When the Government published Command Paper 9500, The Personal Injury Discount Rate: How it should be set in future: Draft Legislation, on 7 September 2017, the Secretary of State asked us to undertake pre-legislative scrutiny of the draft clause contained in the paper. We agreed to do so, taking written and oral evidence, and this Report contains our views on the merits of the draft legislation and the evidence and policy objectives underlying it.
The Government proposes to maintain the principle that claimants should receive 100% compensation for losses they incur. It proposes that the discount rate applicable to lump sum damages invested by claimants should no longer be set with reference to returns from Index Linked Government Securities. Instead the draft legislation provides that the discount rate should be set on the assumption that claimants will invest lump sums in “low risk” investments, and having regard to actual investments made by claimants.
In Chapter 3 of our Report we welcome the Government’s commitment to the principle of full compensation for claimants, but recommend that it clarifies what it means by this, given that a lump sum award will nearly always either under- or over-compensate claimants (paragraph 24). We say that it may be reasonable to change the assumptions on which the discount rate is calculated if they are no longer representative of “real world” behaviour, but we recommend that clear and unambiguous evidence should be gathered about the way claimants invest their lump sum damages before legislation changes the basis on which the discount rate is calculated; and that if the rate is to take account of investment behaviour, a mechanism must be established to keep those responsible for setting the rate informed about that behaviour (paragraph 53).
Chapter 4 of our Report considers evidence on the balance of costs and benefits likely to be produced by the system of setting the discount rate under the draft legislation, including impacts on social equity, care costs, vulnerable groups and claimants, motor insurance premiums and clinical negligence costs. We consider that the Government should ensure adequate safeguards to prevent significant under-compensation of the most vulnerable claimants (paragraph 88). We also recommend that the Government report each time it reviews the discount rate on the impact of changes in the discount rate on motor insurance premiums to inform setting of the rate in future (paragraph 94).
In Chapter 5 of our Report we consider the process proposed by the Government for setting the discount rate. The Lord Chancellor will set the rate, advised on the first review by the Government Actuary and thereafter by an expert panel. We recommend that the panel should advise on the first review; we also recommend that if the Lord Chancellor chooses not to follow the panel’s advice when setting the rate that information should be made public, along with his or her reasons for so doing (paragraph 107). We also recommend that the legislation should require the expert panel and the Lord Chancellor expressly to consider whether to set different discount rates for different periods of loss or different heads of damage (paragraph 125).
Chapter 6 of our Report summarises the changes which we consider should be made to the draft clause to reflect our recommendations before it is introduced to Parliament as part of a Bill. Other recommendations made in our Report are aimed at improving the operation of the new mechanism for setting the discount rate, but do not in our view necessitate changes to the draft legislation.
29 November 2017