News - Ministry of Justice issue latest paper on ‘The Personal Injury Discount Rate’

Personal Injury - Brian Cummins

The Ministry of Justice has issued its latest paper on ‘The Personal Injury Discount Rate’ following the collation of responses to its discussion paper. It was heavily influenced by the research of the British Institute of International and Comparative Law (“BIICL”), as well as other evidence, including responses to questionnaires from: the Wealth Management Association, the Personal Finance Society, and the Association of Professional Financial Advisers: about investments personal injury Claimants would be advised to make.

BIICL research examined the discount rate applying to quantum in personal injury cases from a comparative law perspective, noting a broad range of rates: from 6% in the Australian State of Victoria, to 3.5% in Spain. It highlighted that no jurisdiction with a single discount rate, had a negative rate as is currently the case in the UK (- 0.75%).

Although there was division within the responses received, there was general agreement that claimants should be treated as more risk averse than ordinary prudent investors. Evidence indicated claimants invest in “low risk diversified portfolios” and not “very low risk” investments, such as ILGs. The government concluded that assumptions made by the present law on the setting of the discount rate, as to how claimants invest, were thus unrealistic, and the current rate may well produce significantly larger awards than the provision of 100% compensation. These current unrealistic assumptions were considered to have a significant effect on taxpayers through the additional costs of personal injury settlements, as paid for by the National Health Service and other public sector bodies; and also businesses and individual consumers, through higher insurance premiums.

There was also general agreement in the responses, that rate reviews should occur more frequently, and with greater predictability. However, there was disagreement on how frequently they should occur, and who should review it. The MoJ now intends to introduce time limits within which reviews must be held, with a review at least every three years. Whilst acknowledging support for an independent expert panel to be involved in the process of rate setting, the Government also accepted the importance of clear political accountability for any rate decisions.

The Government now intends to make the following changes:

  • Discount rate to be more realistically set by reference to expected rates of return on a low risk diversified portfolio of investments (rather than ‘very low risk’ investments). Such will take account of actual investment practices of claimants and the investments available to them.

At present the indication is that this figure will be in the 0% to 1% range, though the MoJ has not committed to a specific range or figure, and it remains for the Lord Chancellor “to decide where in the range of low risk the rate should be set”.

  • Principles for setting the discount rate should be in statute.
  • The rate will be reviewed promptly after legislation comes into force, and again at least every 3 years thereafter, with the next review period to be set when the rate is changed.
  • Reviews will be completed within 180 days of starting, to avoid overlong delays and make changes in rate more predictable and manageable.
  • The rate will be set by the Lord Chancellor, with advice from an independent expert panel, chaired by the Government Actuary and including four other members, with experience as: (1) an actuary; (2) an investment manager; (3) an economist and, (4) consumer investment affairs.
  • It will remain possible to set different rates for different types of cases, including reference to length of any award.
  • No changes are proposed in respect of PPOs.

The Government will now publish draft clauses in light of these conclusions for further views to be provided. Following responses to such, it intends to introduce legislation to Parliament as soon as parliamentary time permits. Once enacted, the Lord Chancellor will initiate a review of the rate within 90 days, to be completed within 180 days of the beginning of the review period. A new rate will then be set (if appropriate), coming into force on a date fixed by the Lord Chancellor.

About cookies on our website

To find out more about what cookies are, which cookies we use on this website and how to delete and block cookies, please see our Which cookies we use page.

Click on the button below to accept the use of cookies on this website (this will prevent the dialogue box from appearing on future visits)