The Discount Rate change explained.

Why is it important?

The Discount rate is the rate used to calculate future losses in personal injury claims.

Because awards are usually paid as a one-off lump sum, a ‘discount’ has to be applied. After all, the Claimant is receiving annual future losses in advance and the lump sum can be invested to produce extra future income. The discount rate should therefore reflect the average bank interest rate on savings, less inflation.

 

Why the change?

The discount rate has been set, by the Government, at +2.5% since 2001. With interest rates having dropped sharply since 2009, Claimant lawyers have been calling for a revision for some years.

As from the 20th March 2017  the discount rate was changed to -0.75%. This assumes a savings interest rate of about +1.0%, with inflation running at something over 1.5%.

 

What are the consequences?

It will substantially increase the sums for future losses, particularly for younger Claimants with, for example, nursing care needs and lost future earnings. Of course, insurance premiums are likely to rise, or insurance companies’ profits will fall.
What will happen in the future?

The Lord Chancellor, Liz Truss, has announced that a consultation process will now begin to review how the discount rate should be regularly assessed in the future, and on what basis. For example, inflation has already just topped 2% and future costs, such as for care, have tended to rise much faster than inflation. On the other hand, those with substantial awards often have their capital professionally managed and so get a better return that the basic interest rate. It is likely that any review will result in a discount rate that is less favourable to Claimants.

We predict two related changes:

Firstly, a rise in annual Periodical Payment settlements for future losses instead of, or in addition to, the more traditional lump sum payments. Historically insurance companies have not been keen on these as they are inflation linked; create a future risk and require long-term administration costs.

Secondly, a movement back towards professional rather than family-member Deputies, in Court of Protection cases. In brain injury cases, where a person can no longer manage their affairs, the Court of Protection will appoint someone to manage their money for them. Family Deputies may be reluctant to take any investment risk, or to approach an Independent Financial Adviser (IFA) who they feel that they can trust.