Technical claims brief, monthly update – September 20121
NewsDiscount rate consultationbegins
The long awaited Ministry of Justiceconsultation on the UK discount ratefor personal injury damages finally gotunder way on 1 August 2012 and will rununtil 23 October 2012. The consultationexamines the methodology by which theLord Chancellor (and his counterpartsin Scotland and Northern Ireland) setsthe discount rate and is the first of twoplanned consultations with a second totake place in the autumn of 2012 on thelegal framework for the setting of the rate. The discount rate is used to discountdamages for future losses paid on alump sum basis, to offset the income thatclaimants can obtain through investingtheir damages. The current rate of 2.5% has been inforce since 2001 (in England, Wales andNorthern Ireland, since 2002 in Scotland)and is based on the estimated returnsfrom Index-Linked Government Gilts(ILGS), a very safe form of investment.Since then the rate of return has fallensignificantly leading to a campaign byclaimant lawyers to reduce the rate. Theyargue that an unrealistically high discountrate (compared to actual ILGS returns)is leading to the under-compensation of claimants. The consultations will not take intoaccount the impact on compensatorsof lowering the rate even though anyreduction will greatly increase the valueof lump sum settlements for future losses(especially for long term care claims) andhave a huge effect on bodies like the NHSLitigation Authority and insurers. The table below sets out the effect of decreasing the discount rate for a twentyyear old female claimant with a £100,000per annum care regime with normallongevity.
DiscountRateMultiplier Lump Sum Award
Comment: Although the discount rate has been based on the return availablefrom ILGS since 1998 (when the Houseof Lords set a 3% rate in Wells v Wells),the reality is that most claimants invest in a mixed portfolio with substantially higher returns. The Damages Act 1996 which gives the Lord Chancellor the power to set the rate for England and Wales does not specifically mention ILGS and it is possible that the consultations could lead to a move away from ILGS which would certainly assist compensators.