As explained in a previous bulletins, in order to calculate a Claimant’s future financial loss in a personal injury matter, an annual loss figure is arrived at and a “multiplier” is applied to calculate the present value of the future loss. The multiplier is derived from actuarial tables known as the Ogden Tables.
The multiplier used depends on an assumed rate of investment return on the damages, known as the “discount rate”. The standard discount rate that applied from July 2001 was 2.5% by order of the Lord Chancellor under the Damages Act 1996.
It had never been accepted by Claimant’s representatives that the rate of 2.5% was correct, as the rate did not reflect the actual rate of return available on investments of damages, thus, it was argued, leading to substantial under-compensation, often cases of very severe injury and substantial financial loss.
Various attempts over a number of years were made to challenge the rate but these did not succeed.
Eventually, on 27th February 2017, the then Lord Chancellor announced that with effect from 20th March 2017 the discount rate would change to minus 0.75%. She stated that the change was…”the only legally acceptable rate I can set” and also announced that there would be a consultation in the near future as to how the discount rate should be dealt with in the future, possibly by regular review, involving an independent body or considering the methodology used in calculating the rate.
By way of example, using a 2.5% discount rate, a 30 year old male with annual losses of £10,000 for life would recover damages of £296,000. Using a discount rate of minus 0.75%, the damages would be approximately £717,600. This was therefore a massive change in the legal landscape in this area and insurance companies were extremely unhappy with the change to say the least, although there appears to have been no significant effect on insurance company profits.
The consultation referred to above has since taken place and on 7th September 2017 the Lord Chancellor announced that draft legislation was to be put forward in order to bring in a new approach to the calculation of the discount rate. It appears that the legislation will proceed on the assumption that injured Claimants are no longer to be regarded as “very low risk” investors for these purposes, but merely “low risk”, and so the practical effect is likely to be that the discount rate will be altered once again to around 0% to 1%. Apparently the change will not be retrospective.
There will also be a regular review of the rate every three years, and any change in the rate will be made by the Lord Chancellor, after taking advice from an independent panel of experts. There should therefore be no repeat of the stagnation of the rate which occurred between 2001 and 2017.
The timescale for the implementation of the legislation is not yet clear and the practical effects cannot accurately be predicted. However in the medium term, it seems highly likely that settlements in larger ongoing cases will be delayed, as insurers will wish to benefit from the savings flowing from the change in the rate, if it seems likely that the new legislation will be implemented within a reasonable period.