Personal injury discount rate to change to minus 0.75%

The Lord Chancellor (LC) Liz Truss bit the bullet today and set the discount rate at minus 0.75%, to apply from 20 March. The news was issued via this statement to the Stock Exchange at 07:00 this morning. As a matter of process, Ms Truss should be congratulated for not ducking a very awkward decision – even if the financial implications of her decision are of huge importance for new and current outstanding cases alike. As to substance, views will inevitably differ hugely.

The lowered rate (it’s decreasing by a staggering 325 basis points from 2.5%) has attracted notable criticism this morning from insurers because of its inflationary effect on awards and reserves. The LC said today that she “recognise[s] the impacts this decision will have on the insurance industry. My Rt. Hon. Friend the Chancellor will meet with insurance industry representatives to discuss the situation.” It could be expected that that might be a fairly high-tempered discussion.

Equally, public sector compensators are going to have to pay more in affected cases, something the LC refers to as “significant implications” for the public sector. She does, however, make it clear that funds will be in place: “The government has committed to ensuring that the NHS Litigation Authority has appropriate funding to cover changes to hospitals’ clinical negligence costs.”

On the other side, those representing claimants will welcome the decision that the discount rate should remain for the time being closely linked to ILGS average yields, as it has done since the order back in 2001 setting it at 2.5%.

This is not at all the end of the story. The Lord Chancellor’s short statement to the Stock Exchange this morning refers to a new consultation starting before Easter – less than a month after the new rate comes in – on a wide range of possible reforms, such as whether the rate should be set by an independent body, whether more frequent reviews would be preferable and whether the ILGS based-methodology remains fit for purpose. Dealing with these aspects would need primary legislation, and the LC has made it very clear that following this fresh consultation “the Government will bring forward any necessary legislation at an early stage.”

So, perhaps some nimble political footwork by Ms Truss today in three ways, albeit over the short term only. First, she may have prevented a further judicial review by sticking with ILGS. Second, given that the change is to bite from 20 March, the Chancellor’s Budget next week may be unaffected. Third, she has now set in train a very clear process for legislative change to the overall approach and because of the “significant implications” for those paying claims (insurers in particular) that process already looks very difficult indeed to derail. Moreover, the recently-published Prison and Courts Bill could provide a legislative wrapper into which provisions about any new approach to the discount rate could be readily inserted well before the year end.

A final point of detail is that the newly-announced rate is for England & Wales only (http://www.legislation.gov.uk/uksi/2017/206/contents/made). Scottish Ministers have separate powers as regards the discount rate.


 

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Written by Alistair Kinley, director of policy and government affairs at BLM

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