On 31 January 2017 the UK Government will make an announcement about the discount rate. The discount rate is applied to awards of damages for personal injury, to avoid over or under compensation, and is used to calculate the total payment.
The announcement by the Ministry of Justice will be made more than four years after the consultation on the issue closed.
What is the current discount rate?
Currently the discount rate is 2.5% which was set by the Lord Chancellor in 2001.
The Ogden Tables provide an aid for calculating the lump sums to be paid in compensation for future financial losses, expenses or costs resulting from a personal injury or death. It is expected that following a payout of a lump sum, the capital will be invested and will yield income and that the capital over a period of time will reduce so that, at the end of the period, it is reduced to nil.
An appropriate multiplier is selected which will result in an appropriate annual rate of return. The rate of return is known as the discount rate. The rate of 2.5% set in 2001 was based on yields generated by what were then seen as "safe investments".
The Association of Personal Injury Lawyers has campaigned for years that the current rate of 2.5% is too high and penalises those who have suffered injury - the higher the rate, the less injured people receive. The Association of Personal Injury Lawyers argue that people who are injured are continuing to be undercompensated due to the delay in reaching a conclusion about what the discount rate should be- they argue that the current discount rate which has been in place since 2001 has failed to reflect changes in the economy.
The Ministry of Justice hopes that the discount rate that will be applied to personal injury claims will ensure that personal injury claimants are properly compensated and this is also hoped by solicitors who represent those who have been injured.
What is the position in Scotland?
Section 1 of the Damages Act 1996 allows the Scottish Ministers to prescribe the discount rate for calculating the amount to be deducted from an award. The discount rate of 2.5% is set based on the understanding that people will invest in index- linked government stocks. However, people who receive awards of compensation are anxious that any money lasts to ensure their future medical, care and lifestyle needs are met and, as a result of this, investment can be made in mixed portfolios including higher risk investments.
The 2.5% rate of return was adopted by the Scottish Ministers in 2002. Since 2002 yields have declined to the point where it has been argued that the set discount rate is too high meaning that injured people are seriously undercompensated, leading to unsafe investments.
In Section 1(5) of the 1996 Act it states that, in Scotland, the discount rate falls to be prescribed by the Scottish Ministers following mandatory consultation with the Government Actuary. Section 1(2) of this Act provides that a rate of return other than 2.5% may be taken by the court if any party to the proceedings shows that it is more appropriate to do so.
What consultation took place?
A consultation paper on the discount rate was published in August 2012 jointly by the Scottish Government, the Ministry of Justice and the Department of Justice, Northern Ireland. This was followed by a second consultation paper on whether the legal parameters governing the way in which the discount rate prescribed is currently calculated should be changed and whether there is a case for encouraging the use of periodical payments. This second issue was primarily examined in the context of the laws of England and Wales and Northern Ireland only.
On periodical payments in Scotland, consideration of this issue is limited to the extent that a periodical payment order may be made but only with the consent of the parties involved.
Why is the discount rate so important for people who are injured?
It is a basic principle of the Scottish legal system that the law will put an injured person back in the position they would have been - insofar as money can do so - but for the harmful act.
It is imperative that people who are seriously injured, require care in the future and/ or have limited or no income as a result of not being able to work, are put back in the financial position they were in should the accident not have occurred.
Whilst movement in the announcement about the discount rate is most welcome, it is important that there is regular review of discount rates and inertia in a volatile financial landscape should not harm those who are reliant on damages to restore their lives in some type of positive way.
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The small print: This blog is for information purposes only and should not be construed in any way as providing legal advice.