Kennedys urges the Irish Government to carefully reassess approach to setting the discount rate
Kennedys has urged the Irish Government to change the way the personal injury discount rate is calculated to reflect what injured people actually do with their compensation in real life.
We have called on the Minister for Justice and Equality to set up an independent expert panel which would advise on the appropriate rate every five years.
Seriously injured claimants often receive a lump sum of many millions of euros to support them over potentially decades. Frequently these lump sums are paid from the State purse, as well as being paid by private insurance companies. This money is then invested. The discount rate is a mechanism that adjusts the lump sum to factor in the income such investments are likely to generate over the years, so as to avoid over-compensation, whilst also ensuring that the claimant is adequately and fairly compensated.
The overriding principle at stake here is that injured people should receive 100% of the compensation they are awarded – no more and no less
Joanne O'Sullivan, Partner
Responding to a Department for Justice and Equality consultation on setting the rate in future, which closes on 31 August, Kennedys has said the current assumption – that claimants invest in very low-risk government bonds – does not reflect reality.
It says the rate should take into account that claimants are likely to invest in a mixed portfolio.
Kennedys says: “Claimants and other investors are not routinely advised to invest 100% of their capital in government bonds or any other assets. Investment advice to an ordinary prudent investor will be to invest in a diverse portfolio of investments.
“This will avoid or protect against the situation a current investor in government bonds faces, i.e. that their investments are not producing any return but are creating a loss. That is not the outcome expected by a very risk-averse investor.”
The response argues that it would not be appropriate for the Minister to decide on the rate unilaterally – because of the risk of politicising the decision – or to leave the decision to judges on a case-by-case basis, as this could lead to the discount rate being changed frequently and causing both uncertainty and, likely, more litigation.
Kennedys considers that the most appropriate approach would be to establish an independent statutory body to set the rate, in consultation with the Minister who would make the final decision.
The experience of England and Wales should be factored in. The discount rate was revised downwards in 2017 without the government adopting a balanced and reasoned approach to the assessment. This led to over-compensation in many cases and required legislation containing new principles for setting the rate on the mixed portfolio basis. As a result, it was adjusted upwards last year to deliver fairer compensation levels.
Joanne O’Sullivan, a partner in our Dublin office, says: “The overriding principle at stake here is that injured people should receive 100% of the compensation they are awarded – no more and no less. Any mechanism utilised in the setting out of the discount rate should reflect the reality of how claimants actually invest their award.
“We do not consider it appropriate for those setting the discount rate to ignore the impact on defendants, particularly when in effect the compensation system is funded largely by taxpayers and consumers. Any change should attempt to be fair to all interested parties.”