The Lord Chancellor has this morning made the much anticipated announcement on the discount rate used to calculate future loss claims in personal injury cases. On the whole it is good news for claimants.
In substantial personal injury and clinical negligence claims, a large part of the claim usually relates to future financial losses. These cover such things as the loss of earnings, the cost of care, adapted or alternative accommodation, medical treatment, therapy and equipment. The process of assessing what compensation should be paid involves agreeing the annual loss and period for which it will be incurred and then applying a multiplier which reflects the period of loss and makes allowance for other contingencies as well as the potential for the loss not being incurred in the way anticipated.
However, this multiplier also makes an allowance for the fact that the claimant receives the money in a lump sum rather than incurring a loss over life – and in theory could then invest the lump sum and make a return. The future loss is in effect reduced to reflect the ability to invest. Originally this worked well but in recent years the lack of return on investments has meant that claimants are out of pocket. Broadly speaking their future losses have been discounted to allow for a 2.5% net rate of return on their lump sum – when the reality is that without taking a significant risk on their investments, a return of this level is difficult to achieve.
For a long time there has been a request for a review of the rate applied. This morning’s announcement reduces the applied rate from assuming a 2.5% return to a -0.75% return, invested on a cautious basis. The Ministry of Justice has specifically said: “The current legal framework makes clear that claimants must be treated as risk-averse investors, reflecting the fact that they may be financially dependent on this lump sum, often for long periods or the duration of their life."
Philippa Luscombe, partner in the clinical negligence and personal injury teams at Penningtons Manches LLP, comments: “Claimants were being significantly disadvantaged by the discount rate set at 2.5%. Their future damages claims were being reduced to reflect an expected rate of return that in fact was not achievable without incurring risks which they could ill afford to take. The substantial change announced today will mean that on the whole future loss claims will be preserved and claimants should have sufficient funds to cover the periods for which those losses are expected to be incurred. Claims for future alternative accommodation are however affected in a slightly different way and may in fact reduce.
“We hope that going forward the rate will be kept under review more regularly so it is fair to both sides. For now, this reduction makes settlements more realistic and provides claimants with the security that they need.”