The discount rate and why it matters

Posted: 14/12/2016

When someone makes a claim because they have been injured through no fault of their own, following an accident or clinical error, two types of damages can be sought: general damages, to reflect the pain, suffering and loss of amenity they have suffered due to the injury itself, and special damages to reflect the losses and expenses they have incurred and will incur in the future as a result of the injury, for example to meet their care needs and to reflect any loss of earnings etc.

Special damages for future loss may be paid as a lump sum or as regular periodical payments. In the case of lump sum payments for future loss, it is assumed that the money will be invested until it is needed and that a return will be achieved. A discount is factored into the future claim to reflect this. In practice, an annual loss figure is multiplied by a ‘multiplier’ which is calculated by looking at the number of years the loss is likely to be sustained and then factoring in a discount to reflect the assumed rate of return to be achieved from investing the damages. This assumed rate of return is known as the discount rate. Given that the damages will be needed by the claimant to meet their needs, it is assumed that they should only accept a low risk on their investments.

For the last 15 years, the discount rate has been 2.5%, having been set by the Lord Chancellor pursuant to section 1 of the Damages Act 1996. This figure was reached by considering the three year average yield from Index-Linked Government Gilts (ILGS) at the time. However, over the last few years, the yield from ILGS has declined to below 2.5% and pressure has been placed on the Government to review the discount rate. Because no steps were taken by the Lord Chancellor to review the rate in 2014, the Association of Personal Injury Lawyers (APIL) commenced judicial review proceedings. Subsequently, two consultations took place and another is underway with the Treasury and Government Actuary. It has been announced that the results of the review should be available by the end of January 2017 and it is predicted that the discount rate will be changed and probably reduced.

If the discount rate is lowered, the effect will be to increase lump sum awards, as the rate of return it is assumed the claimant will garner on investments will be reduced.

Alison Appelboam Meadows, a partner in the clinical negligence team at Penningtons Manches LLP, comments: “It is vitally important that claimants are aware of the potential reduction in the discount rate next year and that, in any schedules of loss served at this stage, they reserve the right to alter the multipliers relating to future loss to reflect any changes in the discount rate, so that they recover the full damages to which they are entitled. This issue should also be borne in mind during any settlement negotiations.”

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