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Damages (Personal Injury) Order 2017

Volume 783: debated on Tuesday 18 July 2017

Motion to Regret

Moved by

That this House regrets that the Damages (Personal Injury) Order 2017 makes a substantial change to the Ogden rate, the first change since 2001, just before the completion of a further consultation on how to set that rate more effectively in the future (SI 2017/206).

Relevant document: 29th Report from the Secondary Legislation Scrutiny Committee, Session 2016–17

My Lords, the regret Motion I have tabled may appear dry, complicated and technical. It is technical and complicated but it is not dry. It will have practical, everyday consequences for every taxpayer, for everybody who has an insurance policy, especially if they drive a motor car, and for every person who receives a long-term award of damages following an accident.

The setting of the discount rate to be applied to lump-sum damage awards is a critical decision. On the one hand, the situation cannot be allowed where, because the discount rate has been set too high, someone who suffers a catastrophic injury, maybe as the result of a road accident or an NHS operation going awry, finds that the lump sum runs out too soon. On the other hand, setting the rate too low means that the accident victim is overcompensated, which has a knock-on effect on motor and other insurance premiums, and on the overall operating costs of the NHS.

While the power for the Lord Chancellor to set the discount rate is to be found in the Damages Act 1996, the process by which the rate is set is based on case law, in particular on the 1998 House of Lords judgment in Wells v Wells, which reached two important conclusions. First, any lump sum awarded should neither overcompensate nor undercompensate the unfortunate victim. Who could possibly disagree with that conclusion? Secondly, the legal judgment was that the appropriate benchmark for setting the discount rate should be the yield on index-linked government stocks—that is, index-linked gilts or ILGs. I understand that the court concluded that the sums paid in compensation should be invested only in what the court saw as risk-free assets. The court appeared to anticipate that 100% of every amount paid in compensation would or should be invested in index-linked gilts. In such circumstances, it is not surprising that the conclusion was drawn that the benchmark for setting the discount rate should be that on index-linked gilts.

That second conclusion, 20 years on from the Wells v Wells judgment, is a good deal more controversial than the first, for the following reasons. First, the supply of index-linked gilts is limited. They offer particular attractions to those insurance companies and other financial institutions that seek perfect risk-matching. As a consequence, index-linked gilts tend to be fully priced—some may say overpriced—and arithmetically, as a result, the running yields are driven down. Many index-linked gilts are today traded above par so that a capital loss on redemption is inevitable. Further, if portfolio theory teaches us one thing, it is that diversification is the best way to offset risk. Any proposal that suggests investing in only one asset class needs to be approached with care. It is the all-your-eggs-in-one-basket belief. A more conventional approach might suggest, in addition to index-linked and other gilts, investing in some prime corporate bonds and some blue chip UK or overseas equities.

This rate setting is such a sensitive issue that successive Governments have shied away from changing the rate. Until earlier this year, the discount rate was set at 2.5% and had not been changed since 2001. That is patently unfair. The shape of the yield curve has altered dramatically as a result of the 2008 financial crisis and interest rates remain at historic lows. I am afraid that, as a result of the failure by successive Governments to address this issue, victims may prove to have been undercompensated in recent years.

Then suddenly, essentially out of nowhere, in February the then Lord Chancellor took action. And my goodness, it was draconian. At a stroke, she changed the discount rate from plus 2.5% to minus 0.75%. What is the effect of this rather arcane statement? A simple example may help clarity. Let us assume that you are a 25 year-old young man who has, sadly, been catastrophically injured in a motorcycle accident. The court must consider what sum is needed to look after you for the rest of your life—that is, probably more than 40 years. If the court concluded that on the old rate a sum of £2 million was sufficient, under the new rate that sum would arithmetically need to be £7.3 million. That is an increase of more than £5 million, or more than triple the original sum. Of course, the award assumes that interest rates will stay at the present low—historically, very low—level for the rest of your life. If they begin to rise, you will have been overcompensated at the expense of the taxpayer and other insured people.

