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The Lord Chancellor recently announced a long-awaited reduction in the discount rate which will affect the way that some compensation awards are calculated. The new discount rate of minus 0.75% replaces the current rate of 2.5%. The change, which follows five years of government consultation, will come into effect on 20th March 2017.
Only certain types of medical negligence and personal injury claims will be affected by the change. Smaller claims with no ongoing consequent financial loss will remain unchanged. However, where claimants have suffered serious disability which impedes their ability to work and care for themselves or means that they have an ongoing need for specialist equipment and accommodation, the reduction in the discount rate will have huge implications.
A large proportion of the compensation in maximum severity claims is calculated as an annual loss. This is then multiplied by a ‘multiplier’ to give the total future financial loss for life. On an individual basis, each client’s multiplier takes into account the claimant’s life expectation – a shorter life will result in a lower multiplier.
Then, on a generalised basis, the multiplier is discounted to take into account the notional gain to the claimant by receiving, for example, their entire lifetime’s loss of earnings now rather than having to earn it year by year over the years ahead. The percentage by which the multiplier is discounted is based on assumptions about how claimants are likely to invest their lump sum award and earn interest on it over time.
So why should the multiplier be discounted?
The law says that the purpose of compensation in personal injury or medical negligence claims is to put the claimant (in so far as it is possible to do so with money) back in the position that they would have been if the injury had not occurred. The defendant is only required to compensate claimants to that extent. Compensation payment is not meant to punish the defendant as a fine would in criminal law. Neither is it meant to create a windfall situation for the claimant if their lump sum, reasonably prudently invested, would actually put them (financially speaking) in a better position than they would have been without the injury. Therefore, the discount rate is designed to adjust the multiplier to avoid the windfall scenario by taking into account the claimant’s early receipt and investment earnings from their damages.
Small differences in multipliers make a big difference to the value of a claim. For that reason, the factors that are considered in setting the multiplier take on great significance in a serious injury case. Where the case involves permanent brain injury or severe disability, life expectation is often highly controversial and requires expert medical evidence on both sides.
Since 2001 the discount rate has been set at 2.5%. The Lord Chancellor’s recent announcement will reduce the discount rate from 2.5% to minus 0.75% with effect from 20th March 2017. A lower (in this case, negative) discount rate, means a higher multiplier. Raising the multiplier is the most effective way to add value to the claimant’s claim.
In giving her reasons for setting the new discount rate at such a low figure, the Lord Chancellor acknowledged that the assumptions on which the previous discount rate of 2.5% was based are now out of date. Unlike other investors, who might accept a greater element of risk for the prospect of potential higher returns on their savings and investments, disabled claimants are totally dependent on their compensation award to meet their nursing, housing and other essential needs for the rest of their lives. Given this dependency they are unlikely to choose riskier investment instruments in order to gain higher rates of interest. They are much more likely to adopt a very cautious approach to their money and invest predominantly in low risk but low return investments, such as government index linked bonds (ILGs or gilts). Interest rates are currently very low particularly for low risk investments. On that basis the discount rate should be reduced.
Following the Lord Chancellor’s announcement, any currently active compensation claim which includes a future loss element must now be recalculated having regard to the new discount rate and its impact on the multiplier. The result will inevitably be a rise in the value of the claim, particularly where the claimant’s life expectation is long. That’s good news for claimants who have struggled historically to cover the rising costs of nursing care and equipment out of a once-and-for-all compensation award designed to last a lifetime.
Yet there is still reason for concern on the part of claimants and their lawyers
On a practical level, the new minus 0.75% (negative) discount rate has rendered the traditional method for calculating the cost of housing claims unworkable. Disabled claimants who need larger accommodation as a result of their disability are currently awarded the full reasonable costs of adaptation but only a proportion of the cost of purchase of the house using the discount rate as the basis for the award. If the much-needed new house costs £500,000, the claimant is currently entitled to claim £12,500 per annum (£500,000 x 2.5%). In the same scenario, applying the new discount rate of -0.75% would result in the ridiculous situation whereby the claimant would recover nothing and even possibly end up owing money to the defendant! Clearly it will take time for new methods of achieving a fair cost of accommodation award to be tested in the courts and agreed between claimant and defendant lawyers. Until then, there is likely to be some argument over this aspect of each claim.
Of greater concern, the Lord Chancellor has announced that the government will shortly be issuing a new consultation paper which could potentially lead to reforms of the compensatory system as a whole. The insurance industry are yet to have their say about the impact of the new discount rate which will dramatically increase their outlay in terms of claims.
In relation to medical negligence cases, the Lord Chancellor has pledged an increase in funding to the NHSLA and medical defence organisations to cover the additional cost of claims, but this must be viewed against a background of the Department of Health’s stated objective to reduce the cost of medical negligence claims to the NHS. At best this latest development must be viewed as a small battle won, in the knowledge that far greater battles lie ahead if claimants are ultimately to be fairly compensated.
As specialists in obtaining maximum value compensation for disabled clients who have suffered severe and catastrophic injuries, Boyes Turner are uniquely qualified to understand the long term needs of injured claimants. Our expert medical negligence team regularly achieve top level damages awards for our clients, building in inflation-proof long-term security with index-linked periodical payments. We continue to support our clients post-settlement with managing, investing and enhancing their compensation through our Court of Protection deputyship and trusteeship experts.
At Boyes Turner we welcome all advances in healthcare and compensation which are of genuine benefit to our disabled clients and their families. In readiness for the anticipated reduction in the discount rate we are now taking steps to reassess and revalue those of our current clients’ claims which will benefit from the change.
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