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


Roles in the decision-making process

Under the draft legislation, the Lord Chancellor will set the rate after consulting an expert panel, other than on the initial review where only GAD will advise. The Treasury will also be consulted.119 The expert panel will:

  • be chaired by the Government Actuary, who will have a casting vote in the event of a tie;
  • include four others: an actuary, an investment manager, an economist, and someone with experience in consumer investment affairs; and
  • have a quorum of three, one of whom must be the Government Actuary.120

Lord Chancellor

103.The Medical Protection Society said “the Lord Chancellor should make the final decision” and also that “there will be circumstances where it will be appropriate that the Lord Chancellor should not follow the advice of the panel”, because

The need to balance fair, just and reasonable compensation for claimants against the resources available to consumers and taxpayers is a delicate exercise and we believe that the decision should rest with an elected official, who can properly weigh the broader societal balance which has to be considered.121

104.APIL suggested the Lord Chancellor should always “take account of” the expert panel’s views and give reasons for his decisions. The Law Society, on the other hand, said “decisions on awards made by the courts should not be subject to political influence.” So it considered that:

the role of the Lord Chancellor should be removed entirely from the process of setting the Discount Rate, and … the recommendations of the independent panel should be binding.122

Panel members

105.Fourteen written submissions from both sides of the argument concerning the Government’s proposals highlighted the importance of safeguarding the panel’s independence. Proposed solutions were varied and included: declaration of conflicts of interest, public record of membership, balanced representation of all interests, scrutiny of membership by the Justice Committee, or barring anyone who has worked as an expert in court in personal injury cases. Some submissions suggested other panel members: a health care professional, an investment manager, a claimant lawyer, a representative of injured people or of the insurance industry. We consider that in deciding the membership of the panel regard should be had to the need to ensure it reflects the balance of interests concerned and represents a full range of expertise on the subject.

Panel quorum

106.We received some evidence that the quorum of the panel was too small. NHS Resolution stated:

the quorum for the expert committee is just three, which to our way of thinking is too small for such an important task, especially as the Government Actuary has two votes in the event of a tie. We believe that the quorum should be four as a minimum.123

107.Setting the discount rate has repercussions on the taxpayer through government expenditure and also consumers through its impact on insurance premiums and inflation; therefore we think it is right that the decision to set the discount rate lies with the Lord Chancellor. However, we recommend that whenever taking a decision on setting the discount rate, the Lord Chancellor should publish his or her reasons for that decision, the advice provided on the matter by the expert panel, and reasons for not accepting the advice of the panel whenever that occurs.

108.We also recommend that the panel should have a quorum of four when any decision on advice to the Lord Chancellor is made. Again, this should be enshrined in the legislation. We also agree with the Law Society that the expert panel should be involved in the first review of the rate.

Frequency of review

The draft legislation requires the initial review of the rate to start within 90 days of the legislation becoming law. Then the rate would be reviewed at least every three years, the clock running from the last review. Reviews would have to be completed within 180 days, and would come into force when the Lord Chancellor thinks appropriate. The Government explains the effect would be to “avoid overlong delays between reviews, which will make changes in the rate more predictable and manageable.”124

109.The Medical Protection Society indicated that they thought it was a good idea for the discount rate to be reviewed regularly to avoid sudden changes, though they thought that a yearly change might be preferable to a change every three years, to ensure that “any rate changes would be relatively minor each time” and to “mitigate any incentive for the parties to attempt to delay settlements in the hope of a more beneficial rate in the future”.125

110.On the other hand, Royds Withy King Solicitors in their letter dated 12 September 2017 to the Ministry of Justice argued that the review period should not be less than three years “so that those reviewing the rate have the necessary data to assess investment changes, changes in the financial environment, etc.–any more regularly than that, and we believe there will be insufficient data to properly inform setting of the rate”.126

111.We were told by claimants’ and defendants’ lawyers that a review every 5 years might be the best approach because of the length of time it takes to decide or settle claims. Keoghs LLP stated:

the proposed 3-year rate review cycle would be too short. Personal injury cases do not have to be issued until three years from the date of the accident and litigation in serious injury cases can typically be 3 to 5 years. In that period, the rate could feasibly change 3 times, resulting in uncertainty for the claimant and additional costs for advisers to re-calculate damages on different rates. Once the first rate is fixed a 5-year cycle is a more sensible term.127

112.The IFoA and NHS Resolution were both concerned that a periodic review of the discount rate and anticipations of how the discount rate is likely to move would impede the settlement process. The IFoA were concerned that an infrequent change in the discount rate “would lead to a significant change in behaviour of claimants and defendants trying to rush, or delay, settlements to take advantage of any expected change”. They noted:

