As I committed on 27 February, when I set the new discount rate, I am today launching a six-week consultation on how the personal injury discount rate, used to help calculate lump sum payments of damages in personal injury claims, should be set in the future. The consultation document is available at: https://consult.justice.gov.uk/digital-communications/personal-injury-discount-rate/.
It is a long-standing principle under our system that people who suffer injuries wrongfully at the hands of others should be compensated fully, and put in the financial position they would have been had the injury not happened. Where damages are awarded for future loss in the form of a lump sum, that award is adjusted to take account of the effect of the injured person being able to invest the money before the loss or expense for which it is awarded has actually occurred. The factor by which the award is adjusted is determined by the discount rate.
Under the Damages Act 1996, the Lord Chancellor has the power to set the discount rate from time to time. The rate must be set in accordance with the Act and the applicable legal principles set out in case law, particularly the 1998 House of Lords case of Wells v. Wells. The principles in Wells v. Wells lead to the conclusion that the discount rate should be based on the investment portfolio that offers the least risk to personal injury claimant investors in protecting an award of damages against inflation and against market risk. A change to the current legal framework would need primary legislation.
The power to set the discount rate was used first in 2001, when Lord Irvine set the rate at 2.5% by reference to a three-year average of real yields on index-linked gilts (ILGs). Following a review, I announced a change to the rate on 27 February this year to minus 0.75%, which came into force on 20 March. In doing so, I pledged to review the current law to consider: whether the rate should in future be set by an independent body; whether more frequent reviews would improve predictability and certainty for all parties; and whether the methodology—which in effect assumes that claimants would invest only in virtually risk-free ILGs—is appropriate for the future.
The consultation document I am publishing today covers these points, and includes a call for evidence on how investors in the position of personal injury claimants are likely to invest. The consultation document explores what an appropriate investment risk profile could look like for such investors, and what the effect would be of moving from the current virtually risk-free model, to a low-risk model. While my responsibility extends only to England and Wales, the principles and method for setting the rate have read-across to all jurisdictions in the UK, and the consultation is produced in partnership with the Scottish Government.
We must have a justice system that works for all. I fully recognise the impact that the discount rate has, not just on claimants—including some of the most vulnerable in society—but also on defendants in both the public and private sectors, and the further impact this has on consumers’ insurance premiums and taxpayers. The consultation I am launching today will look at the way the rate is set in future, and I am inviting anyone with evidence and expertise to take part. The consultation will close on 11 May.