After many months of speculation, the Lord Chancellor has finally revealed that the new discount rate for personal injury claims will be -0.25%.
This has been calculated using the new methodology of taking into account the actual returns available on investments, actual investments made by investors, allowances for tax, inflation and investment management costs and wider economic factors.
The Lord Chancellor has provided a detailed statement of the reasons for the rate and an impact assessment to parliament.
I believe that most claimant solicitors were concerned that the new discount rate would swing heavily back into positive figures, due to the outcry from the insurance industry when the rate was altered to -0.75% in 2017 and the new methodology being used. It had been confirmed that actual returns on ‘low risk’ investments would be used, rather than ‘very low risk’ investments as had previously been taken into account in the calculation, as this reflected the reality of claimants’ investment profiles.
It is correct that claimants are more likely to have access to and be advised to invest in low risk (rather than very low risk) investments, as they usually need to try and obtain a higher rate of return to ensure that their compensation keeps up with the increases in inflation and tax.
As it was very simply stated to me recently, £2.50 would have been enough to buy a pint of beer five years ago, but it would now only pay for half a pint. So if a claimant is given a lump sum compensation award, which includes the cost of surgery that they will need in 20 years’ time, they should be able to invest the money so that they have enough to pay for that surgery in the future.
To believe that claimants would invest their compensation money into higher risk portfolios (where there is the opportunity for higher returns but also the risk of losing large sums of money) completely disregards the concerns, priorities and needs of claimants.
Claimants are often awarded life changing amounts of money, but in many cases this is a change from struggle, worry and lack of support, to ensuring that they are able to put appropriate plans in place to safeguard their future. I do not believe that claimants would risk that future for a profit. They simply want to ensure that the money they are awarded does the task that it was intended to do.
In order to do that task, the lump sum compensation award of course needs to reflect the money that can potentially be earned on it through investment, but it is also important that it reflects the realities of inflation, tax and other economic factors.
I feel as though the new discount rate is very fair and appropriately reflects the economic climate.
I know that a lot of Insurers have already voiced their concerns and are disappointed by the new rate. They expected the rate to have been increased to a positive figure and have suggested that the negative rate will still result in overcompensation to claimants.
I would anticipate that it will be difficult for insurers to challenge the new rate, as it has been decided following input from a number of experts and following consultation with the Government Actuary and HM Treasury. However, I am sure that they will be reading the Lord Chancellor’s statement of the reasons for the rate carefully.
The Lord Chancellor has also indicated that he did give some consideration to having two discount rates, one for short term losses and one for long term losses, as they have in Jersey. However, he did not feel that it was appropriate to implement this at this time due to the fact that there was a ‘lack of quantity and depth of evidence required to adopt a dual rate’. He has, however, indicated that he will be asking for a consultation to be launched to consider the potential for two rates at future reviews.
The next review of the discount rate is set to take place within the next five years. We will have to see whether the insurers decide to ask for a review to take place as early as possible, but for the time being at least there is some clarity and certainty for claimants looking to resolve their claims.