MoJ suggests abandoning gilts as means of setting discount rate

Using index-linked government gilts as the basis for calculating the discount rate applied to personal injury awards could be dropped in favour of a 'mixed portfolio of appropriate investments', the Ministry of Justice has suggested.

Justice secretary Ken Clarke agreed to review the discount rate in November 2010 after APIL threatened to bring a judicial review.

The discount rate is intended to take into account that awards can be invested and reduce damages awards by the return that claimants are expected to make from them.

Lord Irvine set a rate of 2.5 per cent in 2001 under Section 1 of the Damages Act 1996, which has remained in force.

MoJ officials said, in a consultation paper published last week, that 'in view of the decline in index-linked government gilts (ILGS) yields', the Lord Chancellor had decided to review the rate.

Following advice from the Government Actuary and the Treasury, the justice secretary had also decided to 're-examine the methodology used in setting the rate'.

The MoJ said it was not consulting on whether to depart from the principles laid down by the House of Lords in Wells v Wells in 1998.

Moving from an ILGS-based calculation to one based on a mixed portfolio was 'potentially consistent' with those principles, officials said, but no decision had made.

An alternative option put forward in the consultation paper was to use a gilt-based methodology applied to current data.

'The methodology will aim to produce a discount rate that will give effect to the principle of full compensation on the basis of investments that would be made under an appropriate low risk investment strategy,' officials said.

'It is, however, for individual claimants to decide what actually to do with their awards.

'In setting the rate the expectation will be that any new rate should endure for a reasonable length of time.

'However, a balance may need to be struck as insufficiently frequent change may increase the risk of inaccurate rates, whilst over-frequent changes could engender uncertainty and make it more difficult and expensive to settle cases.'

An APIL spokeswoman said basing the discount rate on mixed portfolios rather than gilts would make a difference'.

She went on: 'The House of Lords said that the injured person should not be treated like an ordinary investor who has the time and skill to switch his investments in and out of funds to maximise his return.

'The injured person is a risk-averse investor intent on protecting his lump sum for the cost of future care and losses.'