Specifically, the Lord Chancellor’s decision had a direct and substantial effect on the public finances. Box 4.2 in the spring Budget policy costings paper indicates that as a result of this decision, the Chancellor of the Exchequer will have to find an additional £1.2 billion every year for the next five years as a guard against future claims. On page 35 of the same report, the suggestion is that the Lord Chancellor’s decision will result in an increase of 0.1% on CPI, or 0.2% on RPI.

The Times of 28 February this year, while pointing out the importance of not undercompensating victims, said:

“But basing the so-called Ogden formula on just three years’ history of index-linked gilts is crazy, as insurers point out. No accident victim in their right mind would invest their entire lump sum in inflation-protected gilts in this era of superlax monetary policy. One-third now opt for ‘periodic payment orders’, which guarantee a return of at least zero in real terms. Most others invest in a mix that includes higher yielding corporate bonds and equities”.

It went on to say:

“Either way, assuming that the best a prudent investor can achieve is a long-run real return of -0.75 per cent displays an Eeyorish level of pessimism. If this is really the government’s official thinking on likely future investment returns then its policies to encourage pension saving amount to mis-selling on a gigantic scale”.

More recently, on 24 June, the same paper highlighted that drivers now face a rate of increase in the cost of their motor insurance that is five times that of inflation. Not all of the increase can be attributed to the change in the discount rate but its impact will be felt particularly by younger drivers, those under 25, who have seen an increase of 13.1%, and—this may be of more interest to Members of your Lordships’ House—to older drivers, those over 50, who have seen an increase of 17.9%. Of course, this rate of increase will continue as reinsurance contracts run off—they last for only 12 months before they have to be renewed, and will have to be replaced at the higher rate.

I suspect—perhaps I should say I hope—that the Lord Chancellor did not understand or was not properly briefed or advised on the likely full impact of her decision. Certainly, having made this dramatic decision on Monday 27 February, which led to a storm of controversy, she then announced that there would be a further consultation. As my regret Motion makes clear, this appears to be putting the cart before the horse. I understand that the consultation is now closed and the MoJ has to report back by 3 August.

A regret Motion is probably not the place to discuss a remedy in detail but perhaps three brief conclusions can be drawn. First, it is critical that accident victims are properly compensated but in future the discount rate needs to be renewed more frequently to minimise the risk of overcompensation or undercompensation. This will also avoid the massive jerks on the tiller which have so disconcerted the insurance industry this year. Secondly, any new system should recognise that an assumption that all the compensation sums will be invested in the same asset class fails to account for the different circumstances of the various injured parties, so that the Wells v Wells conclusion that investments should be ILGs only is no longer appropriate. Thirdly and finally, those parties that are very risk-averse should place increased reliance on periodic payment orders as a better means of offering security to the injured party while avoiding overcompensation or undercompensation.

While tonight the House cannot discuss any remedies in detail, there is a need for action quickly to right the costly inequities of the present system. Following the recent consultation, the Government now have a wealth of information at their disposal. They also have a legislative vehicle on the stocks in the shape of the civil liability Bill announced in the Queen’s Speech. When the Lord Chancellor herself said, as she did on 7 March, that,

“the system needs to be reformed, because I do not think it is right that a discount rate is set on an ad hoc basis by the Lord Chancellor”—[Official Report, Commons, 7/3/17; col. 657]—

we can surely all agree that action is needed, and quickly. When he comes to reply, I hope that my noble and learned friend will be able to reassure me and the House that the Government recognise the significance of this issue and intend to take remedial action shortly. I beg to move.

My Lords, the noble Lord has done the House a service in raising this issue. I should refer to my interests as an unpaid consultant in my old firm of solicitors, which specialises in personal injury claims.

The changes effected by the order we are debating have been a long time in the making. As the Explanatory Memorandum to the order makes clear, the procedure was prescribed in the Damages Act 1996, which vested in the Lord Chancellor the power to prescribe a discount rate which the courts must consider—though not necessarily apply—when determining compensation in personal injury cases in the form of a lump sum. Until that time, the rate had been determined by the courts.

