Kennedys urges government to reflect reality of investment in discount rate decision
We feel that any change to the discount rate needs to reflect the Ministry of Justice’s own research that personal injury claimants do not simply put their damages into low-risk investments.
Responding to the news that the ministry will announce by the end of January 2017 its decision on whether to change the discount rate, we have said the government also needed to take into account the impact it could have on the public finances.
The discount rate is used to reduce an injured person’s lump sum compensation to factor in income from investment of those damages in future years. In 2001, the then Lord Chancellor set it at 2.5% by reference to index-linked government stocks (ILGS). However, the low return from ILGS in recent years has prompted calls from claimants to cut the discount rate and thus increase the damages they receive.
We and our compensator clients argue that, in reality, claimants want higher rates of return than can be achieved by putting all their damages into ILGS. Instead they select a mixed portfolio of investments – there are dedicated personal injury funds which offer a range of assets to invest in to this end. This was confirmed by research published by the Ministry of Justice in 2013.
The research also recognised that even a small reduction in the rate would have a significant impact on public bodies and insurers.
To assume a claimant only invests in ILGS is to ignore what actually takes place and this could over-compensate the claimant. Ultimately this could lead to higher costs for defendant bodies, such as the NHS and local authorities, and have a detrimental impact on already reduced public sector budgets.
Christopher Malla, Partner, London
Christopher adds: “The reality is that claimants put their damages in a mixed portfolio of investments, and there is good evidence that claimants have been able to achieve real rates of return, net of tax, of up to and above 2.5% that way.”
Christopher also warned of the risk that if the discount rate falls and lump sums become more attractive as a result, claimants may stop settling their cases by way of a periodical payment order. This is where regular payments, linked to an inflation index, are made for the remainder of the claimant’s lifetime.
“This is clearly the fairest and most appropriate way of ensuring adequate funds are available over what can be a very long period of time,” he said.
He cautioned too that the pending decision could hold up existing cases if claimants seek to adjourn damages hearings.
Christopher added: “Ultimately it is important to claimants and defendants alike that we get clarity from the government – a single figure, rather than several, that is then left alone for at least a decade thereafter.”