It must not be assumed that the 100 per cent. principle is self evidently the only sensible compensation system. Judges have to a limited extent tried to control the size of awards for pecuniary losses in personal injury cases. Thus judges have in practice imposed a limit of 18 years in fixing a multiplier and, having done their sums in the context of the facts of a case, they have resorted to the so-called judicial discount for uncertainties. The first tendency is illustrated by McIlgrew v. Devon County Council [1995] P.I.Q.R. 66, at 74, per Sir John May, and the second by the judicial discount applied in the case of Thomas. Moreover, the 100 per cent. principle has been criticised by commentators, notably in Atiyah's Accidents, Compensation and the Law, 5th ed. (1993) edited by Peter Cane, 1993. About the hundred per cent. principle Professor Atiyah states (at 131):

 ". . . most other compensation systems, especially social security systems (and in other countries, worker's compensation laws) generally reject the 100 per cent. principle. Our own social security system generally pays benefits well below the full amount of lost earnings. Similarly, the New Zealand Accident Compensation Act provides for benefits of 80 per cent. of lost earnings; and the Australian Committee of Inquiry recommended benefits equal to 85 per cent. of lost earnings. Moreover, in most compensation systems there are minimum loss qualifications. Thus, no social security benefits are payable in this country for the first three days' loss of earnings; no criminal injuries compensation benefits are payable if the compensation would amount to less than £1,000, and so on.

      Clearly, such arguments are stronger in the case of loss of future earnings than in respect of the cost of future medical care. Rhetorically, Professor Atiyah asks "why should different accident victims be compensated for the same injury on a scale which varies according to their previous level of earnings?" and "if . . . two people are killed in similar accidents, what justification is there for compensating their dependants at different rates?": at pp. 127-129. The author gives two main reasons for rejecting the 100 per cent. principle. The first is the cost involved. The second is that it reduces the victim's incentive to return to work. The second consideration is not relevant to the appellants in the present appeals but may arguably be relevant in other personal injury cases. Not only do these arguments contemplate a radical departure from established principle, but controversial issues regarding resources and social policy would be at stake. Such policy arguments are a matter for Parliament and not the judiciary.

      Leaving to one side the policy arguments for and against the 100 per cent. principle, there is a major structural flaw in the present system. It is the inflexibility of the lump sum system which requires an assessment of damages once and for all of future pecuniary losses. In the case of the great majority of relatively minor injuries the plaintiff will have recovered before his damages are assessed and the lump sum system works satisfactorily. But the lump sum system causes acute problems in cases of serious injuries with consequences enduring after the assessment of damages. In such cases the judge must often resort to guesswork about the future. Inevitably, judges will strain to ensure that a seriously injured plaintiff is properly cared for whatever the future may have in store for him. It is a wasteful system since the courts are sometimes compelled to award large sums that turn out not to be needed. It is true, of course, that there is statutory provision for periodic payments: see section 2 of the Damages Act 1996. But the court only has this power if both parties agree. Such agreement is never, or virtually never, forthcoming. The present power to order periodic payments is a dead letter. The solution is relatively straightforward. The court ought to be given the power of its own motion to make an award for periodic payments rather than a lump sum in appropriate cases. Such a power is perfectly consistent with the principle of full compensation for pecuniary loss. Except perhaps for the distaste of personal injury lawyers for change to a familiar system, I can think of no substantial argument to the contrary. But the judges cannot make the change. Only Parliament can solve the problem.

The basis of the conventional rate

      Although decisions of the House of Lords adopted the 4 to 5 per cent. discount rate, those decisions did not single out equities as the appropriate investment vehicle justifying that rate. Negatively this is clear from a study of the judgments in Mallett, Cookson and Lim Poh Choo. Moreover, although the issue in Wright v. British Railways Board [1983] 2 A.C. 773 was different, Lord Diplock's discussion in the context of Cookson of government stock as giving the "going rate" makes clear that he did not have in mind equities as the appropriate investment vehicle: 781G-782C. But in the present cases the Court of Appeal, relying on general observations in earlier decisions about prudent investment and the need for advice, has sought to justify a rate of 4 to 5 per cent. on the basis of plaintiffs investing in a spread of equities.

The changed economic landscape

      In 1981 the government introduced index-linked government securities which are tied to the retail price index and hence protected against inflation. In 1982 these forms of financial instrument became freely available to individuals. Since that date a market in such instruments has developed and expanded. This has radically altered the investment scene. It is now practicable for a plaintiff to protect himself against inflation by investing in index-linked government securities. This form of investment guarantees that the sums invested will retain their real value. It is tailor-made for investors who want a safe investment: see Bootle, Index-Linked Gilts, 2nd ed., (1991), 94-104. It is in practical terms a virtually risk-free investment guaranteeing a return based on the market's view of inflationary trends. In its reports published in 1984 and 1994 the Working Party chaired by Sir Michael Ogden Q.C. recommended that in future the discount rate should be based on availability of an investment in index-linked government stock. The Working Party observed that whereas in the past a plaintiff had to speculate by investing in equities, or in a basket of equities and gilts or a selection of unit trusts, he need speculate no longer if he buys index-linked government stock. After in depth research the Law Commission took a similar view: Law Com., No. 224, para. 2.28. This is the changed landscape in which three trial judges felt free to depart from the conventional rate of 4 to 5 per cent.: see Mr. Kemp's full and helpful discussion and analysis: Discounting Compensation for Future Loss, (101) 1985 L.Q.R. 556 and (113) 1997 L.Q.R. 195; Kemp and Kemp, The Quantum of Damages, looseleaf edn., 1997, Vol. 1, para. 6-003 et seq. 

The critical issue

       In a careful judgment Hirst L.J., giving the judgment of the Court, held that a plaintiff should be treated in the same way as an ordinary investor. In one sense one can quibble and say that the ordinary investor is a rather elusive figure. For my part I regard the concept as meaningful: by its use Hirst L.J. indicated that he declined to have regard to the special circumstances of plaintiffs who must be compensated in respect of future consequences of the injuries they suffered. That is a perfectly rational position to adopt. And it is one which counsel for the respondents urged on the House. In short they argued that it would be wrong to put such a plaintiff in a privileged position. That, they argued, would not be holding the scales fairly between the two sides. On the supposition that the plaintiff must be treated like an ordinary investor, counsel for the respondents argued that in determining the discount rate the Court of Appeal was right to proceed on the basis that a plaintiff should invest in a diversified portfolio of shares, gilts, unit trusts, and so forth.

      It is necessary to consider how this issue should be approached. Hirst L.J. said ([1997] 1 W.L.R. 677):

 " . . . the Court, which, . . . is dealing with probabilities when fixing the multiplier, can and should pay regard to the high probability that the plaintiff will invest prudently"

      The Court of Appeal assumed that such plaintiffs have in the past usually invested in a portfolio of equities. The only evidence was the Law Commission's research which yielded the answer that the majority of plaintiffs are "risk-averse" and tend to deposit their damages with banks and building societies: Law Com. 225, para. 10.2, Table 1001, at pp. 162-164. More importantly, the court cannot be expected to investigate what plaintiffs, who are not a homogenous group, will or will not do with their damages. The correct approach is to concentrate on the objective question, namely what is the type of investment that plaintiffs can reasonably be expected to make.

      My Lords, the Court of Appeal have also approached the inquiry in the objective way required. But the Court of Appeal have assumed that the same investment policy would be suitable for all investors, regardless of any special needs. The premise that plaintiffs, who have perhaps been very seriously injured, are in the same position as ordinary investors is not one that I can accept. Such plaintiffs have not chosen to invest: the tort and its consequences compel them to do so. For plaintiffs an investment in equities is inherently risky, notably in regard to the timing of the investment. The annuity method contemplates sales of capital from time to time. With equities there is the risk that planned sales of capital will have to be made during a slump, thereby eroding capital and depleting the fund. As the Ogden Working Party observed, it is not difficult to draw up a list of blue chip equities or reliable unit trusts which have performed poorly, or, in some cases, disastrously. The stock market slump of 1973 took substantially more than a decade to recover. Less dramatically, a slump in equities in December 1993 would have caused a loss of 10 per cent. (subsequently recovered) in a single year. The truth is that stock markets are seldom tranquil for long. Periodically, they rise and fall quite unexpectedly. Typically, by investing in equities an ordinary investor takes a calculated risk which he can bear in order to improve his financial position. On the other hand, the typical plaintiff requires the return from an award of damages to provide the necessities of life. For such a plaintiff it is not possible to cut back on medical and nursing care as well as other essential services. His objective must be to ensure that the damages awarded do not run out. It is money that he cannot afford to lose. The ordinary investor does not have the same concerns. It is therefore unrealistic to treat such a plaintiff as an ordinary investor. It seems to me entirely reasonable for such a plaintiff to be cautious and conservative. He does not have the freedom of choice available to the ordinary investor. If a comparison is to be made--and in this field all comparisons are inexact--the position of plaintiffs are much closer to elderly, retired individuals who have limited savings which they want to invest safely to provide for their declining years. Such individuals would generally not invest in equities. But for plaintiffs the need for safety may often be more compelling. In any event, it seems to me difficult to say that an investment in index-linked securities by plaintiffs would be unreasonable. After all, life companies are now accustomed to investing their annuity funds in index-linked gilts to meet index-linked annuities. Similarly, when the only liabilities of a pension fund are to pay index-linked pensions, the pension fund will invest entirely in index-linked government securities. Plainly insurers and pension fund managers, in so investing, are acting prudently. In these circumstances one cannot realistically say that an injured plaintiff who invests in index-linked government securities is acting imprudently. I therefore share the views of the Ogden Working Party and the Law Commission that it is reasonable for such a plaintiff to take the safe course of investing in index-linked government stock. From this it follows that the discount rate ought to be fixed on this assumption.

The satellite issues

      It is possible for me to deal with the satellite issues quite briefly. First, there was much controversy about the real return on equities. Both sides put their case too high. For my part I am content to approach the matter on the basis that a diversified portfolio of equities would yield over a substantial period a better return than index-linked government securities. But I am not satisfied that even on this basis, and ignoring the availability of index-linked government securities, a net rate as high as 4.5 per cent. was justified. Bearing in mind the surprisingly high cost of advice that would be needed by a plaintiff to invest in a portfolio of equities my view is that the Court of Appeal took a rather optimistic view. Secondly, my impression is reinforced by the instructive Appendix on the Duxbury Tables prepared by Thorpe L.J. He observed:

 "The 6 per cent. gross yield conventionally assumed in the multiplier/multiplicand method is probably currently too high. The rate of yield from I.L.G.S. is perhaps too low, although if expressed as 3 per cent. net it is only marginally below the current Duxbury assumption of 4.25 per cent. gross or 3.18 per cent. net were 25 per cent. to be deducted for tax."

      This observation goes a considerable way towards undermining the reasoning in the judgment of the Court of Appeal. That Thorpe L.J. should be a party to both texts is not surprising: compromises are an inevitability in appellate judging. Thirdly, much was made of the fact that the Court of Protection presently works on a discount rate based on an investment in a diversified portfolio of equities. The Court of Protection acts on the basis that the damages are currently calculated by using a 4 to 5 per cent. rate and that it must try to achieve this net real rate even if it involves taking some risks. What the Court of Protection will do if the House adopts a discount rate based on investment in index-linked government securities is uncertain. It is putting it too high to say, as Hirst L.J. did, that even if the rate is modified the Court of Protection "would probably stick to their normal investment strategy of setting up a segregated portfolio [(of equities)]" The witness from the Court of Protection in fact said:

 "If you are looking to have no risk, then the advice to the Court would have to be to use index-linked gilts because they are the only vehicle of that nature that will guarantee you a return over and above whatever inflation is. That we know can fluctuate dramatically."

      The past practice of the Court of Protection does not assist on the principal issue, and its future decisions are uncertain and, in any event, are a matter for its independent judgment. Fourthly, the Court of Appeal accepted an argument on behalf of the defendants that an investment in index-linked government securities was not risk-free. That is a proposition that would surprise the market: being government backed such stock is surely virtually risk-free. The principal point made was the alleged lack of availability of appropriate issues of index-linked government securities. This is unrealistic. According to the Debt Management Report 1998-99, Treasury (1997), the U.K. central government marketable sterling debt stood at £308 billion at the end of February 1998, of which £59 billion (including accrued interest) was in index-linked gilts. In the Government's remit to the National Savings and Debt Management Office, the target proportions of index-linked gilts as a proportion of all gilt sales is 25 per cent. In presently foreseeable circumstances the issue of index-linked government securities must be regarded as an integral and permanent feature of the investment scene. Moreover, if the Lord Chancellor in acting under his powers under section 1 of the Damages Act 1996 were to be guided by the unanimous judgment of the House, and accept index-linked government securities as the best guide to the appropriate discount rate, this would no doubt be an added reason for the Government to ensure that appropriate index-linked government securities are issued.

The guideline

      My Lords, until the Lord Chancellor takes action under his statutory powers it is essential that there should be a firm and workable principle. It should be general and simple in order to enable settlement negotiations and litigation to be conducted with the benefit of a reasonable degree of predictability of the likely outcome of a case. While acknowledging an element of arbitrariness in any figure, I am content to adopt about 3 per cent. as the best present net figure. For my part I would derive that rate from the net average return of index-linked government securities over the past three years. While this figure of about 3 per cent. should not be regarded as immutable, I would suggest that only a marked change in economic circumstances should entitle any party to re-open the debate in advance of a decision by the Lord Chancellor. The effect of the decision of the House on the discount rate, together with the availability of the Ogden Tables, should be to eliminate the need in future to call actuaries, accountants and economists in such cases.

Tax

      The rate of 3 per cent. takes into account tax at standard rates. But counsel for the plaintiffs argued that the rate should be lowered for individuals subject to higher rates of tax. The position is that index-linked government securities are free of capital gains tax held for more than a year. My understanding is that an unusually high proportion of returns from index-linked government securities comes from capital gains rather than income: see Bootle, op. cit, 99. But the income is taxable. For my part I am content that the position regarding higher tax rates should remain as Lord Oliver of Aylmertonin Hodgson v. Trapp [1989] 1 A.C. 807, at 835B, described it, viz. that in such exceptional cases plaintiffs would be free to place their arguments for a lower rate before the court.

The effect on the appeals

      On the principal point I would uphold the judgments of Dyson and Collins JJ. in the cases of Page and Thomas. In Wells His Honour Judge Wilcox adopted a discount rate of 2.5 per cent. by reference to index-linked government securities. This award should be altered so as to reflect a 3 per cent. discount rate. The necessary adjustment in the calculation of damages can readily be agreed between the parties.

The remaining points

      I agree with the speech of my noble and learned friend Lord Lloyd of Berwick on the remaining points in the case.

I would allow the appeal.