This is only the second occasion since 1996 when a change has been made. As we have heard, the rate has been reduced from 2.5% to minus 0.75%. The purpose of the order is to reflect in relation to awards of lump-sum damages in cases of significant monetary loss—for example, long-term loss of earnings or the cost of round-the-clock care—the average yield of index-linked gilts, as the noble Lord, Lord Hodgson, explained. Thus the damages awarded will reflect a rate of return which is designed to ensure that the claimant does not make a profit from the compensation but is adequately provided for.

In 2010 the then Lord Chancellor, Kenneth Clarke, initiated the process of a review and a consultation was launched in 2012 that was inconclusive. It was followed in 2015 by the report of an expert panel commissioned by Chris Grayling. A further 16 months elapsed before Mr Grayling’s successor but one consulted the Treasury and the Government Actuary, and the relevant order was finally made. Over time it became apparent that the 2.5% discount did not reflect the realities of a changing investment market, such that the compensation could run out or the injured party have to invest in higher-risk products.

Needless to say, the insurance industry has opposed the changes and claims that they will lead to higher premiums. This is par for the course for an industry that in recent years has done so much to increase its profits, not least by persuading the Government to effect changes in the realm of personal injury claims while making little, if any, reduction in premiums. APIL, the Association of Personal Injury Lawyers, reports that Admiral Insurance stated that motor insurance profits after the change would still be of the order of £336 million. APIL commended the statement in the Government’s consultation that they could be influenced by the effect of the change in the rate on defendants.

Another organisation, Hastings, said that the reduction,

“is not expected to have a material impact on the Group’s financial outlook for 2017”—

so that is one insurer not apparently overconcerned at the change. Even more illuminating is the figure which Thompsons Solicitors calculated as the saving to motor insurers during the last 10 years of the 2.5% rate—a staggering £30 billion. There is little or no evidence that this has been reflected in reduced insurance premiums.

Given the nature of the claims in question, where long-term losses of income can occur alongside a need for special care, home or vehicle adaptations and the like, periodical payment orders—rather than one-off lump-sum payments—may well feature increasingly in the award of damages or the terms of settlement of claims. The noble Lord alluded to that desirable move.

APIL illustrates this by a member firm’s account of a case where a nine year-old child sustains severe injuries and has a life expectancy of 70 years. The parents are already in their 40s and are anxious to ensure appropriate accommodation and care after they cease to be able to provide it. APIL congratulates the Government on their commitment to ensuring that adequate compensation will be provided in such cases, and I take what might be regarded as a rare opportunity for me of joining them in so doing.

However, the Law Society takes a more cautious stance on periodical payment orders, suggesting that claimants should be given a choice between them and lump-sum orders and that the availability of a periodical payment order should not affect the discount rate or assume a greater propensity to take a greater investment risk. I wonder whether there should be provision for a greater mix of lump sums and periodical payment orders in the cases we are considering, as the noble Lord effectively suggested.

There appear to be divergent views about who should determine the discount rate: the Lord Chancellor, favoured by Thompsons, or a panel of experts chaired by the Government Actuary, favoured by the Law Society. I lean towards the latter, given the changed role of the Lord Chancellor, which is no longer a position necessarily held by a lawyer and is, no doubt, subject to pressure, conscious or otherwise, in relation to public expenditure, not to mention the slow pace of the parliamentary process in terms of secondary legislation.

The Law Society also calls for the 100% compensation right to be maintained and to be involved in any change of methodology, subject to that requirement. Like the noble Lord, it suggests that the rate should be reviewed every five years, with the possibility of what it describes as an “out-of-cycle review” in the event of major changes in circumstances. Perhaps the Minister will respond to that suggestion.

In general, I support the order as laid. My speech would have ended here, but for the curious incident of the consultation in the springtime. A month after making the order which is the subject of this debate, the Government, in the person of the previous Lord Chancellor, launched a new consultation on the discount rate, to which the noble Lord referred, with a four-week period for responses. The then Lord Chancellor stated that she wanted,

“to make sure that the way in which the discount rate is set remains fit for purpose”.

