The discount rate from 2001 through to 19 March 2017 was 2.5% which, for a 30 year old man with a future loss of £30,000 per annum who would have retired at 65, resulted in a multiplier of 22.84 and a loss of earnings claim of £685,200.
However, on 20 March 2017 Lord Chancellor Elizabeth Truss changed the discount rate to
- 0.75%. This meant that the same 30 year old man had a multiplier of 38.71 which resulted in a loss of earnings claim of £1,161,300. Therefore the change in the discount rate meant that insurers would have to pay an additional £476,100.
This caused significant concern to the insurance industry causing motor insurance premiums to jump as well as causing concern to Government due to increased payments having to be made on behalf of various Government departments. As a result the Government launched a consultation as to whether there is better or fair method of setting the discount rate.
The Government has today published its response to this consultation and will be placing new legislation in front of parliament. The Government has concluded that the previous method of calculating the discount rate, which was to assume that a claimant would only invest in risk free investments such as index linked Government securities, was incorrect and would lead to a very significant risk that a claimant would receive more than full compensation for their loss. Therefore, the Government have decided that the rate should be set by reference to expected rates of return on a low risk diversified portfolio of investments and that the actual investment practices of claimants and the investments available to them should be considered. Therefore, the Government intends:-
- the initial review of discount rate should be carried out by the Lord Chancellor with advice from the Government actuary;
- thereafter subsequent reviews will be carried out by the Lord Chancellor with advice from an independent expert panel;
- the rate is to be reviewed promptly after legislation comes into force and thereafter at least every three years;
- reviews are to be completed within 180 days of starting; and
- The Lord Chancellor will initiate a review of the rate within 90 days of legislation passing through Parliament.
The Government has stated that based on currently available information if the new system were to be applied today, then the discount rate would be somewhere between 0% and 1%. On the basis of the example above, a discount rate of 0.5% would mean that the same 30 year old man would have a multiplier of 31.15 resulting in a loss of earnings claim of £934,500. This would be a saving of £226,800 compared to the current -0.75% discount rate but a payment of £249,300 more than the previous discount rate of 2.5%.
However, the Government have made it clear that any change in the discount rate will not be retrospective and as legislation has to be passed through parliament, then the Lord Chancellor has 90 days in which to initiate a review which must be completed within a further 180 days, it would seem very unlikely that there will be any change in the discount rate until the earliest June 2018. This means that any legal case due to proceed to trial before June 2018 will be dealt with on the basis of the -0.75% discount rate.