Lord Chancellor unveils discount rate reforms
Government accepts claimants take more investment risk than law assumes
Changes to the way compensation payouts are calculated have been unveiled today by the Lord Chancellor following a pledge made by ministers to consult on whether there was a fairer way to set the discount rate in future.
In February, the then Lord Chancellor, Liz Truss, reduced the discount rate from 2.5 per cent to -0.75 per cent amid fears of a judicial review brought by claimant lawyers. Following an outcry from the insurance industry, ministers announced that a full consultation would be launched in March.
Analysis of the feedback indicates that claimants often take more investment risk than the law currently assumes – a fact well known to claimant lawyers who have long campaigned for a change in the rate.
The changes, proposed in new draft legislation published today, mean the rate would be set by reference to “low risk” rather than “very low risk” investments as at present, to better reflect evidence of the actual investment habits of claimants.
The proposals will also ensure the rate is reviewed at least every three years and create a role for an independent expert panel in the review process.
The proposals envisage that a review of the discount rate would commence within 90 days of the new law coming into force. Based on currently available information the Ministry of Justice says that a new rate, applied today, would be in the region of 0 per cent to 1 per cent.
Lord Chancellor and justice secretary David Lidington said: “We want to introduce a new framework based on how claimants actually invest, as well as making sure the rate is reviewed fairly and regularly.
“In developing our proposals, we have listened carefully to the views of others, and we will continue to engage as we move forward.”
When the current discount rate was announced in February, the Prudential Regulation Authority estimated that the reduction in the rate could cost insurers around £2bn a year. Meanwhile, PWC predicted an increase of £50-£75 on an average comprehensive motor insurance policy. And the government also set aside an extra £1.2bn a year to meet the expected additional costs to the public sector.
The MoJ say the reforms will ensure personal injury victims receive the right compensation and could result in significant savings for motorists through lower car insurance premiums and the NHS.
Claimant lawyers have been unsurprisingly unhappy with the latest announcement. Reacting to the news, Brett Dixon, president of the Association of Personal Injury Lawyers, said the discount rate must be set to meet the needs of catastrophically injured people.
"Someone with a life-long, life-changing injury such as brain damage or a spinal injury cannot afford to take any risks with how his compensation is invested. He needs the money to keep a roof over his head, to fund his equipment, and to feed and clothe him and pay for his care for the rest of his life.
"We need to examine the detail of the Ministry of Justice’s response, but what I can say is that the new formula for calculating the rate will be critical to injured people.
"The last thing people with devastating injuries think about when they are lying in hospital is their insurance premiums. They think about how they are going to manage. Insurers say an increased discount rate will ‘benefit’ customers through their premiums. It is of no benefit if they are severely injured and forced to take risks with the compensation they so desperately need.”
Elsewhere, Moore Blatch partner Sarah Stanton observed that the announcement creates difficulties for those of lawyers advising clients seeking compensation and called on the government to ensure the Ogden rate is set at a level that is "fair to vulnerable claimants and which affords them certainty and security".
Peter Todd, partner at Hodge Jones and Allen, saiid the government has "prioritised the insurance industry’s profits over the secure and dignified future of injured people". He added: "It remains to be seen whether they can find a parliamentary majority to enact the proposed new legislation."
Insurance lawyers have, quite obviously, been more welcoming of the reforms. Mark Burton, a partner at Kennedys, said: “It’s absolutely right that the discount rate should properly reflect real-world investment behaviours and financial returns. The current rate based on ILGS results in significant overcompensation, if claimants are securing better returns from low-risk mixed portfolios.
“At the claims level, both claimants and compensators have in any event been pragmatically negotiating settlements within the 0 per cent to 1 per cent range since February, regardless of the prevailing -0.75 per cent rate, in anticipation of further reforms. The new methodology may therefore lead to a new rate within a similar range to that widely adopted by the market anyway.
“The more rigorous methodology proposed in the draft reforms, including periodic reviews and independent expertise, will hopefully avoid future controversy and ensure a fairer process.”
His comments were echoed by Malcolm HenkÃ©, head of large and complex injury at Horwich Farrelly, who said he hopes the reforms will result in a much needed radical re-think on compensation payments.
“There is a truly massive gulf between the cost to the state of providing for catastrophically injured individuals with no claim for compensation and the damages paid to those with similar injuries but with a tortfeasor to sue," he said. "One way of approaching the problem that has now arisen is to take the opportunity to fundamentally reform the way in which compensation is assessed.
"Claimants invariably recover damages which will allow them to enjoy a Mercedes Benz package of care, aids, equipment and therapies (although they have no obligation to spend a single penny on the target expenses). Their counterparts, dependent on the state (or their own resources), will experience anything between a clapped out old banger service and a Skoda: they are subject to the so called postcode lottery.
“Horwich Farrelly would like to see consistency and fairness shown to all who suffer life-changing injury. What defendants need to do is press for a system by which multiplicands match actual needs and multipliers set at correct levels, again to represent actual rather than assumed investment.
"A more accurate parallel would be the advice given to someone with a self-invested pension, balancing the preservation of a capital sum with a regular income flow over their lifetime. The difference here is that in most cases the investment ‘pot’ will be far greater than for most pensions and would not be subject to any restrictions.”
John van der Luit-Drummond, deputy editor