Ministry of Justice conclusions on the personal injury discount rate consultation

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The Ministry of Justice publishes its conclusions on the personal injury discount rate consultation.

In February 2017, when we heralded the then awaited announcement of the Lord Chancellor about the new personal injury discount rate, we identified the main issues as:

  • One of the methodology in the setting of the rate. 
  • The assumptions made about how an injured person would invest the damages they recovered.

No surprise then that in the aftermath of the Lord Chancellor’s actual decision about the new rate, a consultation exercise was launched by the Ministry of Justice, which published its conclusions yesterday. The key headlines are: 

  1. Claimants should be compensated in full for the losses they have suffered because of an injury caused by a defendant. 
  2. Assumptions (made by the present law on the setting of the discount rate) about how claimants invest, are unrealistic. These assumptions may produce significantly larger awards than provide full compensation for a defendant. 
  3. Reviews of the discount rate should occur more regularly and with greater predictability, at least every three years.

A practical outcome. So, the following changes to the law will now be made by the Government: 

  • The discount rate will be set by reference to expected rates of return on a “low risk diversified portfolio” of investments rather than “very low risk” investments, as at present. In assessing those rates, the actual investment practices of claimants and the investments available to them should be considered. This will make the rate more realistic. 
  • The principles for the setting of the discount rate should be set out in statute. 
  • The rate will be reviewed promptly after the legislation comes into force and, thereafter, at least every three years, with that period being re-set when the rate is changed. Reviews will be completed within 180 days of starting, to avoid delays between reviews, making changes more predictable and manageable. 
  • The rate is to be set by the Lord Chancellor with advice from an independent expert panel (other than on the initial review, which would be by the Lord Chancellor with advice from the Government Actuary). HM Treasury will, as at present, be a statutory consultee for all reviews. The panel will be chaired by the Government Actuary and include four other members having experience as an actuary, an investment manager an economist and consumer investment affairs. 
  • It will continue to be possible to set different rates for different types of cases, including by reference to the length of the award. 
  • No changes are proposed to the law relating to Periodical Payment Orders.

These changes should be welcomed. A key finding of the consultation was that the unrealistic assumptions currently being used are having a significant effect on: 

  • Taxpayers through the additional cost of personal injury settlements paid by the NHS and other public sector bodies. 
  • Businesses and individual consumers through insurance premiums that are higher because awards of damages may be providing more than 100 per cent compensation.

The Ministry of Justice stated that the key legal principle will be that the rate should be the rate that, in the reasonable opinion of the Lord Chancellor, 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 with the aim of securing that: 

  • The lump sum and the income from it would meet the losses and costs for which they are awarded when are expected to fall. 
  • The relevant damages would be exhausted at the end of the period for which they are awarded.

As we await the draft clauses embodying these conclusion and draft legislation, which is promised as soon as parliamentary time permits, it will be interesting to see what the courts make of this wind of change.

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