Following its call for evidence to explore the option of a dual or multiple rate personal injury discount rate (PIDR) system, the Ministry of Justice’s eagerly awaited response was published on 11 September 2023. Ahead of the next formal review of the PIDR in England and Wales, which must commence by July 2024, we recap on the context to the call for evidence and consider what we can learn from this recent development.
Context to the call for evidence
Before the current discount rate of -0.25% was set by the then Lord Chancellor in July 2019, the UK Government Actuary had explored the possibility of dual rates. However, the government decided that there “was a lack in the quantity and depth of evidence available at that time to conclude that a dual rate was more appropriate than a single rate”. As such, the then Lord Chancellor committed to seeking additional evidence on this issue ahead of the next PIDR review.
Leading up to the launch of the 2023 call for evidence, the MoJ hosted a number of industry roundtables, in addition to launching the recruitment process for the PIDR expert panel that will advise the Lord Chancellor. On 27 June 2023 the MoJ announced the members of the panel. The panel’s first meeting was held on 21 July 2023 (the new PIDR page on GOV.UK documents the minutes of that meeting).
Call for evidence
The call for evidence considered different models for setting the PIDR in other jurisdictions including Hong Kong, the Canadian province of Ontario and Jersey which set different rates based on the duration of the award, in addition to the heads of loss approach adopted in the Republic of Ireland.
MoJ response to call for evidence
The call for evidence has not led, at this stage at least, to “any specific proposals or commitments”. To this end, the MoJ reiterating “the government will not be recommending a policy position or deciding on whether a dual/multiple PIDR should be introduced at this time”.
Rather, the response is limited to providing “a high-level summary of the submissions provided by stakeholders”.
Divergence of opinion
Evident from the summary of responses, is that identifying areas of consensus across the board is particularly challenging. The wide range of stakeholders, including claimant and defendant lawyers (and representative groups in respect of each), insurers, reinsurers, actuaries and economists, as well as those in the medical sector, and financial services, inevitably reflecting a myriad of perspectives. With differences in views on certain matters also evident within the same stakeholder group.
By way of example, some of the key areas of variance in views that will require close consideration by the PIDR expert panel include:
- Switch-over point – dual/multiple rate system
In the context of a dual rate system based on duration, the opinions expressed as to the ‘optimal point’ for the switchover (i.e. the point at which there is a move from a short to a long term rate) demonstrate the variance in views. These range from five years, 10 years, 10 to 15 years, 15 years, 15 to 20 years, 18 years, and 25 years. Responses also included there being insufficient data and dependent on which model is implemented.
- Which dual/multiple rate system – duration of claim (with switchover point), duration based on length of claim or heads of loss (or a combination of the two)?
Views on the potential models were similarly varied and fairly evenly split. In the summary list provided within the response, the preference for a duration-based approach perhaps just edging ahead of one based on heads of loss. Although, those offering a preference for a duration-based approach were split between those advocating one based on a blended and those favouring a switched rate.
- Frequency of review of short-term rates
In recognition of the potential for volatility of markets in the short term, views were sought as to the frequency of short-term rates. Responses included the need for an annual review, three-year intervals, and maintaining the existing five-year review. Some stakeholders noting that “the more regular the review period, the more likely there will be delays, satellite litigation and unpredictability”.
- Settlements which include a Periodical Payment Order (PPO) element
Use of a higher PIDR in settlements which include a PPO element “as a more appropriate way to adjust nominal investment returns for future inflation”, is another area that represents divergence among the various stakeholders.
What does the response tell us?
There is understandably divergence of opinion throughout the summary document. However, a common theme within the responses to a number of the questions is the need to avoid introducing uncertainty, additional complexity and cost, and delay. Alongside these, stakeholders have highlighted the risk of satellite litigation.
Should the PIDR expert panel advise that change is needed, and of course it may determine the current single rate approach is the fairest system, any changes to such a complex system need absolute clarity. Any ambiguity could lead to unnecessary disruption and delays for all parties in arguing avoidable points, not to mention increased costs.
The next step is for all submissions to be shared with the newly formed PIDR expert panel that will advise the Lord Chancellor as part of the next PIDR review. That review is required to commence prior to 15 July 2024.
It is anticipated that a public consultation similar to the one undertaken ahead of the last rate review will form part of the evidence gathering exercise, however, that will be a decision for the PIDR expert panel.