Pre-legislative scrutiny: draft personal injury discount rate clause Contents


The personal injury discount rate

The PIDR is a figure used to calculate how much defendants should pay claimants in cases of life-changing injury. Compensation in personal injury claims is intended to put the claimant in the position they would have been had they not suffered injury. In respect of future losses (e.g. lost earnings; cost of treatment or care), a lump sum or Periodical Payment Order (PPO), (explained in Chapter 3) or both, may be made.

A claimant is assumed to invest a lump sum and receive a return (of interest and capital), which they can then use for their future needs. The lump sum takes into account the return on investment.

The discount rate reflects the likely investment return. If the discount rate is too high, the value of the return will not keep up with inflation; if too low, the claimant could be overcompensated due to the interest received. Ideally, by the time the claimant meets an expense in the future, they will have right amount available to pay for it.

Under the old rate (2.5%), a defendant would have needed to pay out £976 to a claimant to cover a £1,000 loss in say, a year’s time. The claimant was expected to earn 2.5% interest a year on a lump sum payment of £976, which would yield £1,000. [£976 + (£976*0.025) = £1000]

Under the new -0.75% rate, the defendant must pay £1008 to a claimant to cover a £1000 future loss in compensation. [£1008 + (£1,008 x -0.0075) = £1000]1

1.On 7 September 2017, the Secretary of State for Justice, Rt Hon David Lidington MP, made a Written Statement to the House of Commons2 accompanying publication of a Command Paper entitled The Personal Injury Discount Rate: How it should be set in future: Draft Legislation.3 This Paper contained a draft clause which, if enacted, would give effect to the Government’s proposed new mechanism for setting the personal injury discount rate.4

2.It contains three main proposals for change to the current system for setting the discount rate, to be effected by legislation. Those proposals are that the discount rate would be:

3.When making the announcement about the Government’s current proposals, the Secretary of State indicated that “based upon the evidence currently available and using illustrative assumptions, …. if a single rate were set today under the proposals the real rate might fall “within the range of 0% to 1%”.6 The discount rate has been set at -0.75% in real terms since February 2017.

4.A summary of the proposed changes to the current system is given in the table below.

Status quo

New Proposals

Lord Chancellor sets rate after consulting Government Actuary and Treasury

Lord Chancellor sets rate after consulting expert panel and Treasury

No fixed review of discount rate

Discount rate set at least every 3 years

Assumptions about investment of lump sums derive from case law (Wells v Wells)

Assumptions derive from legislation

Rate should be set on the assumption that lump sums are placed in very low risk investments, by reference to yields on Index Linked Government Securities

Rate should be set on the assumption that the recipient of the relevant damages invests the relevant damages in a diversified portfolio of investments; using an approach that involves (1) more risk than a very low level of risk, but (2) less risk than would ordinarily be accepted by a prudent and properly advised individual investor who has different financial aims

5.When he published the Command Paper, the Lord Chancellor wrote to our Chair, inviting us to undertake pre-legislative scrutiny of the draft clause and report by the end of November 2017. He expressed the hope that

this scrutiny will help ensure that the provisions are technically effective and provide assurance to interested parties that the Government is committed to ensuring that compensation remains full, fair and reasonable in the light of changing investment conditions.7

6.At our first meeting of the new Parliament, on 13 September 2017, we agreed to undertake the pre-legislative inquiry requested by the Government. We announced the inquiry the following day and asked for written evidence by 13 October in response to specific questions, as follows:

7.We received 41 submissions which we accepted as evidence to this inquiry; and we held one evidence session, on 1 November 2017, when we heard from:

8.In addition, the Government made available to us copies of responses to the proposals in Cm 9500 which they had received from stakeholders. We are grateful to all those who have assisted us with this inquiry.

1 Example based on an article in The Daily Telegraph, Insurers to save millions, 17 September 2017

2 HC Deb, 7 September 2017, col 13WS

3 MoJ, The Personal Injury Discount Rate: How it should be set in future: Draft Legislation, Cm 9500, September 2017

4 See box on page 5 for an explanation of the discount rate.

5 HC Deb, 7 September 2017, col 13WS

6 HC Deb, 7 September 2017, col 13WS

7 Letter dated 7 September 2017 from the Secretary of State to the Chair.

8 The Medical Protection Society (“MPS”) is a protection organisation for doctors, dentists and healthcare professionals. Membership provides access to expert advice and support together with the right to request indemnity for complaints or claims arising from professional practice.

29 November 2017