The new discount rate: a minus move

After a long reform process lasting nearly two and a half years, the Lord Chancellor has today finally determined a new personal injury discount rate of minus 0.25% effective from 5 August 2019.

The old rate of minus 0.75% was overcompensating claimants and required an upwards adjustment in order to deliver fairer compensation levels. The Ministry of Justice had previously signaled a likely outcome of between 0% and 1%. In practice, serious injury cases have been settling at levels based on a positive rate coming into force. The announcement of a negative rate is therefore surprising.

Mechanics

The main practical repercussions are as follows:

  • Claims and reserves will need to be revalued accordingly and can be calculated with comparative certainty at least until the lead-up to the next review cycle.
  • Outstanding Part 36 offers will need to be re-assessed if based on a different rate, whether the old minus 0.75% rate or alternatively a positive rate in the expectation of a different outcome from the review process.
  • Settlements awaiting court approval will need to be similarly sense-checked and potentially renegotiated.
  • Negotiations that stalled in recent months, because of the knowledge that a rate change was due by 5 August (according to statutory timescales), can now be reactivated.
  • The minus 0.25% rate does not restore the Roberts v Johnstone methodology for assessing future accommodation claims and further test litigation will be required to explore viable alternatives.
  • The current Ogden Tables do not provide a minus 0.25% column and the Government Actuary’s Department will presumably publish a supplementary edition in due course.

Methodology

This is the first review according to Part 2 of the Civil Liability Act 2018 (the Act) and triggers a continuous formal process of future reviews:

  • The Lord Chancellor must now start (not finish) the next review cycle within five years of the new rate determination (and not when it comes into force); that is by no later than 14 July 2024.
  • The duration of the next review period will be 180 days and will require consultation for the first time with an independent expert panel (as opposed to the Government Actuary last time) as well as the Treasury.
  • It remains open to the Lord Chancellor, in future reviews, to fix different rates for different type, duration or time of loss. The announcement expressly refers to ‘promising indications’ for dual rates and confirms that a specific consultation will follow.

Mitigation

The new rate separates England and Wales from most comparative jurisdictions by assuming a negative rate of net investment return. The international research undertaken by the Ministry of Justice revealed universally positive rates ranging from 3.5% in Spain to 6% in the Australian State of Victoria, although the current Scottish reforms may yet result in a negative rate in that jurisdiction too.

The Act still expressly preserves the ability of parties to apply for a different rate where more appropriate - usually in claims involving a claimant who lives and receives care overseas, and will be investing funds locally.

In the lead-up to the next deadline in 2024, claimants or compensators may seek to tactically accelerate or delay cases depending on investment performance and the predicted outcome of the review. There is still a frustrating lack of transparency for compensators about the real-world net returns achieved by properly advised claimants from investing in a low-risk mixed portfolio.

In the meantime, the negative rate perpetuates high lump sum awards due to higher Ogden multipliers, and will have an impact for claimants in relation to their balance of interests as to whether periodical payments are the more appropriate form of award or not.

Outside of the statutory process, the Ministry of Justice may yet decide to incentivize wider adoption of periodical payments. This of itself could reduce the significance of the discount rate, as the largest heads of claim would be compensated according to real-world mortality rather than actuarial multipliers. A novel idea was suggested during the discount rate consultation of a differential (punitive) rate when a party refuses periodical payments.

One positive to emerge from all of the controversy surrounding the shock announcement in 2017 of a minus 0.75% rate is that we now have a clear statutory methodology going forwards, that will ensure the discount rate is formally reviewed at regular intervals in order to restore certainty to the personal injury compensation system.

Read other items in Occupational Disease Brief - September 2019

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