Discount Rate moves to -0.75%

12 Key Points on the Lord Chancellor’s announcement

 

1: This is the first new discount rate since 2001

For the uninitiated – the discount rate is used to discount a lump sum compensation payment for future losses, to balance the fact that claimants invest their lump sum, rather than receiving it in annual chunks.

Section 1 of the Damages Act 1996 gives the Lord Chancellor the power to set the discount rate. The last time it was set was by Lord Irvine of Lairg in 2001, who set a rate of 2.5%.

The 2.5% rate was expressly based on the decision in Wells v Wells [1999] 1 AC 345, where the House of Lords used a 3-year average of index-linked gilts to arrive at a discount rate on the grounds that the use of these gilts provided the greatest protection against investment risk.

 

2: It’s been a long time coming

Yields on index-linked gilts fell precipitously after the financial crash in 2007-8, making the 2.5% discount rate questionable. They remain low. As long ago as November 2010, Kenneth Clarke QC MP announced a review of the discount rate in response to a judicial review threat from APIL. Consultations were conducted in 2012 and in 2013. An expert panel was put together in 2015, and gave unpublished minority and majority reports to the Lord Chancellor in late 2016.

 

3: It comes after an unsuccessful JR attempt by the ABI

The Association of British Insurers sought a pre-emptive judicial review of the Lord Chancellor in December 2016, arguing that the index-linked gilts approach failed to represent the average investor and was an international outlier.

Permission to appeal was first refused by the High Court, and next by Sales LJ on 27 January this year, who held that the ABI had no legitimate expectation of being able to comment on the Lord Chancellor’s decision before the new rate was set.

 

4: It’s a dramatic shift

At a 2.5% discount rate, £975.61 would be awarded today to compensate for the loss of £1,000 in exactly a year’s time. At a -0.75% discount rate, £1,007.56 would be awarded today to compensate for the same loss – Claimants thus receive more money when receipt is accelerated, not less.

The shift is potentially huge for catastrophic injury claims. Before the application of a Table A multiplying factor, at the old discount rate, a 40 year-old man compensated for loss of an annual salary of £25,000 to retirement at 65 would receive £452,250.

At the new rate, he would get £663,000 – an increase of more than £200,000, or 47% more.

 

5: But the methodology has remained

Just as in 2001, the Lord Chancellor has expressly based her decision on the decision in Wells v Wells and chosen a 3-year average of index-linked gilts, the same methodology as that adopted by Lord Irvine in 2001. The dramatic shift in the rate is driven by the decline in gilt yields – which have declined steadily since the financial crisis, and which show no signs of rising again.

 

6: It follows practice in the ET, and in related jurisdictions

The move has been foreshadowed in cases to which Section 1 of the Damages Act 1996 does not apply. For instance, the Employment Tribunal adopted a 0% discount rate in

Michalak v Mid Yorkshire Hospitals NHS Trust and others ET/1810815/2008 (7 December 2011; Employment Judge Burton). In Helmot v Simon [2012] UKPC 5 the Privy Council upheld a decision by the Court of Appeal of Guernsey adopting a rate of -1.5% for earnings-related losses, and 0.5% on other losses.

However, although Section 1 permitted the English courts to depart from the Lord Chancellor’s rate “if any party to the proceedings shows that it is more appropriate in the case in question”, there was never a reported English case where a different rate was adopted.

 

7: Overturning Wells was considered, but rejected

At paragraph 9 of her decision the Lord Chancellor acknowledged that there was “some merit” in abandoning the index-linked gilts model, and adopting a “mixed portfolio” approach as advocated for by the ABI and others. However, she concluded that it was unacceptable to require Claimants to assume additional risk in investing their compensation, and that it was more important that Claimants should be assured of the availability of their money than that the discount should reflect a representative portfolio holder.

 

8: There is a large impact on insurers, and the NHS

The ABI’s director general Huw Evans was quick to describe the decision as “crazy” and he has called for an alternative framework for the discount rate to be incorporated into the forthcoming Prison and Courts Bill.

Reports by the BBC indicate the effect on the insurance industry, which predicts average rises of £75 in motor premiums – this would cancel out the expected £40 savings from the government’s proposed reforms to whiplash injury compensation. Direct Line anticipates £230m lower profits this year, and the government has had to commit an additional £1bn to the NHS Litigation Authority.

 

9: Part 36 offers require urgent review

In any case where there is an element of future loss, existing Part 36 offers from Claimants will need to be reviewed and – if necessary – withdrawn. This should be done without delay.

The effect on Defendants is less clear. The courts would surely take a dim view of Defendants attempting to “snap up” Part 36 offers which are not withdrawn or amended; but since CPR r36.11 provides that the court’s permission is required for acceptance only in limited cases, it is difficult to see how the courts could intervene.

Practitioners should expect this and related issues to be litigated, both in relation to the validity of offers and settlements, and, more likely, in linked professional negligence claims.

 

10: PPOs become redundant

PPOs are already rarer, perhaps, than they were intended to be – now, they are arguably redundant. It is difficult to see why a Claimant would prefer periodical payments to a lump-sum awarded on the basis of a negative discount rate.

 

11: There is a knock-on effect for other kinds of claim

The old discount rate had impacts beyond claims for future pecuniary loss: for example, claims for future housing costs following Roberts v Johnstone [1989] QB 878, where the capital investment required to purchase property for a Claimant is annualised at the prevailing discount rate.

The Roberts v Johnstone calculation would now seem to provide for a negative multiplicand – however, this fails to reflect the reality of the property market, which has not suffered as gilts have. Practitioners should expect to see this decision challenged.

 

12: Don’t ignore the impact on costs

Schedules and Counter-Schedules all now need revision; joint settlement meetings will be cancelled and rescheduled; Part 36 offers will be torn up and rewritten.

Every practitioner knows that this will mean considerable time and, therefore, money being expended as a result of today’s announcement. Costs budgets need to be added to the list of documents marked for revision, which may result in a flurry of applications for budgets to be updated.