To the disappointment of compensators, the MOJ has announced a new discount rate of minus 0.25%, to come into effect in England and Wales from 5 August 2019.
As an upwards variation of the rate from the existing minus 0.75% value, the new rate will benefit compensators to a modest degree but certainly not to the extent that was anticipated. Many will consider that this new rate still falls short of a real-world valuation of what claimants will be able to achieve in terms of a net return on the investment of damages awards.
The Civil Liability Act 2018 has allowed a move away from the unrealistic assumption of claimants investing, or being advised to invest their damages awards in ILGS as a single asset class. However, compensators will be likely to feel that the manner in which the Lord Chancellor has applied the new methodology for the calculation of the discount rate has fallen short of the mark in terms of restoring a more rational approach to how future damages awards are assessed.
In terms of the financial impact of the new rate, the discount rate does not have a linear impact on individual claims. By way of example, a 33 year old male with serious brain injury from a road traffic accident and with impairment of both his physical and cognitive function, might have received an award of £6,200,000 under the pre-2017 discount rate (2.5%), which would have risen to £10,400,000 under the current minus 0.75% discount rate. After 5th August 2019, the award would work out at £9,500,000 under the newly announced rate. Further analysis of the financial impact of the new rate can be found below.
The provisions of Part 2 of the Civil Liability Act 2018 require that the rate must be reviewed at least every five years. It is open to the Lord Chancellor to review the rate earlier than five years from today's announcement although there is no immediately obvious reason why a new Lord Chancellor (David Gauke is expected to step down imminently) would be minded to do so (more details available below).
The courts retain a discretion over whether they apply the discount rate in the context of individual cases but the reality is that this new rate will be used in the vast majority of future damages calculations form 5th August 2019 (more details available below). In terms of the day to day practical implications of that for compensators but fundamentally compensators would be well advised to review the implications of all Part 36 Offers that they have either made or received in the context of handling individual claims. Variation of the discount rate will not negate existing offers or otherwise prevent a party from accepting the same (more detail on this point is available below).
In view of the requirement that the discount rate be revisited at least once every five years, the rate will remain a more constant consideration for compensators going forward. The fact of this review having resulted in the imposition of a negative discount rate for the second time will only serve to underscore the importance of the expert panel, which will advise Lord Chancellors in future reviews, being properly constituted and non-partisan in their approach (see below for more detail and for commentary around some other issues for compensators to keep a track of going forward).
What will the financial impact be?
- As a rule, the discount rate only affects the value of cases with future damages awards.
- In the vast majority, if not all the affected cases, the new rate will serve to reduce indemnity spend to a degree.
- The largest impact will be on cases involving catastrophically injured litigants.
- The impact of the new discount rate on individual claims is not linear. No two cases will be affected in exactly the same way.
- Although the discount rate itself is a single figure, it drives the calculation of hundreds of factors set out within the Ogden tables. Which of those factors are applied to individual cases varies according to case specific circumstances, such as the claimant's age. The relevant factor is then applied to other case specific facts such as the claimant's annual salary, hence the impact of the discount rate varying considerably from case to case.
- By way of example, a 33 year old male with serious brain injury from a road traffic accident and with impairment of both his physical and cognitive function, might have received an award of £6,200,000 under the pre-2017 discount rate, which would have risen to £10,400,000 under the current minus 0.75% discount rate. After 5th August 2019, the award would work out at £9,500,000 under the newly announced rate.
- There will be modest savings for government compensators, such as the NHS, the MOD and Local Authorities. The 2017 downward variation of the discount rate was anticipated to cost the NHS circa. £1.2bn per annum. This upward variation of the rate will reduce that exposure a little, though not to as significant an extent as might have been the case had a more realistic, 'real world' rate been arrived at.
Is this rate likely to remain in force for the next five years?
- Part 2 of the Civil Liability Act 2018 obliges the incumbent Lord Chancellor to ensure that no more than five years elapses between the announcement of a new discount rate and initiating a further review of it. However, there would need to be a reason for the discount rate to be reviewed out of cycle and the natural inclination of any Lord Chancellor is likely to be not to vary the discount rate unless or until he/she actually has
- The purpose of the discount rate is to offset factors such as inflation, taxation and investment returns that impact on the adequacy of compensation awards for future losses and expenses. Fluctuations around those factors could bring about pressure on the Lord Chancellor to carry out an early review of the rate, although the time horizon assumed in the Government Actuary's report (43 years) suggests the changes would have to have a long-term impact.
