New Discount Rate Announced – how will it affect your case?
News | Mon 27th Feb, 2017
The Lord Chancellor has today made a long-anticipated announcement following her review of the discount rate. The rate of 2.5% (fixed in 2001) will, from 20.3.17 be -0.75%. Whilst the news is received with cautious enthusiasm by the claimant industry, it seems clear that this announcement will not be the end of the battle. The defendant industry has already made clear its dissatisfaction with the change and further challenges to the decision are likely.
The Damages Act 1996 gives the Lord Chancellor the power to set a discount rate: a rate of interest which courts must consider when awarding compensation for future financial losses in the form of a lump sum in personal injury cases. The aim of setting this rate is to ensure that claimants are not under- or over-compensated: it adjusts personal injury damages awards to take into account the return expected when a compensation lump sum is invested. When setting the discount rate in 2001, the Lord Chancellor based it on a three year average of real yields on Index Linked Gilts – on the assumption that claimants, who may be financially dependent on the lump sum award for long periods or the duration of their life, must be treated as risk-averse investors. Since 2001, the real yields on Index Linked Gilts (as with many other investment vehicles) have fallen. In 2001 the base rate was 5.75%, it is now 0.25%.
Today’s announcement followed a lengthy review – initially provoked by judicial review proceedings brought in March 2011 by The Association of Personal Injury Lawyers (APIL). The action was brought amid concerns at that time that seriously injured people (those with future losses to which the discount rate would be applied via the Ogden Table multipliers) had been undercompensated for years. Following years of consultation and apparent inaction, APIL issued further proceedings in December 2016 challenging the delay.
Today’s decision has significant implications across the public and private sector.
Consider how a claimant’s damages will be affected by the changed multipliers: if a claimant is 18 years old with injuries requiring care for life, at the 2.5% discount rate the multiplier (from Ogden Table 1) would be 32.52. At -0.75% (if the multiplier is taken to be at the midpoint between the -0.5% and -0.1% figures) the multiplier is 93.3. If the multiplicand for care is £10,000, the future loss increases from £325,200 to £933,000 (a nearly three-fold increase).
The effect of this change will be keenly felt by the NHS in light of the additional budget needed to satisfy judgments in clinical negligence claims and the Association of British Insurers (ABI) has already denounced the decision as ‘crazy’ and ‘reckless’. In December 2016 the ABI issued JR proceedings challenging the decision to review the rate without further consultation as to the methodology to be applied to the review calculation. Whilst those proceedings failed, it seems likely that a further challenge will follow.
One fundamental question to be decided, regardless of any such proceedings, is whether it is still reasonable to base the rate on an assessment of average ILG yields i.e. to assume that claimants will choose that low risk investment model over other investments. The Lord Chancellor’s announcement encompasses an undertaking to review the framework by which the rate is set: a consultation, to be completed by ‘Easter’ will consider options for reform including:
- whether the rate should in future be set by an independent body;
- whether more frequent reviews would improve predictability and certainty for all parties;
- whether the methodology – which in effect assumes that claimants would invest only in index-linked gilts – is appropriate for the future;
- whether there is a better or fairer framework for claimants and defendants.
It remains to be seen whether the statutory instrument giving effect to this change will apply to all claims not yet completed (by court award or settlement agreement) or if there will be transitional arrangements. Those currently valuing claims will have to recalculate future losses – although the task is made difficult by the absence of a 0.75% column in the Ogden Tables. Some providers of PI calculator software are already working on preparing a new set of temporary Ogden 7 tables to fill that gap, but emphasise that final updated versions of the tables have not yet been prepared by the Office of National Statistics.