The discount rate is the rate by which personal injury compensation payments are adjusted to take into account how much the individual can expect if they invest a lump sum over their lifetime. It has previously been based on a three year average of real returns on Index Linked Gilts. In her announcement the Lord Chancellor has set out that the new rate of minus 0.75% is also based on the three year average of real returns on Index Linked Gilts.
This is a substantial change in rate. The level of settlements will increase in cases where the Ogden Tables are to be used.
Any public sector bodies who pay out compensation for personal injury claims will also be affected. The impact on large compensators, such as the Ministry of Defence and NHS, will be substantial. One estimate suggests that the NHS' annual compensation bill will increase by almost £1 billion. The Lord Chancellor has provided assurance that the government will provide appropriate funding to cover changes to hospitals' clinical negligence costs and that they also work closely with GPs and medical defence organisations. So far, no such comment has been made in relation to any other public sector compensators. The insurance industry will also be hit by considerable increases in the costs of compensation - inevitably consumers will see increases in premiums.
In Scotland the discount rate is prescribed by The Damages (Personal Injury) (Scotland) Order 2002. It was 2.5%, being the same rate that has been prescribed elsewhere in the UK. The Scottish ministers have reduced it to minus 0.75% as well, with effect from 28 March 2017, to remain in line with the rest of the UK.
The new rate in England and Wales will have effect as of 20 March 2017. Prior to then it is likely that Defenders will wish to see as many claims settled as possible, although obviously Claimants will be less keen to do so.
The Lord Chancellor has announced there will be a consultation before Easter that will consider options for reform including whether or not the rate in future should be set by an independent body, whether more frequent reviews would improve predictability and certainty for all parties, and whether the methodology used to calculate the discount rate is appropriate. That may result in more regular changes to the discount rate in the future, which cannot be good for certainty in valuing claims and assessing budgets. However, arguably, more regular review may avoid claimants being either under or over compensated.
What is certain is that the already stretched budgets of the public sector compensators now face considerable further pressure.