One might have thought that, nearly seven years after Kenneth Clarke initiated the process which led to the order we are debating, that matter might already have been taken into account.

Instead, the latest consultation explicitly raises as issues basic questions which one might be forgiven for believing would have been taken into account before tabling the order: namely: what principles should guide how the rate is set, how often it should be set and who should set it. It also identifies the question of whether sufficient use is being made of periodical payment orders. In her Written Statement promising a review of the order, the then Lord Chancellor explicitly recognised,

“the impacts this decision will have on the insurance industry”,

with which the Chancellor would discuss the situation.

There was no mention of the needs of those who, by definition, also have an interest: namely, people who have sustained significant injuries by virtue of the negligence and/or breach of statutory duty of the companies comprising the insurance industry’s policyholders. Instead this latest consultation contains 36 questions covering the whole field, from whether the law on setting the discount rate is defective to whether there is any evidence that the Government have,

“not considered it as part of their equality analysis, and if so to supply the evidence and describe the effect of such evidence on the proposals”.

The Secondary Legislation Committee, in its 29th report of the previous Session, expressed its concern and disappointment,

“that a policy the insurance industry tells us will have financial impacts on most of the drivers in this country was not accompanied by an Impact Assessment setting out the Government’s calculations”.

Accordingly, it drew the order,

“to the special attention of the House on the ground that it gives rise to issues of public policy likely to be of interest to the House”.

Clearly it is a grave mistake for the Government not to have provided that financial impact statement.

The Committee wrote to the then Lord Chancellor seeking, inter alia, clarification as to,

“why, if the discount rate has remained unaltered since 2001, a new rate is being set now before the further consultation”.

It asked, quite reasonably:

“Would it not cause less disruption to the insurance industry and the public to conclude the proposed discussions before setting a new rate?”.

The response stated, somewhat bizarrely, that,

“the change in the discount rate is not itself regulatory in nature. I am, as Lord Chancellor, providing (nonbinding) guidance to the Courts on how they calculate awards of damages in personal injury claims, not providing guidance to businesses on carrying out their activities”.

The committee replied:

“This seems to us too narrow a view of the change being made: first, because any change made by Statutory Instrument must of its nature be ‘regulatory’; second, because this change will have broad consequences and we expect the supporting documentation to legislation to identify and acknowledge them even if the Government decide to continue with the policy change nonetheless”.

I hope the Minister will be able to assure us that, after the current consultation, there will be a properly costed impact assessment.

Whichever side one takes on the merits of the actual decision—now of course subject to this further consultation ex post facto—the exchange exposes a lamentable failure on the Government’s part to make use of the secondary legislation process in a reasonable and competent manner. Given the approaching tidal wave of such powers under Brexit, it is a disturbing illustration of the Government’s failure to apply due process. I hope it can be corrected here, but at the moment I have to say that the Opposition could not support the noble Lord’s Motion. However, he is absolutely right to canvass some of the issues that the Government have to address, and which I hope will receive a rather fuller and better-explained response than on the previous attempt to correct a situation that has been left standing for far too long.

My Lords, I congratulate the noble Lord, Lord Hodgson, and thank him for bringing forward his regret Motion on this order. So much of the detail has been described to the House that I am not going to repeat it, but there can be almost no one who looks at a discount rate of minus 0.75%, even for a risk-free investment, who does not come to the conclusion that the number is simply preposterous. For the Government to implement a result that is preposterous seems to me entirely inappropriate, not just for this Government but for any.

For many years I was a banker. There were times when it was necessary to price instruments, and I would turn to one of the junior bankers who worked with me and ask them to go away, go through the analysis and come forward with a conclusion. You would find one or two who were wedded to a particular formula that had been brought to their attention at some point during their training, and were absolutely certain that by applying the formula they would come to an appropriate result, even though when one looked at the result it was completely inappropriate for the situation and the purpose. That is what we have here: an allegiance to a formula—which was probably the wrong formula from the day that it was brought in but is certainly an inappropriate formula today—that the Government are insisting on applying simply because it is the existing formula. Frankly, I can think of no worse way in which to manage any aspect of finance in this economy.

