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Changes to the Discount Rate

You may have seen or read in the news that the Lord Chancellor has changed the way in which claims for future losses (care claims and loss of earnings for example) are calculated for claimants in personal injury claims, including those relating to clinical negligence.

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Enough in the pot

The media reporting of the effect of the change to the ‘discount rate’ is stating that claimants will simply receive more money when their claims for compensation are settled or awarded, and they will receive an extra windfall. The situation is a bit more complex than that and the amendment to the rate is long overdue.

By way of an example, this is how the discount rate is supposed to apply: a claimant in a clinical negligence claim needs future care and assistance for 20 years as a result of the negligence of their doctor, and their claim for compensation settles in 2017. The discount rate is in place to take into account the claimant has received all the money now even though the majority of it will not get spent for up to 20 years. The amount of compensation a claimant receives has been reduced to take into account that a claimant could invest the compensation and, over the 20 years, it will gain sufficient interest, that by the time the money gets spent there is enough in the pot to pay the cost of the care required at that time.

Unfair to claimants

Since 2001 the discount rate has remained at the same figure; a 2.5% discount. It has been clear for many years now that this figure is unfair towards claimants. As a clinical negligence solicitor, it is certainly something I have considered and queried over the years. The reason it is unfair to claimants is that interest rates have changed significantly since 2001, and for years now it has been the case that even if claimants invested their compensation to provide for the future, they would not get enough return on their money in interest to pay for the care they would need in, say, 20 years from when they received the compensation. This leaves vulnerable claimants, who have suffered life changing injuries as a result of someone else’s negligence, in a position where they cannot have the help they need in the future, because the system has not provided them with enough money to pay for it. However, this has seemingly gone unnoticed and unaddressed and as a result the discount rate was not changed to reflect the changing economy for 16 years.

Changed to -0.75%

The Lord Chancellor, Elizabeth Truss, undertook a review of the discount rate and finally announced a dramatic change on 27 February 2017, she used the principles that have been applied in assessing discount rates and, on that basis, announced that the discount rate would be changed from 2.5% to -0.75%. The practical effect of this is that claimants will actually receive an increase in their compensation rather than a discount, to reflect the ‘accelerated receipt’ (receiving their money now even though they would use it for some time in to the future).

Despite the fact the Lord Chancellor concluded that from her review she was clear that -0.75% was the only legally acceptable rate she could set to ensure claimants are adequately compensated for injuries they have suffered through no fault of their own, insurers and the media have reported that the new rules are controversial and that pay outs to claimants have tripled in some cases as a result. Whilst these reports are inaccurate in respect of the extent of the increase, the compensation payable to claimants has increased (considerably in many cases), and rightly so in my opinion as claimants have, arguably, been undercompensated for years now as a result of the static discount rate which should have been changed long ago. A consultation is now under way to review how the discount rate is set and on what basis it is assessed in to the future.

Long overdue correction

I think all practitioners involved in the industry were surprised by the extent of the change, but claimant lawyers, including myself and my colleagues at Lanyon Bowdler, consider it is just a long overdue correction to reflect the current economy and financial market. If the discount rate had been reviewed and changed, as it should have been over the years, to reflect the changing world of decreasing interest rates and increasing inflation, the change now would have been nowhere near as significant.

 

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