On Thursday, 7 September 2017 the Ministry of Justice announced that it proposes to change the way the personal injury discount rate is calculated.
In the UK, changes would be calculated by reference to ‘low risk’ rather than ‘very low risk’ investments. The Lord Chancellor will also consult a panel of independent experts when setting the rate. Further, there will be a review of the rate at least every three years (although it will not necessarily change every time there is a review).
Lord Chancellor and Justice Secretary David Lidington said: “We want to introduce a new framework based on how claimants actually invest, as well as making sure the rate is reviewed fairly and regularly.”
The move is apparently designed to ensure that claimants continue to receive full compensation while significantly reducing overpayments of compensation by more reliably reflecting how money is actually invested by claimants.
Alongside their response to the discount rate consultation, the Ministry of Justice has also published some interesting analysis by the Government Actuary’s Department (GAD).
The GAD analysis examines the risk of under-compensation if claimants adopt a typical “low risk” investment strategy, the kind of which the Government is proposing to base the new rate on.
According to the GAD modelling, if a claimant adopted a typical “low risk” investment strategy:
- they would have a 30 per cent chance of being under-compensated by 5 per cent or more if the discount rate were set at +1 per cent;
- they would have a 19 per cent chance of being under-compensated by 5 per cent or more if the discount rate were set at +0.5 per cent;
- they would have a 11 per cent chance of being under-compensated by 5 per cent or more if the discount rate were set at 0 per cent. According to the Government, if the proposed new system were applied today, “the rate might be in the region of 0 per cent to 1 per cent”. The above illustrates that a significant number of claimants would be under-compensated at rates between 0 – 1 per cent even if, as the Government assumes, they pursued a “low risk” rather than a “very low risk” investment strategy.
- The GAD analysis also ignores the investment fees, management charges, adviser fees and taxes that claimants will be required to meet. If these costs were taken into account, the claimant would be at even greater risk of under-compensation.
- If a claimant adopted a typical “low risk” investment strategy under the current -0.75 per cent discount rate, they have a 4 per cent chance of being under-compensated by 5 per cent or more.
We would like to offer our thanks to John McGlade, Policy Research Officer at APIL, for providing us with information contained within this article.
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