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The Discount Rate – what next?

17 April 17

In association with Tilney: comment on the new rate to apply in calculating damages

by Tilney

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.

Kathryn Milne is a personal injury specialist at Tilney. To learn more about Tilney’s financial planning and investment management services for personal injury clients and their legal representatives, call 0333 014 5429 or email lawscotland@tilney.co.uk, www.tilney.co.uk
Investments and the income from them can go down as well as up, and may return less than originally invested.