The Discount Rate – what next?

The recent discount rate announcement sent shockwaves through the personal injury world – nobody predicted the reduction from 2.5% to -0.75%.

Since the rate of 2.5% was introduced, it has generally been accepted as unachievable. It meant pursuers were only able to generate enough money and make it last, if they invested in a mixed portfolio. The new rate should give pursuers a greater chance of meeting their lifetime needs.

The Lord Chancellor confirmed that legally she must follow the Wells v Wells principles: the discount rate should be based on an investment portfolio which offers the least risk; a single, fixed rate should be used in all cases and it should be easy to use. She confirmed a further consultation will be launched before Easter to review how the discount rate is set, specifically whether: the rate should be set by an independent body; more frequent reviews would improve predictability and certainty; the methodology assuming pursuers invest only in index linked gilts (ILGS) is correct.

Changes might include: using averaged ILGS rates or a single rate linked to the Bank of England base rate, CPI or RPI or a typical low risk portfolio; applying different rates for particular heads of loss; greater use of periodical payments or provisional damages; recovery of investment and advice fees; a review of Roberts v Johnstone calculations.

It will be interesting to see how long this consultation takes and whether the rate will be reviewed. Anecdotally, we understand some defenders are delaying settlement, hoping for a higher discount rate. The maths tells us that a discount rate of -0.75% still requires a pursuer to take some risk, but by doing so, they should now be able to fund their lifetime losses. On this basis, we believe any increase would be a move away from the principle of 100% compensation.