The Government may take the view that the impact of making a preposterous and inappropriate decision does not matter very much. I think that it does, as I think does most of this House. Of course it is crucial that anyone who has been severely injured and is awarded damages over a long period should not be undercompensated, but there is no rationale either for overcompensation. If I understand correctly, this does not change the award; it is with the translation of the award into a lump sum that the discount rate comes into play.

The impact on insurance premiums matters. I admit that I am less concerned about the profits of insurance companies than about the impact of rising insurance premiums on many of the people who have to take out insurance. The noble Lord, Lord Hodgson, referred to young people who are now having to pay significantly more for motor insurance. It has been proposed that the price could be as much as an additional £1,000 a year, a very significant sum. We have already seen a significant rise in insurance premiums, partly due to changes in the Government’s tax regime. I point out to the noble Lord that if you are a young person living in a rural community you may have no choice but to drive if you want to have a job and go to school, as we have cut back on rural bus services, so there is an ongoing impact that is quite significant.

There is also very little discussion of the impact on various different departments. I think that the MoD suffers badly from this change in the discount rate, although I have no idea what the figure is. Presumably the National Health Service is impacted significantly as well. All that rolls back on the taxpayer, so there are real implications of getting the discount rate wrong.

I do not understand why the Government persist in applying a formula that they know is entirely inappropriate and comes up with a preposterous result, particularly when they have almost completed a consultation, with a review to follow which, we hope, will mean that they go back to the drawing board in a matter of weeks to try to right this set of wrongs.

I would become very angry with a junior banker who blindly applied a completely inappropriate formula. When it is a Government blindly applying a completely inappropriate formula, it begins to be unforgivable.

My Lords, I congratulate my noble friend Lord Hodgson on bringing these matters to the attention of the House. I ought to preface my few comments by declaring an interest: I am a practising barrister and much of my practice is concerned with the application of the discount rate in calculating damages. Some of my clients will benefit from this and others will not, but I hope to be able to stand back to make a few general comments about the appropriateness —or, I fear, the lack of it—of the proposed changes.

As several noble Lords have pointed out, this came about in rather unusual circumstances. The noble Baroness, Lady Kramer, is quite right: it is adherence to a formula which is inappropriate. There may be some internal mathematical integrity about the exercise, but it bears little relation to the proper approach to the assessment of damages. We approach them on the basis that there should be full compensation, and nothing that I say should derogate from that—we think that claimants ought to be properly compensated—but how do we assess what the compensation should be?

It has always been said that by giving a claimant a lump sum, the one thing you are certain about is that the damages will be inappropriate. Either the sum will be too much, because the claimant dies earlier than expected, or it will not be enough. Either way, that is undesirable. That is one reason why judges often said that it would be much better for there to be periodical payments. From about 1996, periodical payments became part of the picture. With great respect, I rather disagree with the noble Lord, Lord Beecham, who seemed rather to distance himself from the advantages of periodical payments. Perhaps he did not—he was referring to the Law Society’s dislike of the overreliance on periodical payments.

If we are to approach the assessment of compensation on the basis that claimants should not be taking too much by way of risk, surely periodical payments offer a significant advantage. For example, the largest head of damage is often the future cost of care for a badly damaged claimant. Most claimants nowadays will seek periodical payments. Sometimes the cost may be £100,000 or even £200,000 for a long life, and life expectation has been increasing, particularly for brain-damaged babies and others severely affected. Periodical payments provide security, but if claimants are now to say, “No, I would prefer to have a lump sum”, they are, as it were, saying, “I do not want the security provided by periodical payments”. What then is the sense of awarding damages on the basis that they are an entirely risk-free investor? That simply does not make any sense.

