change the way the discount rate prescribed by the Lord Chancellor under the Damages Act 1996 is set.

It is unlikely that the discount rate will change in the very short term, as Royal Assent is yet to be received and following this the process to setting the new discount rate is as follows:

1. Evidence submission closes on the 30 January 2019.
2. The Lord Chancellor must start the first review within 90 days of the Bill receiving Royal Assent.
3. The Lord Chancellor must determine the rate within 140 days of the review commencing.

Given the above timescales, it is possible, but unlikely that the discount rate will change in the first half of 2019, although bodies such as the ABI will no doubt be pushing for an early amendment.

For the first review, the Lord Chancellor must consult with both the Government Actuary and the Treasury, but will not consult with any external experts.

Following the first review, subsequent reviews will take place at least once every five years. For subsequent reviews, the Lord Chancellor will consult with an expert panel chaired by the Government Actuary and the Treasury.

The aim of the changes to the way in which the discount rate is calculated is to provide for a rate that is based on the return that, in the opinion of the Lord Chancellor, a personal injury claimant could reasonably be expected to receive from investing a lump sum award of damages for future financial loss in a diversified low risk portfolio. As the Lord Chancellor states “it is vitally important to many of the most vulnerable individuals in our society that the rate is set fairly and accurately”. He goes on to state that this “may make the difference between victims of dangerous driving, clinical negligence or workplace accidents receiving the right compensation and their awards being inadequate or excessive.”

What is very clear in the new approach is the need of recipients of personal injury awards to take proper financial and investment advice. This is because the discount rate in future will be set on the assumption that each and every recipient is:

1. Properly advised on investments.
2. The damages are invested in a diversified portfolio, using an approach to investment that involves more risk than a very low risk low level of risk, but less risk than would ordinarily be accepted by a prudent and properly advised individual investor.

In making the rate determination, the Lord Chancellor must take account of:

1. The actual returns that are available to investors.
2. The actual investments made by investors of relevant damages.
3. Appropriate allowances for taxation, inflation and investment management costs.

In effect, the new discount rate will be based on every recipient taking appropriate and proper financial advice and as part of damages awards in future, there will be an element to cover the cost of this advice.

If individual recipients are not advised by their solicitors or representatives to take proper investment advice or decide not to take this advice, then the chances are that their award will run out, as not taking the required amount of investment risk will inevitably mean the award will not last for the remainder of their lifetime. It is therefore imperative that in all future settlements that investment advice is recommended to the claimant. Not doing so will clearly expose the claimant to the risk of their award being exhausted.

The current review does not focus on the use of Periodical Payment Orders and is instead based on the investment of lump sum awards. We understand that the MOJ will focus on PPOs at a later date. However, as part of appropriate financial planning the use of PPOs will significantly reduce the risk of an award being exhausted in the most severe cases.  Therefore, advice on PPOs should be sought at the earliest possible opportunity.

Based on the evidence we have seen so far (most pertinently, the mathematical formula used in the calculation of the discount rate), our view at Adroit remains that a negative discount rate is still the most appropriate outcome. Clearly there is still evidence to be gathered and this situation may change.

Adroit will be involved in responding to the call for evidence and will update you further as the process continues. In the meantime, please contact us if you have any questions on this article or require clarification on any settlements that you may be working on.

For further information, please contact Paul Rosson.