The end of RPI?

Since April 2005, following the implementation of the Courts Act 2003, courts have had the power to award periodical payments in respect of future losses for personal injury in appropriate cases. This represented a break from the traditional lump sum, once and for all payment, and was perceived to herald a new era in personal injury damages awards. The Department of Constitutional Affairs (DCA) hoped that awards by way of periodical payments would become the norm, but the reality proved to be very different.

Despite the fact that the Civil Procedure Rules (CPR41) require the court to consider periodical payments for all cases involving future losses, in practice this was very rarely adhered to. There were many reasons given by both claimant and defendant as to why there was such a low take-up of periodical payments, and these included:

• A historical preference for a lump sum
• Perceived inflexibility of Periodical Payment Orders (PPOs) '“ payments have to be specified at outset, and are then fixed
• PPOs were likely to be increased by reference to the Retail Price Index (RPI), with claimants arguing that this measure had failed to keep pace with care cost inflation, therefore a lump sum was preferable.

Against this background, indexation reared its head. There is some logic in the argument, as RPI represents an increase in a basket of goods and services, like mortgage rates, utility bills, food. On the other hand, PPOs are likely to be made in respect of the cost of future care, which is more closely linked to increases in earnings.

Periodical payments replace the amount which would have been awarded by way of a lump sum for the particular head of damage, for example future care, in return for a guaranteed income which would be payable, tax-free, throughout the claimant's lifetime. The PPO would state the amount of payments, the frequency of payments, and any increase or decrease in payment at specified times, together with indexation by reference to a given index.

The Damages Act 1996, as amended by the Courts Act 2003, states as follows:

• s 2(8) 'An order for periodical payments shall be treated as providing for the amount of payments to vary by reference to the Retail Prices Index (within the meaning of section 833(2) of the Income and Corporation Taxes Act 1988) at such times, and in such a manner, as may be determined by or in accordance with Civil Procedure Rules'.
• s 2(9) 'But an order for periodical payments may include provision:

'a) disapplying subsection (8), or

'b) modifying the effect of subsection (8)'.

As previously stated, periodical payments are typically used to cover the cost of future care, which in many of the maximum severity cases represents the highest single element of the claim. In practical terms, the heads of damage covered by the periodical payments would be taken out of the claimant's lump sum schedule, to be replaced by the guaranteed income stream. Past losses, general damages and all other items of future loss would be calculated and paid in the normal way as a lump sum.

Historically, based on official statistics, earnings have risen at a higher rate than RPI. It is also noticeable that the government, after sustained pressure from consumer groups, have recently pledged to base future increases in the state pension on the Average Earnings Index (AEI), rather than the current RPI. This is perceived to be more appropriate and beneficial to pensioners, as historically the AEI has consistently risen at a higher rate and therefore will lead to higher pension increases.

In 2006, matters came to a head, with a number of cases reaching the courts to determine the issue of indexation. In the first case, Flora v Wakom (Heathrow) Limited [2006] EWCA Civ 1103, the claimant sought leave to adduce evidence to demonstrate that an earnings-based index was a more appropriate measure rather than indexation by way of the RPI. The defendants sought to strike this out as a preliminary issue, claiming that the proposals had no realistic prospect of success.

The matter went to the Court of Appeal, where Brooke LJ held that the purpose of indexation was to ensure that the real value of the annual payments would be retained over the whole period for which the payments would be payable. This was based on the principle that claimants should make a 100 per cent recovery. He concluded that if payments were restricted to increases by reference to RPI, PPOs would never be made, and that could not have been the intention of Parliament when enacting the Courts Act.

At para 37, Brooke LJ stated: 'The claimant should be allowed to advance his statement of case and adduce Dr Wass's evidence at the trial of this action. It will then be for the trial judge to decide whether it is appropriate to use the powers given to him by Parliament in

s 2(9) and to make such order for index-linking the periodical payments (if a PPO is in fact made) as he considers appropriate and fair in all the circumstances.'

Thus, although the Court of Appeal in Flora did not consider the substantive issue of which index to apply, it did set out guidelines as to the correct approach to Section 2(8) and (9).

Thompstone

Following the decision in Flora, the case of Thompstone v Tameside & Glossop Acute Services NHS Trust (2006) EWHC 2904 went before the court. Here evidence was produced on behalf of the claimant, as a substantive issue, and relating to the future care costs alone. It was tried on a specific rather than generic basis, based on the evidence in this particular case.

In summary, the claimant's experts identified three measures which, it was claimed, represented an alternative index to the RPI, and which would be more appropriate.

1) AEI '“ which measures the actual growth in average earnings.

2) Annual Survey of Hours and Earnings (ASHE) Median '“ which measures changes in the levels of average earnings.

3) Annual Survey of Hours and Earnings (ASHE) 6115 '“ which measures changes in the levels of earnings of a particular

occupational group, including carers.

All the above are official measures produced by the Office for National Statistics (ONS), and all were put forward as being a more appropriate measure than RPI.

The claimant's expert did not express any preference, but merely outlined the pros and cons of each of the indices, but concluded that each was more appropriate than RPI.

