The discount rate is applied to awards of future loss to reflect the assumed rate of return that a claimant will receive when they invest the award. Following years of consultation, and as a result of pressure from the Association of Personal Injury Lawyers (APIL), the discount rate was reduced from 2.5% to minus 0.75% with effect from 20 March 2017.
On 30 March 2017 the Government launched a further consultation on how the discount rate should be set in future. The consultation ran for just over six weeks and asked respondents for views on:
- What principles should guide how the rate is set?
- How often should the rate be set?
- Who should set the rate?
Respondents' views to the consultation were mixed although a number of respondents consider the current law to be defective in some way. Many said that the methodology for setting the rate was flawed and did not reflect the way that claimants actually invest awards which fails to achieve the aim of 100% compensation.
In response, the Government has set out the following key proposals:
An independent expert panel
The discount rate will be set by the Lord Chancellor following consultation with the Treasury and with advice from an independent expert panel. The panel will be chaired by the Government Actuary and include four other panel members to include an actuary, an investment manager, an economist and an expert in consumer investment affairs.
The discount rate will be reviewed at least every three years and each review will be completed within 180 days of commencing to avoid overlong delays between reviews. The first review will take place within 90 days of the commencement of the draft legislation. In conducting the first review, the Lord Chancellor must consult the Government Actuary and the Treasury. For subsequent reviews, the Lord Chancellor must consult the expert panel and the Treasury.
The rate is to be set by reference to 'low risk' rather than 'very low risk' investments. It will be based on the assumption that the damages will be payable in a lump sum rather than under a periodical payments order and that the claimant will receive proper investment advice and will invest in a diverse portfolio.
The draft legislation defines ‘low risk’ as more risk than a very low level of risk, but less risk than would ordinarily be accepted by a prudent and properly advised individual investor who has different financial aims.
The new methodology predicts a higher rate of return on investment than the current rate of -0.75%. Hypothetically applying the new methodology today the current rate would fall between 0% and 1%.
It will continue to be possible to set different rates for different types of cases, including by reference to the length of the award.
What is next?
Along with the consultation response, the Government has published draft legislation to replace section 1 of the Damages Act 1996 and has invited comments with a view to passing it into law promptly. As it stands, the draft legislation provides for a review of the current rate within 90 days of commencement, although it remains to be seen when the new legislation is enacted and whether there are any changes to the current draft.
On the face of it, the new methodology, along with the involvement of an expert panel and regular reviews should lead to a fairer result for both claimants and compensators. Changes in the rate will be more predictable and manageable and should avoid the situation that compensators found themselves in when the rate changed drastically in March.