Setting the Discount Rate and Achieving Fairness for Victims of Accidents

27 February 2017

This morning, the Lord Chancellor Liz Truss announced that she is changing the discount rate from 2.5% to minus 0.75%. 

The discount rate is a very important factor in how compensation for personal injury and clinical negligence claims are calculated.  It is particularly important in catastrophic claims, such as those involving spinal injury, cerebral palsy and brain injury.  In those cases, Lawyers have to work out how much it will cost to look after seriously injured people for the rest of their lives, and to compensate them for things like future loss of earnings and accommodation costs. 

The rules assume that the injured person will be given a lump sum, and that he or she will invest it.  Therefore it is important to know what the presumed rate of return is on that investment.  For the last 13 years it has been set as 2.5%, and the assumption behind this is that a “prudent investor” would put his or her funds in Index Linked Government Stock.

One of the many problems with this approach is that for many years now, the rate of return on ILGS has been nothing like 2.5%.  This has meant that seriously injured Claimants have been receiving compensation settlements that have not been large enough to meet their future needs. 

The announcement does not explain the methodology for setting the discount rate at a seemingly radical negative figure, but I presume that the Lord Chancellor, who is an accountant by training, has followed the rules very scrupulously. 

Successive Lord Chancellors have had the power – and indeed the legal responsibility to review and adjust the discount rate from time to time.  However, despite numerous requests from Lawyers acting for Claimants, the discount rate has remained unchanged.  The present adjustment has only followed the threat of a judicial review – legal action by the Association of Personal Injury Lawyers, and even then the Lord Chancellor has delayed and delayed. 

It should also be said that the “other side” – in particularly the insurance industry and the Lawyers who represent it have worked very hard to postpone any change to the rate. 

There is likely to be a flurry of commentary concerning the implications of the change, particularly for the NHSLA, which pays out in compensation claims for clinical negligence.  Figures will be produced showing that hundreds of thousands, if not millions will be added to the total compensation bill. 

There will be some truth in that.  Although Claimant Lawyers try to ensure that most serious injury cases are settling on the basis of Periodical Payments Orders, meaning that the discount rate is less important, all cases with future losses will have to be recalculated.  In a typical cerebral palsy claim, in which the lump sum value of the case might be in the region of £8,000,000-£10,000,000, it is likely to lead to an increase in the value of the claim in the hundreds of thousands of pounds.  It is important though to recognise that this only represents what is fair, and allowed under the rules, and that Claimants are not some separate part of society – they are ordinary people, like you and I. 

It should also be said that for about the last 10 years settlements have not been made at levels which are fair and allowed under the rules.  On the contrary, the insurance companies and the NHSLA have been the beneficiaries of a system of institutionalised under settlement.  Therefore, whilst the Defendants in these cases will have to pay more in the future, it should be remembered that for years now they have paid less than they really should.  

Just recently we have heard a lot about the rule of law, and how President Trump seems to be paying scant regard to it in the USA.  We pride ourselves that that could never happen here, and to a certain extent that is true.  However, it has been said that in a non-coercive society such as ours, concealment is the means by which the rule of law is subverted, and I would suggest that delay is used in a similar way.

The rule of law relating to the Lord Chancellor’s power to set the discount rate is something that very few people will care about or understand.  However, for injured people and their families, it is deeply important.  Compensation awards are not lottery wins, and they don’t contain any “spare” money to spend on fun things.  On the contrary, they are carefully calculated and negotiated, and Defendant Lawyers rightly make sure that there is no overpayment.  If the award is correctly calculated, it lasts the injured person for the rest of his or her life, meaning that they do not have to worry about being able to afford carers, or paying for things like incontinence products.  It really is that basic. 

For years now the discount rate has been too low, and Claimants and their Lawyers have known that the money will run out sooner than it should.  The change to the discount rate will change that, and for a brief period injured people should be able to receive the proper amount in compensation. 

The sting in the tail is that the Lord Chancellor has announced that whilst the new discount rate will be introduced on the 20th March, it will be accompanied by an immediate review of the rules, the suggestion being that they are no longer fit for purpose.

As a Lawyer, I know that rules and regulations need to be reviewed from time to time.  Equally though, I will be saddened if the rule of law for injured people is shown to be about delaying the fair application of that law, and then scrapping the rules to make it unfair again.  That seems like moving the goalposts, and I hope that we are better than that. 

Terrence Donovan is a Partner and the Head of the Clinical Negligence Team at Kingsley Napley.  If you have any questions or observations concerning the matters discussed in this blog, he can be contacted at tdonovan@kingsleynapley.co.uk

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