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Discount rate review: what is it all about and why does it matter?

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    Partner, Paul Rumley, considers the discount rate consultation and why it is so important to those who recover compensation following a claim for clinical negligence.

    By Paul Rumley

In a nutshell, the discount rate helps to calculate how much compensation an injured person gets – the lower the rate, the higher the amount of compensation which should be received. The rate is used to set the amount of compensation injured, and therefore in some cases extremely vulnerable, people should receive over their lifetime. This produces a lump sum of money, which the person then has to invest to make sure it lasts them for life. Therefore how the money is invested, and so what discount rate should be applied to calculating the lump sum, is vitally important.

Background

Since the case of Wells –v- Wells[1] the discount rate, which in turn produces a lump sum of money to provide for the needs of an injured person over a long period of time and regularly for life, has been set on the basis that injured people are extremely vulnerable and should therefore be assumed to take very low risk investment options with their compensation monies. This in turn means that such people need larger initial sums of money, because low risk investments will not produce a lot of return, in order to provide for their needs for life.

Since 1999, the discount rate was set at 2.5%. However, the aftermath of the financial crisis in 2008 has meant that investment returns have been very low mirroring the Bank of England interest rate of 0.5% and then 0.25%.

Current Situation

Given very low interest rates set by the Bank of England, it can be seen that a discount rate based upon an investment return of 2.5% (versus interest rates of 0.5% and now 0.25%) has meant that for a number of years injured people have either been under compensated or have been forced to take very uncomfortable decisions about the amount of risk they are prepared to take when investing their compensation monies in order to provide for their needs.

After much delay therefore, the Government changed the discount rate effective from 20.03.17 to -0.75%.

This greatly increased the value of lump sum awards of damages – as above, the lower the rate the higher the amount of compensation required to provide funding for the injured person’s needs.

Great concern about the impact of this has been expressed by private insurance companies, who have to pay out on such claims, and also the Government itself in terms of the impact upon claims for negligent NHS medical treatment. As a result of those concerns, the Government is consulting upon how the discount rate is set and that consultation closes on 11.05.17.[2]

The Consultation

This asks 3 questions:

  • Who should set the discount rate?
  • How often should the rate be set?
  • What principles should guide how the rate is set?

At the heart of the consultation is a commitment that injured people should receive 100% of the damages they are entitled to.

However, the consultation seeks to question the underlying approach to the discount rate, namely that injured people are assumed to be very vulnerable and therefore should be taking minimal risk with their compensation monies, as set out in the case of Wells –v- Wells referred to above. In particular, it questions whether injured people do actually put the money into very low risk investments, or whether they take more investment risk and so end up producing more money than they ultimately need.

It is clear that the consultation is being driven by the concerns expressed by the private insurance companies – who just happened to be available for an emergency meeting with the Chancellor the day after the discount rate change was announced – and the Government itself as the funder of medical negligence claims against the NHS.

Our View

How injured people choose to invest their damages, is entirely a personal one. As such, any attempts to reach general conclusions about that and/or to discourage injured people from having lump sum awards of damages which are driven by individual case-by-case considerations including the risks inherent in that particular claim, should be resisted.

It remains right – both in law and common sense – that people injured through no fault of their own, and therefore having to piece their lives back together in very difficult and vulnerable circumstances, should still be treated as a group as needing to take very low risk investment decisions.

Furthermore, the discount rate should not be influenced by the people who have to fund the awards – some of whom are private insurance companies who still manage to make many billions of pounds in profits, despite the apparent pressure they claim the simple operation of the justice system in this country brings to bear upon them. It should solely be guided by the injured people, and the most vulnerable of them at that.

The rate should continue to be set according to the financial and investment environment that exists.

It is agreed that the rate should be reviewed more regularly, precisely to guard against the very significant delay between the significant reduction in interest rates in 2008 and the final – and apparently somewhat reluctant – decision to change the rate in March 2017.

The guiding principle should be that if something is only broken a bit, that we should fix that bit and we shouldn’t break the whole thing.

If you have any queries about the discount rate review consultation please get in touch with me or one of my colleagues.

 

[1] [1999]1 AC 345

[2] The Personal Injury Discount Rate – How it should be set in future – published by the Ministry of Justice and the Scottish Government. https://consult.justice.gov.uk

 

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