16 May 2017

The Consultation inviting views on the personal injury discount rate has now closed. The joint Consultation, between the Ministry of Justice and the Scottish Government, sought views on how the discount rate should be set in future.

Whilst the Consultation did not seek individual views on the level at which the rate should be set, the focus was on the methodology employed in coming to the rate and how it ought to be set in future. The consultation paper invited views on issues such as who should set the discount rate, how often the rate should be set, the underlying principles on how the rate is set and whether sufficient use is being made of periodical payment orders.

The Consultation followed the shock announcement of the Ministry of Justice to reduce the personal injury discount rate from 2.5% to -0.75%. The Scottish Government were quick to follow suit, mirroring the MoJ’s decision to reduce the discount rate to -0.75%. The Association of British Insurers (ABI) branded the decision as “crazy” and submitted a detailed response to the Consultation. Commenting on the current methodology in calculating the discount rate, James Dalton, Director General of Insurance Policy at the ABI described the current practice as “fundamentally flawed” and not reflective of the reality of how claimants invest their damages in practice. This in turn, has a significant impact on the costs faced by compensators such as the NHS, insurers, general consumers and businesses. In its response to the consultation, the ABI has set out its “plan for a fairer framework” in terms of the discount rate as follows:

• “Providing 100% compensation to claimants.
  
  
• No link to one particular investment asset. The current link to Index Linked Government Securities (ILGS) is flawed as it fails to recognise the investment options open to claimants, and how they invest their compensation.
  
  
• An allowance for the reality that claimants invest in a low-risk, mixed portfolio of assets which yield higher average returns than investing all a claimant’s compensation in ILGS. Where claimants want to minimise investment risk, they can chose a Periodical Payment Order where the investment risk is borne by the compensator.
  
  
• A preference for replacing the current single rate with a ‘stepped’ dual rate – two rates for a single case to reflect different investment periods. This would take into account lower returns likely for claimants with short-term needs, while reflecting the higher returns that can be expected for claimants investing over a longer time horizon. A similar system is in place in Ontario, Canada, where for the first 15 years a short-term variable rate applies, updated annually to reflect returns on yields, with a fixed rate of  2.5% applying for any period over 15 years.
  
  
• A panel of experts including insurers, claimant lawyer representatives, independent financial advisers and actuarial firms, set up to assist the relevant Secretary of State in setting the rate. This panel would need to be consulted before any new rate was set.”

Whilst the Consultation has now closed, the Ministry of Justice has confirmed that no external talks will take place until after the general election on 8 June 2017. In reality, it seems unlikely that any external talks will take place until the latter part of 2017.

If you require further information about this update, please do not hesitate to contact: