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Baroness Hooper: My Lords, I support my noble friend's Motion. In so doing, I support the argument put forward by the noble Lord, Lord Brennan, to end the uncertainty in this matter.

I intervene in the debate as a former independent board member of the Medical Defence Union. I shall not repeat the detailed arguments which have already been made. I recognise the needs of claimants in these sometimes very tragic circumstances. But I make the point that lowering the discount rate from June of this year immediately increased compensation payments for medical and negligence claims. It dramatically increased the National Health Service's clinical and negligence liability. That was a point made by my noble friend Lord Hunt. It increased the payments made by medical defence organisations on behalf of their members. These payments have increased exorbitantly in recent years. Therefore, it follows that

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any further decreases in the discount rate will not be in the public's long-term interest as increases in awards will ultimately be made from the public purse.

I also ask the Minister why discount rates cannot be based on a prudent combination of index-linked government stocks and equities and not just on index-linked government stocks. That blend would be extremely helpful.

The final point that I make is in relation to the retrospective effect of these changes. Medical negligence claims have such long time-scales that any increases in awards have an immediate adverse effect on NHS funds.

Baroness Scotland of Asthal: My Lords, I first thank all those who have contributed to the debate. I am very grateful to noble Lords who have raised a number of issues. Noble Lords will know that my noble and learned friend the Lord Chancellor gave a long and detailed consideration to this order. In so doing, he acted entirely properly throughout and reached an entirely reasonable decision.

I have listened with great care to what the noble Lord, Lord Kingsland, has said, but perhaps I may gently suggest that some of the quotations were a little selective. One really must read the decision and the reasons given to it in the round. In preparing for the debate, I refreshed my memory by reading those reasons in full. Indeed, I was tempted, so comprehensive and complete were they, simply to read them into this debate as my speech. But I know that that would never do.

Last year the Lord Chancellor issued a consultation paper seeking views on his powers in setting the discount rate. Respondents were overwhelmingly in favour of the Lord Chancellor prescribing a discount rate, but it is right to say that there was a wide range of contrasting opinions about what the rate should be. The noble Lord, Lord Thomas, asked why it took so long. Part of the reason is because the Lord Chancellor was determined to get this matter right and to make as broad a consultation as was necessary. The Lord Chancellor gave careful consideration to the many difficult and detailed points raised and commissioned further advice from expert financial analysts.

I was refreshed to hear the comments made by the noble Lord, Lord Hunt of Wirral. I agree with him in terms of what the reality of the situation demands.

In the course of the process, the Lord Chancellor, as he is required by statute, consulted the Government Actuary and the Treasury. He also approached the Debt Management Office, which is the Treasury executive agency responsible for managing the Government's debt. As such, it records daily market prices on all government stocks available in the market and is an authoritative source on the real yields implied by those prices. His decision takes account of their advice about the details of different methodologies. I stress the word Xconsultation". The Lord Chancellor, although he is obliged to consult and to take that into consideration, is not restricted to simply

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applying what those consultees say. He must engage in an analytical process of defining what the consequences of those diverse consultations actually mean.

On 27th June, the Lord Chancellor laid the order setting the discount rate at 2.5 per cent. His reasons were placed in the Libraries of both Houses. Those reasons referred to a three-year average gross yield of index-linked government stock of 2.61 per cent, on which the decision was largely based. Questions were raised as to the correctness of the figure, and the Debt Management Office, which supplied that figure, subsequently discovered that there were certain minor inaccuracies in the underlying data.

It was regrettable that that error arose. As a result, the Lord Chancellor considered his decision completely afresh. He applied the legal principles laid down authoritatively by the courts, most recently by an Appellate Committee of your Lordships' House in Wells v Wells, as has already been said.

It was held that,

    Xthe object of the award of damages for future expenditure is to place the injured party as nearly as possible in the same financial position he or she would have been in but for the accident. The aim is to award such a sum of money as will amount to no more, and at the same time no less, than the net loss".

That point has been emphasised by several noble Lords, not least by my noble friend Lady Crawley. The Lord Chancellor also acknowledged that claimants who had suffered severe injuries in an accident will not be in the same position as ordinary investors and will need to ensure that they have dependable sources of income to meet their future needs and care costs. For those reasons, it is unrealistic to expect them to take even moderate risks when investing their damage awards.

The Lord Chancellor thought it important that both claimant and defendant should have a reasonably clear idea about the impact of the discount rate on their case. He decided that this objective would be achieved by setting a single rate to cover all cases; that it should be set to the nearest 0.5 per cent; and that there should not be frequent changes to the rate. Noble Lords will know that the noble and learned Lord, Lord Lloyd of Berwick, made just that point in Wells v Wells, when he said that it was undesirable that the guidelines should be changed too often.

The discount rate has to cover a wide variety of different cases and claimants with widely differing personal and financial characteristics. The consultation exercise also demonstrated that estimating the real rate of return on possible future investments, including index-linked government stock, involves making some assumptions for the future about the wide variety of factors that affect the economy as a whole—for example, the likely rate of inflation. So any approach to setting the discount rate must be fairly broad brush. There can be no single right answer as to what rate should be set.

Their Lordships in Wells v Wells decided that it was appropriate to set the discount rate by reference to the average yield on index-linked government stock. In deciding what the rate should be, the Lord Chancellor

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considered advice on various forms of investment in addition to index-linked government stock, including banks, building societies, bonds and equities. I must tell the noble Baroness, Lady Hooper, that that was very much in his mind.

He considered that claimants with a large award as compensation could reasonably be expected to seek expert financial advice. I was not surprised to hear the noble Lord, Lord Hunt of Wirral, say that that was in accordance with good practice. The advice that my noble and learned friend received demonstrated that a mixed portfolio, which would be recommended as offering a low-risk form of investment, could be expected to produce real rates of return well in excess of 2.5 per cent. Nevertheless, the Lord Chancellor followed their Lordships in Wells v Wells and decided that he should use the average yield on index-linked government stock as the benchmark for setting the rate.

