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

2Background

9.The Damages Act 19969 gives the Lord Chancellor power to set the discount rate, but no methodology is prescribed. That derives from case law: in particular, the 1998 House of Lords case of Wells v Wells.10 Since 2001 (in England and Wales; 2002 in Scotland) the rate has been set on the hypothetical assumption that lump sums are placed in very low risk investments, by reference to yields on Index Linked Government Securities (ILGS).11

10.In 2001, the Government set the discount rate at 2.5% in real terms. Despite yields falling sharply since that time, the Government did not change the discount rate until February 2017, when the then Lord Chancellor, Rt Hon Elizabeth Truss MP, moved it to -0.75%, based on a three-year average of real yields on ILGS.12

11.A negative discount rate is counter-intuitive because it implies that a sum paid now will be worth less in the future. It is usually the other way around: people would ordinarily expect to earn a positive return on the sum received.

12.The Government recognised that the change would cause a significant increase in compensation awards, which could lead in turn to increases in insurance premiums and also have implications for costs to the NHS arising from clinical negligence claims. However, the then Lord Chancellor said that she was “clear that this is the only legally acceptable rate I can set”.13 The insurance industry expressed dissatisfaction with the sharp reduction in the discount rate, while it was welcomed as being long overdue by those representing claimants.

Government consultations

13.In recent years, there have been a number of Government consultations about the discount rate, as detailed below:

Consultation timeline

timeline

14.In 2012, the Ministry of Justice, Northern Ireland Department of Justice and Scottish Government consulted on how the discount rate should be set in accordance with existing law.14 In 2013, the Governments again consulted, this time on whether the law should be changed and whether periodical payment orders should be encouraged.15 The results of both consultations, published in 2017, showed there was little consensus.16

15.Around 2013, the then Lord Chancellor appointed an expert panel to advise on setting the rate in accordance with the prevailing law. It reported on 7 October 2015 that a rate assuming “risk-free” investment should be set with reference to ILGS; or that a “very low risk” portfolio might be appropriate, with up to 25% (50% said the minority) invested in non-risk free assets.17 The experts agreed that:

Actuarial practice is supportive of the use of risk free discount rates in the context of quantifying an award of damages. ILGS provide a measure of these risk-free rates.18

16.The Government’s revision of the rate to -0.75% in 2017 was followed shortly afterwards by a consultation on—

17.In Cm.9500 the Government noted 47 of 135 responses indicated there was currently “over-compensation”. Opinion was divided on whether claimants should be considered either to have a “very low risk” appetite or a higher, but still “low”, risk appetite. As to PPOs: “A substantial majority considered that the current law relating to PPOs was satisfactory, and there was very little enthusiasm for changes to create either a presumption or a requirement in favour of PPOs”.19


11 Cm 9500, draft Explanatory Notes. ILGS are ‘gilts’ issued by the UK government. They have their principal and coupon (interest) payments adjusted according to the official government Retail Price Index (RPI).

12 HC Deb, 27 February 2017, col 2WS

13 MoJ, ‘New discount rate for personal injury claims announced’, accessed 28 November 2017

17 Cox, Cropper, Gunn and Pollock, Discount rates: A report for the Ministry of Justice, October 2015, paras 6.6, 6.11 and 6.12. Further questions were subsequently put by the Ministry and answered.

18 Ibid, para 6.4

19 MoJ, The Personal Injury Discount Rate: How it should be set in future [Consultation response], September 2017, pp 5, 6 and 8




29 November 2017