The noble Lord, Lord Beecham, referred to the often somewhat unedifying disputes that exist between claimants’ lawyers on the one hand and insurers on the other. I distance myself from that and concentrate on the position of the NHS. The noble Baroness, Lady Kramer, referred to the MoD. The NHS will feel the effects of this measure very considerably. Speaking to a colleague of mine, a schedule of damages was priced before the discount rate operation at £9 million. It is now £23.5 million. Very often a standard brain-damaged baby case might have been on a lump sum calculation £10 million; it is now going to be £30 million. That is partly because life expectation of those claimants has vastly increased, but it is a result of the discount rate alteration.

As has rightly been pointed out, it seems unusual to make the change and then, as it were, almost in the same breath to announce that the change may not have been a very good idea. I quote two comments from the former Lord Chancellor. On 28 February, she said:

“It is important that going forward, personal injury discount rates are set at a level that is fair to both claimants and consumers. The Government will progress urgently with a consultation on the framework for setting future rates and bring forward any necessary legislation at an early stage”.

Then on 7 March, she said that,

“the Lord Chancellor must only consider the impact on the victim. I do not think the procedure works in the right way, which is why I will shortly bring forward a consultation on a better way to set the discount rate”.—[Official Report, Commons, 7/3/17; col. 657.]

So there is a better way, but not a way that she took.

We are now in a position that is profoundly unsatisfactory. What should the Government do? My noble friend Lord Hodgson rightly points to the legislative opportunity that lies with the civil liability Bill. I agree with the noble Lord, Lord Beecham, that there is a significant advantage in having a panel approaching the question of a proper discount rate, rather than leaving the matter to the Lord Chancellor, for the very reasons that he gives. But I suggest that the approach to the proper measure of damages, looking to the future, should not be on the basis of an entirely risk-free approach—it should be on the basis of a cautious investor, or something of that sort. The situation that we now have is not fair to defendants; it is going to fall on those who have to pay increased premiums—often young and elderly motorists—and the NHS and government departments, and the NHS needs all the money that it can get. I join my noble friend in expressing my regret.

My Lords, in declaring my interests, as set out in the register, I join my noble friend Lord Faulks in very much supporting the points made by my noble friend Lord Hodgson of Astley Abbotts, and congratulate him on giving us this opportunity to reflect on the present situation and to look to Ministers expeditiously to resolve this problem. Noble Lords will know that I wear a number of hats in debates in this House, but I speak today as a common lawyer—that is to say, a lawyer who works within the common law. I have had the privilege to practise as a common lawyer since 1968. The assessment of damages for personal injuries has always been a function of the common law. To lapse momentarily into Latin, the founding concept that I was always taught of the law of damages is restitutio in integrum—restoring the claimant as nearly as possible to the financial position in which he or she would have been had the damage or injury not occurred.

For a seriously injured individual, it may be thought next to impossible to put a price on how that is to be delivered, so the law of damages has developed a series of principles designed to deliver a fair outcome—fair, of course, to the injured claimant, but fair also to the person paying those damages. The civil law of damages in this context is never punitive, only compensatory, and we must remember that. The principle is that of full compensation, which is to say neither undercompensation nor overcompensation. It is also known as the 100% compensation principle, which exists to ensure that the claimant, the injured party, is compensated fairly by the person paying the damages.

If there is undercompensation, then the claimant is not fairly compensated. Equally, it is not fair to the defendant if the claimant is overcompensated. As has been said in this evening’s debate, the payment may be made by the Government on behalf of the National Health Service or by an insurer, but it is ultimately funded by insurance premiums or taxes paid by everyone. If the claimant is overcompensated, then he or she is placed in a better financial position than if the injury had not occurred, and the defendant is paying something over and above the amount that is proper and fair compensation.

