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Consultation opens on how to set PI discount rate

30 March 2017

Lord Chancellor Liz Truss, along with the Scottish ministers, have opened a joint review of the way the personal injury discount rate prescribed under s 1 of the Damages Act 1996 is set.

The rate, which has to be taken into account by the court in assessing the size of a lump sum award of damages for future financial loss in a personal injury case, was reduced by the Lord Chancellor, from 2.5% to minus 0.75% with effect from 20 March, with the Scottish ministers making an equivalent order effective from 28 March. The change is expected to increase significantly the size of awards of damages for future loss, and while welcomed by claimant legal firms, was heavily criticised by insurers and their representatives. The issue also has significant implications for the NHS.

Concerns have been raised that the present method, which derives from principles established in the 1998 House of Lords case Wells v Wells, is flawed. In setting the new rate the Lord Chancellor took a three year average of real returns on index linked gilts. The main criticism is that this approach intrinsically overcompensates many claimants, contrary to the overall objective of meeting in full the costs and losses caused to the claimant by the injury, neither more nor less.

The paper considers possibilities for how, when and by whom the discount rate should be set, but does not make specific proposals. The core issues examined are:

  • What principles should guide how the rate is set? Are the present principles still fit for purpose? What should the principles be? What investment returns should be taken into account in setting the rate? Should the possibility of a periodical payment order affect the decision as to the relevant investments?
  • How often should the rate be set? Should this be left open, as now, or would a set pattern of review be better? Would an annual, three year or five year system be better? Should reviews be triggered by degrees of change in investment returns?
  • Who should set the discount rate? Should the power to do so remain with the Lord Chancellor and her counterparts in Scotland, or would it be better for someone else, possibly an expert panel, to set the rate?

The paper also considers whether sufficient use is being made of periodical payment orders, which, from the claimant’s perspective, remove much if not all of the risk associated with ensuring that the anticipated future financial loss is met in full and on time. Whilst the legal framework in relation to periodical payment orders is different in Scotland, Scottish ministers are interested in views on this.

Click here to access the consultation. The deadline for responses is 11 May 2017.

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