The Personal Injury Discount Rate - legislating for change

Following the outcome of the Personal Injury Discount Rate consultation, The Personal Injury Discount Rate: How Should It Be Set In Future  the Ministry of Justice has invited comments on its proposed draft legislation before Parliament enacts it as law.

The draft legislation is designed to give effect to the government’s intention to amend the basis on which the Lord Chancellor sets the personal injury discount rate. Since 1998 the rate has been set in accordance with the principle laid down by the case of Wells v Wells. In that case, the House of Lords based the rate by which a claimant’s lump sum damages should be discounted to allow for investment income over the course of their lifetime, on an assumption that claimants are very risk averse investors. For nearly two decades the rate has, therefore, been set largely by reference to Index Linked Gilts (“ILGs”), very low risk and very low income-producing government stock.

Following the recent consultation, the Ministry of Justice concluded that whilst everyone would agree that personal injury claimants are more risk averse in their investment behaviour than other investors, it is unrealistic to assume that they will be advised to adopt a “very risk averse” investment strategy with their compensation. Legislation is, therefore, required to reset the legal parameters within which the Lord Chancellor and the panel of experts who will now assist him, can set the discount rate in future.

If Parliament passes this proposed amendment to the Damages Act 1996 the discount rate will reflect the rate of return that the claimant could be expected to receive from a low risk, diversified portfolio. The Lord Chancellor will aim to set a rate which a properly advised recipient of a lump sum of damages for future financial loss could be expected to achieve if he or she invested the lump sum in a diversified low risk portfolio. If the rate is correct, the lump sum and its income should meet the losses and additional costs that the compensation is designed to cover on time and the damages should be exhausted at the end of the period for which they are awarded, but not before. The Lord Chancellor must consider the investments that are available and actual investments made by claimants, and must make allowances for taxation, inflation and investment management costs.

The proposed changes to the law will not affect the underlying principle of the law of damages, which is that claimants should be compensated in full for the losses they have suffered as a result of the injury caused by the defendant. If properly pitched, the discount rate is designed to ensure that the claimant is neither under nor over-compensated.

Once the proposed changes in the law have been enacted by Parliament, the Lord Chancellor will then reset the discount rate applying the new statutory basis for his decision. On current indicators, the new rate is expected to be somewhere between 0% and 1%, a small rise which will be to the detriment of claimants but not so high as to take damages for future financial loss back to their pre-March 2017 levels.

At Boyes Turner we specialise in securing maximum value compensation claims for severely disabled clients. Having established liability, we can arrange for compensation to be paid in the best way to ensure maximum rehabilitation, early accommodation, specialist equipment and care provision. With basic needs in place our lawyers work with financial experts to structure the remaining compensation in the most appropriate way to provide security for the future, including the use of tax free, life-long periodical payments. Our Court of Protection experts provide ongoing assistance to maximise grants, benefits and provide for the future. Our SEN team can also assist in securing specialist educational placements and support, according to the individual needs of each client.