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The Discount Rate: What Next? - Trevor Ward, Fletchers Solicitors

26/08/18. A reminder – when claimants suffer life changing injury and accept a lump sum payment method of compensation, the same is calculated by reference to a rate of return over their lifetime on the theoretical basis of expected earnings from investments of that sum against inflation. The method uses the ‘Discount Rate’.

Some of us will remember the days when the discount rate was 4.5% and then 3% following the decision in Wells v Wells (and other cases) in 1999 and before the introduction of section 1 of the Damages Act 1996 and the power of the Lord Chancellor to fix the rate. The Lord Chancellor did not indeed fix the rate until 25 June 2001. Then 2.5%. The Lord Chancellor immediately reviewed the rate but confirmed it on 27 July 2001. One concern at the time was the detrimental effect of frequent changes to the rate, particularly on settlements.

And so it remained until 2017. This followed an attempt by APIL to judicially review the Lord Chancellor’s decision in 2012 and the ‘consultations’ and the establishment of a working party to consider the discount rate that followed.

It was then the (new) Lord Chancellor, Liz Truss, who announced a new discount rate (surprising to some) of -0.75%. This was effective from 20 March 2017. I say a surprise to some but not too many; it had been on the cards for a while and using the same methodology (a methodology which apparently cannot be changed without primary legislation) she looked at the previous three-year returns on ILGS, similar to the exercise carried out in 2001, and reached this decision. It was clear to most that we were in a very different economic climate in 2017 than in 2001.

Such a discount rate substantially increased compensation amounts, insurance reserves, uncertainty and consternation in the reinsurance market and a substantial increase on balance sheet provisions for the NHSLA. Uproar ensued and the government embarked upon a period of further reflection and consultation culminating in the Civil Liability Bill Part 2 currently weeding its way through the Parliamentary process.

Aside Brexit and the Parliamentary recess in the summer, it is likely that Part 2 of the Bill will have its second reading in early September and if it obtains the Royal Assent, implementation in relation to the discount rate change will commence shortly thereafter. What will that look like?

The assumed investment risk for claimants will change from very low risk to low-risk. It is uncertain what this means and whether claimants will be required, perhaps at their own cost, to risk their investment in part and thus potentially jeopardise the 100% compensation principle for so long established.

A panel of experts will at some point be formed to assist the government in setting the rate; but apparently not the first change in rate. That is to be restricted to the Treasury and the government actuary, perhaps to ensure the government can afford the appropriate rate!

Who will be appointed to the eventual panel remains to be seen.

The review period may be extended from the initial 3 to a 5-year period.

Evidence as to what the rate should be based upon what claimants do with their compensation is to say the least thin and in any event probably flawed by past economic circumstances and claimants lack of security.

There may be an extension of the use of periodical payments orders (PPOs) to more inventive areas outside of care and case management, although consideration will have to be given to the appropriate indexation of those future payments.

The security of future payments may also be under consideration so as to assist those organisations currently not deemed to be secure for PPOs e.g. Medical Protection Society and the Medical Defence Unions.

Accommodation claims have been historically linked to the discount rate but I suspect that has to change. Roberts V Johnstone is no longer relevant when considering property prices and the economic changes since 2001. A vehicle for a senior court to consider is required.

There has been much speculation as to what the new rate will be, I suspect we won’t have to wait too long now.

Trevor Ward
Senior Solicitor
Fletchers Solicitors

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