There is no single correct method by which the average yield on index-linked government stock can be calculated. Among other factors, the calculation will depend on which stocks are to be included in the average, the length of the period under consideration, the inflation assumption made and the form of average taken. There is room for reasonable people to reach different conclusions as to the preferable approach to each of those points of detail. Indeed, there were some differences of this nature between the judgments of their Lordships in Wells v Wells itself.

The Lord Chancellor chose a methodology for calculating the average yield on index-linked government stock that is robust and straightforward. It is a simple average of the real yields over the past three years of all stocks available in the market. His calculation is based on an assumed inflation rate of 3 per cent, which is now the standard industry assumption.

That calculation produces an average gross yield figure of 2.46 per cent and a yield net of tax of 2.09 per cent. Accordingly, my noble and learned friend concluded that the net average yield on index-linked government stock, as adjusted to take account of tax, lies in the range between 2 per cent and 2.5 per cent. In his opinion, following Wells v Wells, the discount rate should be set with that range in mind. The Lord Chancellor did not consider that the choice of whether a rate of 2 per cent or one of 2.5 per cent was appropriate was a simple arithmetical matter, nor that Wells v Wells required him to prefer one rate or the other.

It was in the context of that final stage of the reasoning process—whether to round up or down—that the Lord Chancellor again considered the advice received through consultation. That included advice that the present rate of return in respect of index-linked government stock does not represent a pure and undistorted measure of the real rate of return that markets would afford. It also appeared that there are sensible low-risk investment strategies available to claimants that will enable them comfortably to achieve a real rate of return of 2.5 per cent or above, without

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their being unduly exposed to risk in the equity market—a point reinforced this evening by the noble Lord, Lord Hunt of Wirral.

Having considered all the evidence and advice available to him, my noble and learned friend concluded that the discount rate should be 2.5 per cent. In doing so, he had borne in mind that it will, of course, remain open to the courts, under Section 1(2) of the Damages Act 1996—I am happy to confirm to my noble friend Lord Brennan that his correction was right—to adopt a different rate in any particular case if there are exceptional circumstances to justify them in so doing.

So there is a degree of flexibility. The Lord Chancellor's decision to set the rate at 2.5 per cent, which achieves the objective of providing full compensation—no more; no less—strikes a fair balance between the interests of claimants and defendants. There is a major point here. The Lord Chancellor has set the discount rate in exercise of his statutory powers to do so, has directed himself correctly in accordance with the law and acted throughout on the highest quality legal and financial advice.

Your Lordships may think it significant that having set the discount rate at that level, he has been criticised both by those who want a lower discount rate and by those who want a higher rate. That in itself is unsurprising. But—perhaps this is the point—no one has initiated legal proceedings to challenge his decision in the courts. Any such challenge would now be time-barred. The courts are the correct place to challenge the ministerial exercise of discretionary powers conferred by Parliament. One almost feels that if no one is entirely happy, my noble and learned friend has probably got it exactly right. I invite your Lordships to so infer.

I turn to some of the specific points that have been raised. The noble Lord, Lord Kingsland, said that the Lord Chancellor's decision mirrored that of the Court of Appeal in Wells v Wells, which was overturned by their Lordships on appeal. Your Lordships will know that that is not correct. The Court of Appeal in Wells v Wells favoured a figure of 4.5 per cent based directly on a mixed portfolio. The noble and learned Lord the Lord Chancellor used the benchmark on government stock and adjusted that figure only at the margins to take account of the mixed portfolio and other factors which I have already outlined.

In reply to the noble Lord, Lord Thomas, who asked about setting the rate and suggested that the delay was unreasonable, it can be seen from what I have described that it took a great deal of time and care to reach that conclusion. I invite the noble Lord to accept that it was undertaken as speedily and efficaciously as was necessary and appropriate.

The noble Lord also asked about a flexible rate. What people most need in this area is certainty. A number of noble Lords commented on the distress, concern and disadvantage which was caused by instability and lack of certainty. We do not believe it would inure to anyone's benefit to return to that position.

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The noble Lord, Lord Hunt, asked about a lump sum. Calculating a lump sum is not an exact science and claimants will invariably end up with too much or too little. That is why the noble and learned Lord the Lord Chancellor is currently taking forward work on structured orders and expects to publish a consultation paper on detailed proposals in the new year. My noble friend Lord Brennan mentioned some of that work.

There is an issue in relation to lump sum awards. Some have argued that it will encourage families to save money instead of spending it on care; that families will be concerned that they will be squandering it. Others say that they will be depriving themselves of the care needed. The consultation paper must encompass all such issues in order for us to gain a better understanding before reaching an informed decision.

The noble Lord, Lord Hunt, also asked when information will be published. The published information will be available early in the new year. We need to gather data from all the major interest groups affected, including the local authorities. The latter has been taking a little time and we must await the outcome of that exercise. However, the matter is being examined with a deal of energy.

I hope that I have covered the issues which were raised by noble Lords. In responding to the Motion, I should make clear that I am not, on behalf of my noble and learned friend the Lord Chancellor, making a fresh decision but seeking better to explain and amplify why he reached the decision he reached in July. That is the only decision that he has made in relation to the matter.

I invite your Lordships to say that we have had a good debate but that time has moved on. Many cases have been settled as a result of the 2.5 per cent recommendation and they have finally been disposed of on the basis of that rate by the Lord Chancellor. I invite your Lordships to say that it would not be appropriate for us now to seek to re-open a situation which has properly and fairly been closed.

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