Following on from Wakom, the court's role was to examine the evidence and to determine the appropriate measure, weighing up the features of each of the indices, including RPI. Having heard and considered the evidence, the court found that:

i) RPI

RPI had failed to keep pace with care cost inflation, and was unlikely to do so in the future. There was a strong probability that the earnings of the carers employed by the claimant would grow at a rate in excess of RPI, and was likely to result in significant under-compensation if periodical payments were linked to RPI. It concluded that RPI was unlikely to meet the claimant's needs and therefore could not be described as fair, reasonable or appropriate.

ii) AEI

This is an aggregate measure covering all occupational groups, including high earners. It was found that it represented too broad a measure, and it was likely that the claimant would be significantly over-compensated. Therefore indexation by reference to the AEI could also not be said to be fair, reasonable or appropriate.

iii) ASHE Median

This shared some of the disadvantages of the AEI, and the court found that it was insufficiently sensitive to reflect trends affecting carers' earnings. Accordingly, it would not be an appropriate alternative to RPI.

iv) ASHE 6115

The court found, on hearing the evidence, that indexation by reference to this index was likely to reflect the changes which will affect the earnings levels that the claimant would be required to pay. Swift J held at para 143: 'I am satisfied in all the circumstances that indexation by reference to ASHE 6115 would provide a reasonable and accurate indicator of the growth of the earnings of carers of the type to be employed by the claimant, and it is therefore probable that it would fulfil the purpose of indexation as previously identified.'

The PPO specified that the payment should be linked to the 75th percentile of ASHE 6115, ie the closest comparator to the rate actually being paid to the claimant's carers.

'I am satisfied therefore that, were a Periodical Payment Order to be made, it would be appropriate, fair and reasonable, under the provisions of Section 2(9) of the 1996 Act, to modify the effect of Section 2(8) by providing for the amount of payments to vary by reference to the 75th percentile of ASHE Occupational Group 6115, published by the ONS, or to any equivalent or comparable occupational group which from time to time may replace the ASHE occupational group 6115 as the appropriate occupational group for home carers. I find that a Periodical Payment Order with such modification will best meet the claimant's needs and I shall therefore make such an order in respect of his future care costs'.

The judgment is likely to have far reaching effects. The defendant in the case was the NHS, who traditionally self-fund their periodical payments in any event. If ASHE 6115 rises at a rate higher than RPI, it will inevitably cost the defendant more than an equivalent RPI-linked PPO. However, it was clear that the court is not concerned about the cost to the defendant, as long as that defendant could be regarded as 'reasonably secure', as defined in s 2(4) of the Damages Act 1996. That was not an issue in this particular case.

There are significant practical implications for insurers. Whilst it is open to insurers to self-fund in the same way as the NHS, historically most insurers have chosen to buy out their liabilities under a PPO by the purchase of an annuity from a life office which mirrors its obligations under the PPO. Annuities are available in the marketplace (albeit expensive) which are linked to RPI, and therefore the insurer can effectively close its books once the annuity purchase has been made.

However, no such annuities exist which are linked to any form of earnings index, let alone ASHE 6115, and this is unlikely to change. This is not a concern for the claimant, as he will have the benefit of a PPO against an organisation which would be deemed to be reasonably secure, and would have recourse to the Financial Services Compensation Scheme (FSCS) in the event of the failure of the original insurer.

But what if the defendant is not reasonably secure, for instance in the case of a foreign insurer? Can a court compel a defendant (or his insurer) to purchase a financial instrument from a third-party life office, rather than award damages by way of a lump sum?

Thompstone was heard on its particular facts, specifically the cost of an existing care package for that claimant. Will this lead to evidence being adduced for different indices in respect of different heads of damage, even in the same case?

Disatisfaction

A further twist in the tail came with the case of A v B Hospital NHS Trust [2006] EWHC 1178, which was heard before Lloyd Jones J. In this case, the parties reached agreement on all heads of claim other than the cost of future care, in the region of £2.5m. There followed a trial on the issue of the appropriate award for the cost of future care, and this was assessed on a lump sum basis in the total sum of around £4m. The claimant received financial advice in respect of the alternative forms of award, which concluded that a lump sum was to be preferred. The defence objected, claiming that a PPO for the future care element was more appropriate.

The question of the form of the award was argued before the court at a hearing on 27 October 2006, where the advantages and disadvantages of PPOs, and in particular the indexation argument, were heard. The claimant contended that a PPO was too prescriptive, and that a lump sum award would allow the necessary flexibility to better meet the claimant's future care needs. Whilst it is accepted that payment by way of a lump sum, and the consequent investment policy, would involve a degree of risk, this was preferred by the claimant to periodical payments linked to the RPI.

The court held, in similar circumstances to the Thompstone case, that there was a high degree of likelihood that if the payments were indexed by reference to the RPI, they would not meet the actual cost of care, and that the shortfall would be very substantial. Accordingly, an order was made for payment by way of a lump sum. This reiterated the dissatisfaction with the RPI, although the conclusion reached by the claimant's advisers was that a conventional lump sum was to be preferred.

I understand that the defendants in Thompstone have lodged an appeal, as was widely expected. This is likely to result in a period of uncertainty until the appeal process has been completed. There are likely to be many more twists and turns, but it seems that periodical payments are now being considered (as required by CPR41) in many more cases than previously, and that appropriate scrutiny is required as to the form of award which best meets the claimant's needs. At the very least, it should mean that the requirements of CPR41 are more likely to be adhered to in the future!