The Discount Rate – The Civil Justice Committee Report

The recent cabinet re-shuffle provided us with yet another Lord Chancellor, the third in the space of a year. There is little doubt that Mr Gauke will have a full in-tray. One of his jobs is to consider the current state of affairs regarding the discount rate for personal injury damages awards. We have written substantively over the last few months on this important subject, and made contributions to the consultation process. Also, in early November, we provided written evidence to the Civil Justice Committee hearings.

The Civil Justice Committee reported their views on the draft legislation (which proposes a move away from the Wells no-risk principle), toward a low-risk investment approach. You can download the report in full by clicking here.

The committee considered 41 written submissions and oral evidence from both claimant and defendant representatives. Lord Keen, of Elie QC, gave oral evidence on behalf of the MOJ. For present purposes, key excerpts from the Committee’s conclusions are recited below;

“We welcome the Government’s commitment to full compensation, neither more nor less. However, we recommend that the Government clarifies what it means by 100% compensation. In practice a lump sum award will nearly always either under-or over-compensate claimants. Some will receive too much and some too little. If the Government is targeting a median level of 100% compensation in relation to interest earned on lump-sum investment, it needs to say so.

The Committee went on to state;

It is possible that claimants may be “under-compensated” even when the discount rate is set at a “risk-free” rate because compensation may be inadequate for their accommodation needs; they may be living longer than expected or there may be real increases in their cost of care over time. We recommend that the Government find a means of assessing whether the legislative framework is compensating claimants fairly for their losses; otherwise by increasing the discount rate to remove what it sees as one type of “over-compensation” (primarily over-compensation due to greater than anticipated earnings from lump-sum investment), it may be simply increasing levels of under-compensation for claimants who were already under-compensated.

It may seem intuitive that the discount rate should reflect actual investment behaviour. But we conclude that this proposition should not be adopted without some further critical examination.

We advise caution in considering evidence of claimants’ investment behaviour to set the discount rate. Investment by claimants in higher risk portfolios could indicate they are under-compensated and forced into higher-risk investments to generate sufficient return for their future living expenses.

The Civil Justice Committee also appears to question the evidence of real claimant investment behaviour. This is something that we applaud, given the apparent paucity of evidence as considered to date by the Ministry of Justice;

It may be reasonable to change the assumptions upon which the discount rate is currently calculated if they are indeed no longer representative of “real world” behaviour. However, we do not believe the evidence presented on this point so far is adequate. We recommend that clear and unambiguous evidence is gathered about the way claimants invest their lump sum damages before legislation changes the basis on which the discount rate is calculated. If the rate is to take account of investment behaviour, a mechanism must be established to keep those responsible for setting the rate informed about that behaviour. This mechanism must ensure it captures the behaviour of those claimants who do not access professional investment advice and fund management.

The proposal underpinning the draft legislation, (that claimants should take investment risk in order to meet the 100% principle), is in our firm view, incorrect. Indeed, the meaning of a low-risk strategy was considered by the Committee;

There does not appear to be a consensus about what type of portfolio would be suitable to set a discount rate for claimants. There are likely to be multiple portfolios with differing rates of return that would fit into the Government’s requirement of an approach involving (i) more than a very low level of risk, but (ii) less risk than would ordinarily be accepted by a prudent and properly advised individual investor who has different financial aims.

We recommend that the Lord Chancellor publishes the basis upon which he or she has decided upon a particular rate out of the range available. We also think that it may be problematic for the Lord Chancellor to use investment behaviour of claimants to set the rate of return within the range. There are no such data widely available, and currently no mechanism in the draft legislation to obtain those data; and also claimants could be taking on more risk because they are being under-compensated. Until the Government obtains data on whether claimants are being appropriately compensated and not just with regard to investor risk, we recommend that the Lord Chancellor as a starting point sets the rate at the lower end of the range of “low-risk” to avoid the risk of under-compensation for claimants.

We welcome wholeheartedly, the views as expressed by the Committee in this important report. For personal injury claimants and their families, who have endured the lack of action by previous Lords Chancellor under the previous 2.5% rate, any move away from the no-risk Wells principle, requires a great deal of further hard evidence and full consideration.

For an expert view on financial planning for personal injury claimants please get in touch.
We are able to assist with Expert Witness reports on:

Accommodation Funding Options
Periodical Payment Allocation
Investment Advice Costs
Investing Personal Injury Damages