The discount rate is a vital part of the process of assessing how much compensation is fair. In this respect, it is just like any other component of the sophisticated methods by which lawyers and the courts assess as accurately as possible what a claimant’s losses are and will be for the future. The discount rate is simply a device by which a claimant receiving a lump sum for damages has that sum adjusted to reflect the fact that losses for a period of future years are being paid fully in advance. If that rate, which is set by the Lord Chancellor, is too low, then the claimant will be overcompensated. If it is too high, they will be undercompensated. It is vital that the discount rate should be set at a rate which allows the vital principle of 100% compensation to be achieved: no less, no more. That is not a controversial principle. Indeed, the principle is central to the proper function of the common law.

I was heartened to learn that the Economic Secretary to the Treasury, Stephen Barclay, speaking at a conference on 27 June, stated that the Government intend to keep true to the 100% compensation principle and will put the statutory process for setting the rate,

“on the firmest possible footing in future, so we have a better and fairer system for claimants and defendants”.

In essence this is a question of fairness for everyone involved. When does the Minister expect to publish the Government’s official response to the consultation earlier this year, which I am confident will fully embody the words of his colleague, the Economic Secretary to the Treasury?

My Lords, I thank my noble friend Lord Hodgson for tabling the Motion on this important topic. I welcome the valuable contributions that he and other noble Lords have made.

As has been observed, the discount rate to be taken into account by the court in determining the rate of return to be expected from the investment of a lump sum award of damages for future pecuniary loss caused by a personal injury is set for England and Wales by the Lord Chancellor under Section 1 of the Damages Act 1996. This is colloquially referred to sometimes as the Ogden rate as in practice it is applied through the actuarial tables published by the working group originally set up by the late Sir Michael Ogden.

As noble Lords have observed, the rate plays a key role in underpinning one of the core principles governing the law of damages. Claimants who have suffered injury as a result of another person’s negligence must be compensated fully for their loss, and should be placed—as far as is possible in financial terms—in the position that they would have been in but for the injury. This is known as the principle of full compensation or the 100% rule. Under this principle, the aim of an award of damages is therefore to compensate claimants fully, but not to overcompensate them or undercompensate them.

To fulfil that aim, where damages are awarded for future pecuniary loss—such as future loss of earnings or the care costs that are going to be incurred—in the form of a lump sum, the award is, and must be, adjusted to take account of the benefit to the claimant of being able to invest the money before the loss or expense in respect of which it is awarded has actually occurred. The discount rate is the factor applied to the award to make this adjustment so that it represents the expected rate of return. The court, of course, has a power to apply a different rate but, as my noble friend Lord Hodgson noted, it has almost always applied the prescribed rate in these circumstances.

The Damages Act 1996 does not specify when the rate should be reviewed. However, the Lord Chancellor is under a continuing duty to ensure that it is not set at an inappropriate level. The rate was set in 2001 on a certain basis. Thereafter, there was consultation on the legal framework for setting the rate. Indeed, in 2013, a consultation was carried through but reached no consensus as to any changes or proposed changes to the legal framework for setting the discount rate. So, as at 2013, the coalition Government, of whom the noble Baroness, Lady Kramer, was a member, took no steps to deal with what she referred to as a preposterous state of affairs. Indeed, it was not at that time a preposterous state of affairs.

In 2015, an expert panel advised with regard to the matter of the rate. But in all these circumstances, when it came to 2016 and the beginning of 2017, the then Lord Chancellor had an existing duty to address the adequacy or otherwise of the discount rate. That was her legal obligation. In the light of that duty, she announced on 27 February this year that the rate should be changed from 2.5% to minus 0.75% with effect from 20 March 2017. I note that the Scottish Government made the same change to the discount rate about a week later on 28 March 2017. The then Lord Chancellor also undertook to review the framework under which the rate is set to ensure that it should remain fit for purpose in the future. The consultation paper she promised was published on 30 March. It sought views on a range of issues, including what principles should guide how the rate is set; whether the existing methodology is appropriate for the future; whether the power to set the rate should remain with the Lord Chancellor or move elsewhere, possibly to an expert panel; whether more frequent reviews would improve predictability and certainty for all parties—a point raised by a number of noble Lords—and whether further steps should be taken to encourage the use of periodical payments orders instead of lump sums, a point touched on by the noble Lord, Lord Beecham.

