The Lord Chancellor has announced that the ‘Discount Rate’, which lawyers use to calculate compensation awards for future losses, will increase to 0.5% from 11 January 2025.
What is the ‘Discount Rate’ and why is it so important?
A personal injury claim has two broad types or heads of compensation.
Firstly, damages for an injured person’s ‘pain, suffering and loss of amenity’, sometimes also called general damages. These compensate for the physical and psychological impact of an injury, including any restrictions on day-to-day living.
The second type compensates for financial losses and expenses that are due to the injury, such as lost earnings, damaged property, care needs etc. These losses are also known as special damages and are relatively easy to assess when they have already been incurred. However, when the losses are ongoing, sometimes for many years or even the claimant’s lifetime, then it is necessary to calculate the value of their future losses.
Traditionally, lawyers will use a formula in the Ogden Tables to convert annual losses over a known time period into a lump sum. This calculation though does not just multiply the annual loss by the number of years it will last, as that does not account for the fact that the lump sum will earn income. Instead, the discount rate (which takes into account that interest will be earned on the lump sum) is used to modify the number of years multiplier so that in principle, the lump sum will last for the period of loss, no more and no less.
As you can see, the level of the Discount Rate is therefore critical to the amount of compensation that an injured person will receive for their future losses.
How is the Discount Rate set?
There is a statute which requires the Lord Chancellor to consult and review the level of the Discount Rate for England and Wales every five years. The rates in Scotland and Northern Ireland are set independently. The review in England and Wales explicitly considers the economic state at that time and, as we have moved from a time of historically low interest rates set by the Bank of England to higher rates, everyone has been anticipating an increase. The question was, to what rate?
What does the 0.5% Discount Rate mean for claimants?
The current rate is -0.25%, so the increased Discount Rate will have the impact of lowering the value of lump sums calculated to compensate future losses. A change of 0.75% does not sound much, but in a serious injury claim, the future financial losses are often the biggest part of the claim. So, any increase in the Discount Rate, will reduce the amounts recovered to compensate these losses. As a rough guide, a lump sum for a period of over 10 years will be reduced by around 4%, and for 20 years by around 7%.
These reductions will have an immediate impact on claimants, as whilst a court hearing a trial before the 11 January 2025 should use the current lower Discount Rate, any claimant with a trial date set for 11 January 2025 onwards or who has no set trial date and is in negotiations with an insurer to settle their claim, will have to concede that the increased Discount Rate will apply to their claim.
What can a claimant do about the increased Discount Rate?
In more modest claims, where the future losses are smaller in amount or time, there is no way to avoid the change. However, for a person with more serious or life-changing injuries, then the strong advice would be to ask for a Periodical Payments Order.
Periodical payments orders remove the need for the claimant to settle future losses in a single capital lump sum on an assumed investment return that is unlikely to be accurate for the length of their period of loss. Instead, they can have an annual sum paid for the extent of their loss, which is increased annually with an appropriate interest rate. For lifetime losses, the payments are made whilst they are alive, removing the uncertainty of relying on projected life expectancy evidence.
Periodical Payments Orders, although not appropriate or available in every case, are now going to be even more attractive to claimants, now that the Discount Rate has returned to a positive figure.
