The Personal Injury Discount Rate Review

13 Mar 2019

James Braund, Personal Injury and Clinical Negligence Senior Associate Solicitor, considers the ongoing review of the personal injury discount rate.

What is the personal injury discount rate?

The personal injury discount rate is a rating which is used to convert an annual future loss into a lump sum in serious Personal Injury claims. It is applied through actuarial tables called the Ogden Tables, which provide a multiplier for the annual loss.

The rate is required to take into account that, upon conclusion of a Personal Injury claim, a Claimant will often be provided with a lump sum (unless periodical payments are ordered) and would have the opportunity to invest some of the lump sum and receive an additional return on such investments (until the award if exhausted).

The personal injury discount rate assumes a certain estimated return on investments and, when multiplied with the annual loss, provides a lump sum figure which should (on the basis of the estimated return on investments) provide the exact amount required annually by the Claimant.

How is the personal injury discount rate set?

For the last few decades the personal injury discount rate has been set by the Lord Chancellor, pursuant to the Damages Act 1996. Previously, this was set in accordance with principles determined in the case of Wells v Wells [1999] 1 AC 345, which essentially led to the personal injury discount rate being linked to the return on index linked government securities (as the Court in that case held that a Claimant is not in the same position as an ordinary investor and should be entitled to greater security and certainty).

The discount rate was set at 2.5% since 2001. Following a diminish in the rate of returns on investments following the 2008/09 recession, a review of the personal injury discount rate was opened and led to it being reduced to -0.75% on 20 March 2017.

On 20 December 2018 the Civil Liability Act 2018 received Royal Assent. The Act provided that the Lord Chancellor set the personal injury discount rate with reference to what a Claimant would reasonably be expected to achieve in a “low risk” diversified portfolio (rather than essentially “no risk” government securities).

The first review by the Lord Chancellor, following the Civil Liability Act 2018, is currently underway.

Why is the personal injury discount rate important?

The personal injury discount rate can have a significant effect upon the value of claims for future loss.

For example, if a 25 year old male Claimant (with a retirement age of 70 years old), previously earning £25,000 net per annum, is unable to work again, under a 2.5% discount rate he could expect to receive £660,000. This would increase to £1,283,250 under a -0.75% discount rate.

What is the likely outcome of the personal injury discount review?

The review remains ongoing, following a call for evidence. A decision is currently expected in the summer. It remains to be seen the exact level which the Lord Chancellor may set the discount rate at. However, it is widely expected to increase from -0.75%, given the wording of the Civil Liability Act 2018 and the government had previously suggested, in the consultation, that they expected that a new rate would be between 0 and 1%.

If you are looking for further advice regarding the personal injury discount rate and how changes may affect you, or want to pursue a personal injury claim, don’t hesitate to contact our team of expert personal injury solicitors. 

*Since this article was written it has been confirmed that the outcome of the latest discount rate review will be announced on 5 August 2019.

© James Braund – Specialist Personal Injury and Clinical Negligence Senior Associate Solicitor, Poole and Bournemouth offices.

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