Is the dust settling on the new discount rate?

A month ago today, one of the final acts of David Gauke MP during his time as Lord Chancellor was to decide to set the new personal injury discount rate for England & Wales at -0.25%, with this being only a marginal increase on the -0.75% figure which had applied from March 2017. The new legislation requires a review of this within five years, so will anything relevant realistically happen in the interim?

Yes, and almost certainly. The wider debate around the discount rate is far from over and several issues closely related to the rate-setting decision are set to develop over the short to medium term. [In the last two weeks the effects of the -0.25% decision, which took effect on 5 August, have been noted in the reported half year results for 2019 of several UK insurers.]

First is the separate rate-setting process in Scotland. The Damages (Investment Returns & Periodical Payments (Scotland) Act 2019 introduces a different methodology for setting the discount rate from that in England & Wales. The notional investment portfolio from which the rate for Scotland is to be derived is a little more conservative, the assumed investment period is set at 30 years (compared to the 43 years adopted in England & Wales) and the mandatory adjustments to the portfolio yield are prescribed in the Act as being 0.75% for inflation and investment charges and a further 0.5% margin to guard against the risk of under-compensation. The process is also different, being more arithmetical than political, with the rate determination being allocated to the Government Actuary (GA) rather than a Minister. The process started on 1 July 2019 and the GA must deliver his report by 28 September (although it could be submitted earlier). These differences in methodology had tended to suggest that the rate in Scotland might be lower than that in England & Wales. However, in setting the English rate, the adjustments (to notional investment returns) made last month by the Lord Chancellor are identical to those in the Scottish Act. This would appear to have made the prospect of differences in both jurisdictions a little less clear in the short term.
Likely timescale here? The rate decision should emerge in September or October 2019.

Second is the potential for challenge to the Lord Chancellor’s decision. In recent years, claimant and insurer interests pursued separate judicial review proceedings about the discount rate, both of which were unsuccessful. The announcement last month has seen some parts of the media speculate that the decision to set the rate at -0.25% might be challenged by insurers. The associated narrative is (a) that the government had expressed a view in late 2017 that the rate might be within a window of 0 – 1%, perhaps creating a level of expectation and (b) that the Lord Chancellor’s reduction of the GA’s notional yield of +0.25% by a further 0.5% to minimise the risk of under-compensation might be argued to be unreasonable. If these – or any other arguments – were to be used as the basis for challenging the decision that would need to be done quickly: judicial review claims must be filed promptly and in any event not later than three months after the decision which is challenged.
Likely timescale here? Any JR proceedings would need to be issued by mid-October 2019.

Third is accommodation awards, specifically how the discount rate plays out in the Roberts v Johnstone approach? Although this has been examined and criticised by the Law Commission, the MoJ and the Civil Justice Council at various times over the last two decades it nevertheless still stands. The difficulty is that the R v J formula* delivers a negative loss for the claimant when the discount rate is below 0%. Such an outcome does not really make sense outside the arithmetic formula – it would lead to the claimant paying the defendant – and parties have generally compromised the issue pragmatically (often on a nil loss basis) since the first negative rate in 2017. The Court of Appeal, however, has now made it clear that it wishes to tackle to the question head on. It adjourned Swift v Carpenter last month to allow for further relevant evidence to be obtained, giving permission for four types of experts (an IFA, a surveyor/valuer, an economist and an actuary) to deal with five key issues**, with reports to be exchanged in November prior to the hearing resuming on 24 March 2020 for three days.
Likely timescale here? A decision on appeal could be delivered by summer 2020.

Fourth is dual rates, which were examined in some detail in the GA’s recent advice to the Lord Chancellor in England & Wales. The advice covered the matter extensively, looking at claimant outcomes over a range of rates for shorter and longer periods of loss as well as several options for cut offs or “switching points” marking the boundary between the two periods. That said, the Lord Chancellor concluded that now would be an inappropriate time to adopt a dual rate in the absence of clear and persuasive evidence that it would be more suitable than a single rate. He added, however, that he had asked MoJ officials to “set in train a consultation in due course to examine this in greater depth, and to inform the next discount review and the work of the expert panel who will be advising me.” Neither the phrase “in due course” nor the linking of dual rates to the next rate review – which is as much as five years away – smack of urgency in Gauke’s mind. That said, Robert Buckland QC MP (Gauke’s successor as Lord Chancellor) might be amendable to examining the issue somewhat more promptly if strong representations were made to that effect?
Likely timescale here? Consultation on dual rates looks unlikely to begin before well into 2020.

Fifth and finally is Northern Ireland. As in Scotland, the rate-setting power is devolved to local Ministers. But in the absence of a functioning administration the rate remains unchanged and, technically, the 2.5% rate (as set in 2001) still applies. Following the recent announcement in England & Wales, the Department of Justice indicated that it anticipates seeking stakeholders’ views on the way forward in NI – possibly by formal consultation – once the outcome in Scotland is known. Local primary legislation would be needed if the basis on which the rate is set is to be changed. Any such legislation could take up to a year, or more, to be enacted. In the interim it is possible that trial judges in NI may come under pressure (from plaintiffs) to exercise the discretion in the current legislation (ie section 1(2) of the Damages Act 1996) in order to adopt a different discount rate.
Likely timescale here? The way forward may be clearer by the end of 2019.

* R v J award = (Cnew – Cold) x Dr x Lm, where C is the capital value of the accommodation, Dr is the discount rate and Lm the lifetime multiplier.

** Those being: (i) indexation of borrowing costs (ii) impact of inflation on the issues arising (iii) investment return and discount rates (iv) mortgage rates, products and the costs of borrowing for the purchase of property; and (v) valuation of a potential reversionary interest in any property purchased by the claimant.


Written by Alistair Kinley, Director of Policy & Government Affairs at BLM

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