The Discount Rate – Rumours of the Death of Periodical Payment Orders are Greatly Exaggerated!

Since the announcement of a review, seven years ago no less, news of the Lord Chancellor’s decision to dramatically reduce the 2.5% discount rate down to -0.75%, still came as a surprise to many involved in personal injury litigation.

Finally, we have a decision based upon the economic realities of investing damages in low/no-risk investments, in accordance with Wells – a long-awaited reminder that personal injury claimants should not be treated as ‘ordinary investors’.

We at Nestor welcome this decision. We have (for the past ten years!) been advocating that the 2.5% rate was wrong for so many reasons. Indeed, we had written to the Lord Chancellor in that regard on several occasions, going back as far as the then Lord Chancellor, the Right Honourable Jack Straw MP.

Before the ink was dry on the Lord Chancellor’s decision earlier this week, personal injury lawyers were asking us whether this deals a fatal blow to the continued use of Periodical Payment Orders (PPOs), for future recurring losses. Why, it was asked, if claimants are getting significantly more damages for future losses, don’t we just accept the increased lump sum and disregard a PPO? Maybe not a mortal blow perhaps, but certainly a good and hearty kick.

On the face of it, this is a reasonable question. If claimants are recovering larger lump sums for future loss, then why not just take the cash, invest in low-risk assets and allow them to get on with their lives?

In our view, it is certainly not as simple as that. Comparing a future loss lump sum (albeit bigger) versus earnings-linked PPOs is still a complex decision, and one which will affect the lives of personal injury claimants for many years to come. Time for adequate consideration at the end of the litigation process is, in our view, just as vital as it has always been.

On the face of it, the fact that future loss lump sums will be greater in value does not in itself allow those advising personal injury claimants to give a cursory glance towards a PPO then disregard it. There are, and always will continue to be, significant advantages for a claimant to have part of their future loss damages paid by way of a PPO.

As regards the reduction, the assumptions used when the Lord Chancellor made her decision still remain only assumptions. The new rate ignores mortality, and lump sum awards cannot match the lifelong, tax-free, inflation-proofed certainty of a PPO.

Ah yes, we hear what you say, now that we are getting future loss damages based upon a more realistic discount rate, this alleviates any investment risk! Why not have the lump sum award and place it in a basket of Index-Linked Gilts (ILGS)? That is what the Discount Rate is all about – low/no-risk investments – so what is the point of investing in anything other than ILGS?

Quite simply, ILGS are not without risk. That risk increases when attempting to create a ‘basket’ of such investments, in accordance with the Lord Chancellor’s reasoning. And remember, ILGS are linked to general price inflation, rather than care-cost wage inflation, so immediately they fall behind the lifelong certainty of a PPO, which is linked to the increasing cost of earnings. Although, in recent times, wage growth has been subdued, we cannot be confident that this will remain so over a claimant’s lifetime.

Our next article on the discount rate will consider why future loss lump sum investments still need to be invested to achieve longer-term returns. But, for now, and, to summarise, whilst we welcome the Lord Chancellor’s decision, this is not in itself sufficient reason to disregard a PPO for future losses. For the majority of a claimant’s future losses which, in the main, are needed to meet care needs, careful consideration and good financial advice is still vital.

Doubtless and, given the scale of the recent change, dialogue on the issue is most welcome.