Underlying the consultation was the wish of the Government to make sure that the way the rate is set is put on the firmest possible footing in future, so that we have a better and fairer system for claimants and defendants, and, in so doing, keeping true to the 100% principle—namely, that claimants are paid no more but no less than they should be. The consultation closed on 11 May and the Ministry of Justice is currently analysing the 135 responses received, which, as might be anticipated, reflect a broad range of opinion as much as they reflect a broad range of interests. This requires considerable care and thoroughness, as many of the responses are highly complex and contain detailed technical information on investment returns and investor behaviour, something the noble Baroness, Lady Kramer, pointed out could be quite diverse and divergent in particular circumstances.

It is not for me to anticipate the outcome of the consideration of the consultation, but I seek to assure my noble friend and other noble Lords who have spoken in the debate that an announcement of the Government’s conclusions will be made at the earliest possible opportunity. Of course, the interests of all parties concerned will be considered, and there will be an impact assessment.

My noble friend’s Motion is, however, directed at the change of rate rather than the outcome of the consultation. His argument is that the then Lord Chancellor should not have set the rate at a time when she had decided that a further consultation exercise was to take place on how the rate should be set in the future. I venture that this argument is not well founded. As I have explained, the Lord Chancellor is under a continuing duty to ensure that the rate is set at an appropriate level. This means that once the then Lord Chancellor reached her decision on what the appropriate rate should be, she was legally obliged to put that decision into effect. The option of delaying setting the rate until the outcome of the planned consultation was known was simply not available to her.

My noble friend’s regret that the then Lord Chancellor carried out her duty is therefore, I respectfully suggest, misplaced. The then Lord Chancellor acted correctly both in changing the rate and in initiating a consultation on whether there is a better or fairer way for it to be set in future. Had the Lord Chancellor adopted the approach proposed by my noble friend and delayed a change in the rate until a consultation—and no doubt any consequent change in the law—had been complete, she would have knowingly maintained an inappropriate rate for what might have been a considerable period of time. That would have been in breach of her legal obligation with respect to the setting of the rate.

Consequently, the approach taken by the Lord Chancellor was correct in law. In these circumstances therefore, the Government cannot support my noble friend’s Motion, and I hope that he will feel able to withdraw it in light of the explanation I have sought to give on behalf of the Government.

My Lords, the hour is late so I will be brief. I thank all noble Lords who have spoken in support of this regret Motion: the noble Baroness, Lady Kramer, for her forthright support; I think I got half or maybe two-thirds of a loaf—I am not quite sure but I will settle for half—out of the noble Lord, Lord Beecham; and I thank my noble friends Lord Faulks and Lord Hunt for their support. They speak from a position of a great deal more expertise than I will ever have.

Of course awards need to be fair, and I do not argue at all with the first arm of the Wells v Wells judgment, that it must not undercompensate or overcompensate; it must be fair. As my noble friend Lord Faulks mentioned, there was this sensation around that this is an attempt by insurance companies to boost their profits. If we leave that aside, over the next five years there will be £6 billion less in the National Health Service, which would have been used for looking after patients and carrying out the essential work that the NHS does, as a result of this decision and as provided for in the recent budget development.

I appreciated my noble and learned friend’s teaching on recent developments as regards the setting of the discount rate. His defence of the then Lord Chancellor was stout in the extreme. It is extraordinary that in 2017 the then Lord Chancellor suddenly felt that she had a duty when her predecessors in all the years since 2001 apparently thought that they did not. However, he made a good fist of quite a tricky brief—although I know that, as an expert barrister, he will be long used to and practised in that.

I am pleased to hear that there have been 135 responses to the consultation and that the Government are analysing them. I thought I got a slight Nelsonian wink that we might expect some developments in this area. I hope very much that that assumption is correct, as we have to deal with this running sore. However, we can take it no further this evening, and I beg leave to withdraw my Motion.

Motion withdrawn.

House adjourned at 9.04 pm.