MPs Tell Ministers to Justify Discount Rate Reform

MPs recently insisted that ministers must learn more about how claimants invest their damages before they make changes to the discount rate. Below Sue Bowler, Partner at Coffin Mew, talks Lawyer Monthly through the ins and outs of this discussion.

The discount rate governs how much annual loss in a personal injury or clinical negligence claim should be multiplied by to work out the lifetime loss. It applies to elements such as loss of earnings, cost of future care and adapted housing to reflect future interest earned on lump sums received.

Until 1999, the discount rate was 4.5% as it was assumed a claimant could attain an annual return of between 4% and 5% by investing his or her damages on the open market. This was reduced to 3% by the House of Lords in Wells v Wells on the basis that claimants should not be expected to make “risky” investments.

The House of Lords decided claimants should be assumed to invest their damages in index linked government stocks (ILGS), which was then just about the safest form of investment possible. As the net of tax rate of return on ILGS over a three-year period was 3%, the discount rate was reduced to this level. The House of Lords also made it clear that how claimants invest their damages was irrelevant.

In 2001 the then Lord Chancellor, Lord Irvine, exercised his power pursuant to the Damages Act 1996 and reduced the discount rate to 2.5%. He did so by taking the investment return of ILGS over a three-year period and rounding the discount rate up to 2.5%.

Then the returns on ILGS fell dramatically, so the Ministry of Justice consulted in 2012 about how the rate should be calculated and at what level it should be set. This partly focused on whether the discount rate should be based on a normal portfolio of investments rather than ILGD returns.

However, this defeated the principal that claimants should receive 100% of their compensation without risking the money. People with life changing injures are not “normal” investors and the money is desperately needed to provide for their needs for the rest of their lives.

The Lord Chancellor, Liz Truss, changed the discount rate from 2.5% to -0.75 per cent on 20 March 2017. She took the view that her hands were tied by the Wells v Wells decision and that she had to apply the rate of return on ILGS, which by then was losing money so resulted in the negative figure.

It meant that some compensation awards doubled or even tripled, but that claimants no longer had to take risks with their money to make it last for their lifetimes. At the same time Truss announced a full-scale review and another consultation. The insurance industry was up in arms about the reduction to -0.75% because of the additional cost of meeting claims for serious and catastrophic injuries.

On 30 November 2017 the House of Commons justice committee called on the government to ensure there is ‘clear and unambiguous’ evidence before bringing forward any legislation. Ministers believe that a figure set according to government proposals would be between 0% and 1%. The committee recommends the government ensures ‘adequate safeguards’ to prevent significant under-compensation of the most vulnerable claimants.

Committee chair Bob Neill said setting the discount rate is much more than a technical decision and is about how society treats people who have been seriously injured, whether through medical negligence, road traffic accidents or by other means.

“It involves balancing the interests of claimants with defendants, and also balancing the social costs of increased clinical negligence payouts and increased insurance premiums with protecting the interests of vulnerable claimants,” he added. “If the government remains convinced that it must change the assumptions it makes about how damages will be invested, to adjust the balance between the interests of different groups in society, it should say so. It is vitally important that we get this right, and that changes are evidence-based.”

The committee proposes that the lord chancellor explain his or her reasons for every decision to change the discount rate or to leave it unchanged. Current plans are for the rate to be reviewed every three years and set after consultations with an expert panel and the Treasury.

The report recommends that legislation should require the expert panel and the lord chancellor to consider whether to set different discount rates for different periods of loss or different heads of damage.

The government is inevitably heavily lobbied by the insurance industry, the NHS and local authorities, all of whom are often defending catastrophic injury claims. However, their views need to be balanced against those who have suffered life changing injuries, who cannot speak with such a loud collective voice.

How would we all feel if we had a child who was severely disabled at birth through medical negligence or a relative who suffered a spinal injury in a road traffic accident, but to pay for lifelong needs such as housing and care we had to ‘gamble’ the money on the stock market?

To preserve the principle of 100% compensation the rate should be set at a level where injured people and their relatives know that their futures really are secure without the need to take any risks.

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