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The Civil Liability Bill and Discount Rate
Following last year’s Ministry of Justice (MOJ) consultation on the Personal Injury Discount Rate and the MOJ’s proposed draft legislation to reform the way that the discount rate should be set in future, the Civil Liability Bill has now begun its journey through Parliament. If enacted, the way in which the discount rate is set and reviewed in future, and the assumptions upon which the discount rate is based, will change, with almost immediate effect.
Why is the discount rate important?
In previous posts I discussed why the discount rate is of importance to claimants, particularly those with lifelong needs for care, specialist equipment and therapies and with ongoing financial loss, such as loss of earnings, which arise from severe, permanent disability caused by the NHS or through somebody else’s negligence. The future loss component of a compensation claim in serious injury cases is calculated by multiplying the annual cost or loss figure by a ‘multiplier’ which takes into account the number of years that the loss is expected to be incurred. The multiplier is discounted to allow for any expected reduction in life expectation and other factors, including the benefits associated with early receipt of a lifetime’s worth of money which will be invested to generate a financial return.
Returns on investment are dependent on economic factors, such as interest rates, but are also affected by the investor’s approach to risk. A speculative, high-return-for-high-risk investment has the potential to generate higher levels of interest than a safe, low risk investment, such as ILGS government stock. To date, the discount rate has been set on an assumption that injured claimants are very low risk investors, as they are usually totally dependent on their lump sum compensation to provide for their needs for life. If enacted, the Civil Liability Bill will change that assumption, raising the discount rate to lower multipliers, which in turn will reduce the level of compensation awarded to those with the greatest long-term need.
What will the new legislation do for me?
Under the new legislation, in setting the discount rate the Lord Chancellor must assume that a claimant’s lump sum will be invested, following proper advice, in a diversified portfolio of investments, using an approach that involves ‘more risk than a very low level of risk but less risk than would ordinarily be accepted by a prudent and properly advised individual investor who has different financial aims’. The Lord Chancellor must also have regard to the actual returns available to investors, and the investments that claimants really make, and must make allowance for taxation, inflation and investment management costs.
The new legislation aims to avoid a repetition of the lengthy delay in reviewing the discount rate which occurred, to claimants’ detriment, in the years leading up to the Lord Chancellor’s decision to reduce the rate to minus 0.75%. Claimants can rightly feel aggrieved that for many years they were undercompensated owing to a discount rate of 2.5% based on historically high interest rates, when current interest rates were in fact extremely low. Within just a month of the Lord Chancellor’s unprecedented decision to set the discount rate at a negative figure (with its inevitable increase in damages awards) to reflect the true position, insurance industry protests were answered with the consultation which would ultimately lead to reform.
Under the new legislation the discount rate must be reviewed every three years. The first review must take place within 90 days of the new law taking effect. The Lord Chancellor must take advice at each review from an independent expert panel with members experienced in actuarial, investment management, economic and consumer investment practice, and chaired by the Government Actuary. Government department employees and ministers are not eligible to be on the panel.
Civil Liability Bill
Whilst it seems inevitable that the Civil Liability Bill will lead to the discount rate being increased, it is unlikely, given the current economic climate that the discount rate will return to its previous, and arguably unfair, setting at 2.5%.
Whatever the outcome, at Boyes Turner, we will continue to achieve the best possible awards for our severely disabled clients. Wherever it is in our clients’ interests we will continue to secure guaranteed lifetime provision for their care and case management through index-linked periodical payment orders (PPOs) in combination with lump sum interim payments and final awards to cover capital costs and provide flexibility for life’s unexpected circumstances.
If you are caring for someone who has suffered severe disability as a result of medical negligence or an accident and would like to discuss how we can help you contact us by email at email@example.com.
I have to say I was extremely impressed with the service in what was a very difficult time for myself and my family. The advice and support I had from the team was fantastic and invaluable. They put mine and my wife's mind at rest on many occasions and got a great result for us. Thank you from all of us.