Is the court obliged to apply the new rate?
- Technically no, as s.10(1)(2) of the Civil Liability Act 2018 provides that the courts can "take a different rate of return into account if any party to the proceedings shows that it is more appropriate in the case in question". However, the courts have always had that discretion yet have rarely departed from the discount rate set by the Lord Chancellor. Thus in practical terms this rate will commonly be applied in all but the most exceptional of circumstances.
What are the immediate implications for existing claims?
- Judges assessing quantum in respect of damages will be obliged to apply the new minus 0.25% discount rate from 5 August 2019 but also to continue to apply the existing -0.75% discount rate before then. Thus the damages value of affected cases that come to be assessed before 5 August 2019 will likely remain the same, whereas those being assessed post 5 August 2019 will likely reduce in value.
- Variation of the discount rate will not negate existing offers or otherwise prevent a party from accepting the same. Most of those involved with personal injury claims had been anticipating a more dramatic increase in the discount rate and have been factoring that in to negotiations and the formulation of offers. The danger for compensators there is that claimant offers that had previously been dismissed as unrealistic may now become more relevant and that, conversely, offers that compensators had made in anticipating of them putting in place reasonable costs protection, will now become seen as less valid.
- Compensators would thus be well advised to review all existing offers and review individual case strategies against the new rate.
Does this draw a line under the discount rate?
- The discount rate will be reviewed with relative frequency by comparison with the 16 year hiatus between the setting of the two previous discount rates in 2001 and 2017. That is by virtue of Part 2 of the Civil Liability Act 2018, which obliges the incumbent Lord Chancellor to ensure that no more than five years elapse between the announcement of a new discount rate and initiating a further review of it.
- Going forward, on each occasion that the discount rate is reviewed in the future, the incumbent Lord Chancellor will have to set up an expert panel to advise him as to the level at which the discount rate should be set. The recommendations of that panel will not bind the Lord Chancellor. Nonetheless, he or she will certainly be obliged to take account of the same and will be keen to be seen to have done so, in order to avoid a judicial review. Therefore, such panels will wield significant influence. The process of compiling such panels will be one of political appointment, the government of the day steering the appointments, albeit subject to Parliamentary scrutiny. Compensators must ensure that the composition of such panels is such that they are not dominated by those partisan in their views and/or with claimant leanings. Appropriate lobbying will need to be undertaken with a view to avoiding that outcome.
- Compensators will have been looking for the Lord Chancellor's review to deliver a more balanced discount rate, giving rise to a more realistic basis for the calculation of future damages awards. As indicated above, most will consider that this new rate falls short of that.
- The legislative process through which the Civil Liability Act 2018 has come about has cast renewed light on the issue of why the uptake of Periodic Payment Orders (PPOs) in England and Wales is so poor. PPOs involve claimants receiving annual payments for certain aspects of their future damages, significantly reducing the relevance of the discount rate where that mechanism of compensation is adopted. The government agreed to look into the issue and compensators should keep an eye on developments. However, there is a certain irony in that, with future damages awards continuing to be calculated on a negative discount rate basis, the new rate will offer very little incentive to claimants to opt for compensation by PPO, as opposed to a lump sum.
- The legislative activity around the discount rate has also cast additional light on the thorny question of how best to compensate claimants for accommodation expenses. Historically, claimants have been compensated for lost return on investment experienced as a result of them having to invest capital in a new property. Following the introduction of a negative discount rate, the limitations of that approach have been exposed on the basis that through assuming a negative net return on investments, it leads to a 'no loss' outcome. The question of how best to deal with accommodation claims is consequently the subject of case law being appealed in the higher courts, which compensators will again be well advised to monitor.
- Similarly, at points during the evolution of the Civil Liability Act 2018 there was debate around the possibility of introducing the cost of investment advice as an accepted head of claim, in circumstances where at present the cost of investment advice is intended to be another factor to be taken account of when the Lord Chancellor sets the discount rate. Although there are as yet no active initiatives to vary that position, compensators should watch out for such claims being advanced. Our own assessment is that the issue is already dealt with adequately by the factors in the Act, which require the Lord Chancellor to set a rate net of taxation and investment charges.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.