Discount Rate Changes from 2.5% to Minus 0.75%

On Monday 27th February 2017 the Lord Chancellor, Liz Truss, announced an important procedural change that will affect the way that compensation for future losses will be calculated in personal injury and medical negligence claims.

This procedural change will affect very high value claims such as those where Claimants are likely to experience a future loss of earnings or where they are likely to require professional care and assistance. A discount rate is applied where a Claimant receives their compensation as a lump sum payment. This means that a seriously injured client will get all of their compensation for future losses straight away rather than receiving a payment on an annual basis. The conventional wisdom being that a Claimant would gain by getting their compensation as a lump sum as they would invest the money and receive an income from it. A discount rate was therefore applied to ensure that Claimants did not ‘gain’ from their claims. They would therefore receive an appropriate amount that, if invested in ‘safe’ investments, would mean that their lump sum of compensation would last for as long as it was intended to do so, often for their lifetime.

When the 2.5% discount rate was set back in 2001, interest rates were relatively high and it was easy to invest money in low risk investments and receive a ‘safe’ rate of return of 2.5%. However, given that Bank of England base rates are now 0.25% and have been no higher than 0.5% since 2009, a ‘safe’ rate of return is no longer attainable. When inflation is taken into account, it is patently not possible for a Claimant to obtain a ‘safe’ return of 2.5%. Obtaining such a rate would involve a Claimant taking undue risks with their compensation.

The Lord Chancellor’s decision is therefore welcome. Since 2009, seriously injured Claimants have been grossly under compensated meaning that many of them will potentially run out of compensation long before they were ever intended to and whilst still suffering the effects of their injuries. Though welcome the recent decision of the Lord Chancellor has clearly taken some by surprise. The Insurance Industry included! The Association of British Insurers (ABI) has slammed the decision as “reckless in the extreme.” While one price comparison website has stated that: “The concern is that the discount rate change will see much of the money move from the pockets of motorists and into those of personal injury lawyers, who campaigned for it.”

In addressing these two points we would like to state…

  1. The simple fact of the matter is that the Government (through the NHS Litigation Authority and the Ministry of Defence) and the Insurance Industry have saved billions of pounds over the last 6 – 7 years by being able to under settle the claims of the most seriously injured victims and thankfully the recent change to the discount rate has finally rectified this position. We would like to remind all critics of the recent change that the guiding legal principle for compensation awards has always been that a Claimant’s compensation should put them in the position that they would have been in (as far as money can) had they not been injured. This basic principle has not been fulfilled for the last few years as a result of the previous level of the discount rate but hopefully now all those who have been seriously injured (through no fault of their own) will be appropriately compensated.
  2. Turning to the comments from the price comparison site. Yes, Claimant lawyers have campaigned for this change for years because we actually care about our Clients and don’t want to see them disadvantaged by the system. However, we won’t gain from this change! The rules don’t allow us to make any deductions from the compensation that our Client’s receive for future losses. We want to ensure that all those who have been injured are treated fairly and certainly don’t want consumers receiving misinformation about who will benefit!

Neil Clayton is one of our Clinical Negligence Partners. If you wish to discuss this article or another medical negligence issue you can contact us on Freephone: 0808 164 0808. Alternatively, please complete the request a call back form and we will call you.

About the Author

Neil Clayton

Neil Clayton

Partner - Clinical Negligence