Reviewing the rate every three years does not alter that understandable desire to time the date of settlement to gain the maximum benefit. To help mitigate this risk, we would encourage the review to be completed within 90 days.128

113.NHS Resolution stated:

once it is known that a review is underway–and this will be the case if three years have passed since the last one–settlement negotiations will be affected because parties who believe that the new rate will be favourable to them will refuse to settle at the existing rate. That was a feature of 2001, when claimants’ lawyers believed that the Lord Chancellor would make a decision benefitting claimants.129

114.Sixteen written submissions agreed that a three-year period between reviews was acceptable. Ten preferred a longer period. Most of them proposed five years, but one proposed ten years. Five submissions advocated more frequent (up to annual) reviews. Eight submissions argued that an economic trigger would be preferable to a fixed period. The IFoA recommended “an annual check on the suitability of the rate given current market conditions.”130

Short, frequent intervals between review

Long intervals between review

Rate more likely to fit with existing market conditions

Rate may not match existing market conditions

Risk of insufficient data on claimant behaviour to inform setting the rate

May result in delays as claimants and defendants attempt to settle at the most preferential discount rate

Possible greater uncertainty about what the rate will be at settlement of the case for both claimants and defendants

Possibly greater certainty about what the rate will be at settlement of the case for both claimants and defendants

First review

115.The Law Society was concerned that the first review of the current rate will take place without the expertise of the panel:

The draft legislation sets out that the first post-legislative review of the current rate will take place without the expertise of the expert panel. However, the Government consultation response decided that the correct way to set the rate in the future is with the Lord Chancellor acting upon the advice of a panel of experts. With this in mind, we are concerned that the expert panel will not be involved at the outset of the new rate-setting process.

It recommended that: “All reviews, including the first, must include the expert panel.”131

Timing of review

116.The Committee also received evidence that the timing of the announcement of the discount rate was critical for those in the insurance industry and NHS Resolution. NHS Resolution stated:

If, for example, a new rate is announced shortly after 1 April in any year this will have a huge impact on the accounts of NHS Resolution, as stated in our consultation response, and may lead to difficulty in the accounts of the government as a whole being signed off.132

117.In its submission to the Government about the draft legislation, Zurich Insurance asked that: “new rates … be introduced mid-year with an expectation that any changes should not be dramatic enough to create major rate changes or tactical delays by claimants”. It stated: “Government’s sudden announcement in early December 2016 of its intention to review the Discount rate caused well-documented difficulties for insurers in complying with their year-end reporting requirements”.133 Whether or not the new mechanism for setting the discount rate is introduced, we recommend that the Lord Chancellor should ensure that the timing of changes to the rate takes account of the need to minimise disruption to the finalisation of year-end accounts by insurers and the NHS.

Setting the discount rate as risk-free rate

118.The IFoA argued that “a market-related risk-free rate” avoids a lot of the pitfalls of periodic reviews and moreover has advantages for insurance companies as well as claimants as:

Setting fixed PIDRs that are prescribed periodically will continue to create inequities and distortions in settlements and behaviours, as well as uncertainty for insurance companies, which will be unable to hedge effectively changes in the discount rate and will remain exposed to significant reserve adjustments.

119.It argued that it would also be simpler for Government:

One of the advantages of such an approach is that there would be no need to set up a panel to regularly review the rate. The risk-free rate would also remove any accusation of political bias towards claimants or defendants.134

120.The Institute and Faculty of Actuaries’ recommendation of setting the discount rate according to a risk-free rate has attractions. However, if the Government is determined to set the rate using a “low-risk” diverse portfolio, a periodic review is required.

Differential discount rates

The draft legislation would continue to allow for the setting of different rates for different “classes of case”. 135 The Government says this will allow different rates “by reference to the length of the award”.136 The draft legislation would also still allow the courts to use a different rate if appropriate.

121.There was some evidence of an appetite amongst insurance companies for different discount rates to be set which depend on the term of the claim. The ABI stated that “the industry favoured legislation enabling a dual or “stepped” rate option, in which different rates are set for different periods of loss in the same case.”137 Ageas Insurance Ltd stated that an approach “which recognises that risk can be managed by use of differently constructed portfolios over different time windows would be inherently fairer and, critically, protect against the risk of under compensation for claimants with short term losses.”138 Evidence to us pointed out that this was the approach in Ontario, where there is a rate “varying between the first fifteen years and any years thereafter”.139

122.Amongst those representing claimants, there was also some appetite for setting different discount rates for different heads of loss. FOCIS stated:

There should be a different rate which is applicable to earnings-related heads of future loss, notably loss of earnings and future care and case management.140

123.Professor Victoria Wass argued that:

The Bill strengthens the case for two discount rates: one for prices-linked losses and expenditures and a different one for earnings-linked losses and expenditures. An alternative would be a weighted average of the two.141

124.But the Law Society and others argued that setting different rates would be inappropriate because it would “add unwarranted complication”142 to the case. One law firm, Curtis Law, said “It would be inappropriate, unfeasible and unworkable for different types of case to attract a different discount rate.”143

125.We recommend that the legislation require the expert panel and Lord Chancellor expressly to consider whether to set different discount rates for different periods of loss or different heads of damage. In both cases, the benefits need to be balanced by the added complexity it would bring to cases. We recommend that when the panel considers this, it looks at the experience of jurisdictions where differential discount rates have been used.

