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The Discount Rate - All change!

  • United Kingdom
  • Personal injury claims litigation - Claims e-briefing


Earlier this year we saw a dramatic change to the discount rate and with it a significant increase in the cost of future loss claims.  Following that change, which saw the discount rate fall from 2.5% to -0.75%, the Government has undertaken a consultation which  concluded that the new discount rate may result in claimants being over compensated. The Government, who remain the largest compensator in the UK, now seeks to reform the way in which the discount rate is set.

What is the Discount Rate?

Compensation in personal injury claims is intended to put the claimant back in the position that he or she would have been, had injury not been sustained. A claimant should not be under or over compensated.

In most larger cases a claimant will receive a lump sum which will include amounts to cover future losses such as earnings, treatment and care. It would be usual for a claimant to invest the sum and receive return on it. The discount rate reflects the expected rate of return on the investment of the lump sum.

What are the new proposed changes?

The Lord Chancellor and Justice Secretary, David Lidington MP, has today laid draft legislation before Parliament seeking to change the way in which the personal injury discount rate is set. The fundamental principle that a claimant is entitled to compensation to put them back into the position they would have been, but for their accident remains.  As does the right of the Lord Chancellor to set the discount rate. What has changed is the approach that will be taken when setting the discount rate and the frequency with which it will be reviewed.

The approach

The level of risk a claimant is willing to take when investing is shifting from "very low" to "low".  The new discount rate will assume investment in a low risk diversified portfolio.  The Lord Chancellor must consider the actual investments available, the types of investments other claimants are purchasing and make allowance for inflation, tax and management costs.

Frequency of review

The legislation provides for the discount rate to be reviewed within 90 days of the law coming into effect.  Thereafter it will be reviewed at least every 3 years.  This change will see an end to the static discount rate position we had become accustomed to (before the change in February earlier this year the discount rate hadn’t changed since 2001).

What will the new discount rate be?

At this stage we do not know but the draft legislation states if a rate were set today it might fall within the range of 0% to 1%.

How much will the change cost?

Assuming the new discount rate is set at the mid-point of 0.5%, the value of future loss claims would fall.

By way of example:

A 30 year old male with a lifetime future care claim of £50,000.00 per annum would receive:

1. At the current discount rate of -0.75%, his award for future care would be £3,571,500

2. At the new discount rate of 0.5% his award for future care would be £2,434,000

That’s a difference of £1,137,500.

When are the changes coming in?

Not immediately. The Government is seeking comments on the draft legislation following which it will still need to follow the usual law making process before it can come into force. This is unlikely to happen before 2018. The changes will not be retrospective but will apply to any awards made after the legislation comes into force.

So what should you do?

Watch this space - if the discount rate increases as anticipated the value of future loss claims will be reduced.

Anticipate a rush of claimants trying to settle their claims using today’s discount rate of -0.75%.

If you can, seek to delay settlement of claims until the new rate is in place, this strategy is likely to save you money.