Management costs and investment advice

The draft clause states that in setting the rate, the Lord Chancellor must “make such allowances for taxation, inflation and investment management costs as the Lord Chancellor thinks appropriate”144 .The Lord Chancellor must also assume that claimants are properly advised about investment.

126.In its evidence, the Law Society noted:

There is an assumption within the draft legislation that the claimant is properly advised on investment of damages. In order for that assumption to be correct, it should be enshrined within legislation that the cost of obtaining proper advice on a regular basis be recoverable as part of a claimant’s compensation.145

127.Lord Keen argued that “At the present time, under our law it is not possible to identify a distinct and separate head of damage based on professional advice” but:

the Lord Chancellor will have regard to the fact that any investment portfolio will be the subject of management charges, and that will be reflected in the determination of the discount rate.”146

128.However, it should be noted that the cost of obtaining investment advice is not the same as management charges, which reflect the costs of selecting and researching the investments.

Measures of inflation

129.The Government received some submissions that CPI may be a better indicator for inflation than RPI147 in the context of setting the discount rate. In its submission to the Government about the draft clause, Tokio Millennium explained:

we strongly believe that the correct measure of inflation to use should be based on CPI and not RPI. The RPI figure is flawed in its calculation method, not recognised internationally.148

130.The 2015 expert report commissioned by the Ministry of Justice included an extensive discussion about the merits of using CPI and RPI, and concluded that until ILGS were available which offset inflation measured by CPI as opposed to RPI, RPI was probably the right indicator to use for inflation.149 However, if the Government no longer wishes to use ILGS to set the discount rate, the measure of inflation used becomes once again a topic for discussion.

131.We recommend that the expert panel advise the Lord Chancellor on the most appropriate way to take into account advice and management costs and inflation when setting the discount rate. The panel should consider whether the law should be changed to identify a distinct and separate head of damage based on professional advice. It should also consider the most appropriate measure of inflation to use, when setting the discount rate.

119 Cm 9500, Schedule A1, para 2

120 Cm 9500, Schedule A1, paras 5–6

121 Medical Protection Society (IDR0002)

122 The Law Society of England and Wales (IDR0039)

123 NHS Resolution (IDR0031)

124 Cm 9500, para 14

125 Medical Protection Society (IDR0002)

126 Royds Withy King, representation to MoJ about Cm 9500 (not published)

127 Keoghs LLP (IDR0001)

128 IFoA (IDR0040)

129 NHS Resolution (IDR0031)

130 IFoA (IDR0040)

131 The Law Society of England and Wales (IDR0039), paras 12, 13

132 NHS Resolution (IDR0031)

133 Zurich Insurance, representation to MoJ about Cm 9500 (not published)

135 Cm 9500,Section A1(3) to be inserted into the Damages Act 1996 by subsection (1) of the draft clause.

136 Cm 9500, para 11

139 The rate applicable to damages in the 15 years following the start of the trial is the greater of either (a) zero, or (b) the average return rate on a prescribed day for specific long-term Government of Canada real return bonds, less ½ per cent and rounded to the nearest 1/10 per cent. The rate applicable to losses after 15 years from the start of the trial is 2.5% per year for each year in that period, an attempt to reflect the long-term real rate of return. British Institute of International and Comparative Law, Briefing Note on the Discount Rate applying to Quantum in Personal Injury Cases: Comparative Perspectives, p 12, para 37

144 Cm 9500, Paragraph 4(5)(c) of the proposed new Schedule A1 to be inserted into the Damages Act 1996 by the draft clause

146 Q97

147 RPI and CPI are both measures of inflation. However, they use different formulae and are calculated on a different basis. RPI tends to be higher than CPI. The RPI measure itself is no longer classed as a national statistic due to inherent issues with the methodology used to derive it

148 Tokio Millennium, representation to MoJ on Cm 9500, (not published)

149 Cox, Cropper, Gunn and Pollock, Discount rates: A report for the Ministry of Justice, 7 October 2015, Paras 3.34, 3.38

29 November 2017