When a claimant is awarded a lump sum compensation payment, the actual amount they receive is adjusted to take into account the interest they can expect to earn by investing it. The law makes it clear that claimants must be treated as risk-averse investors, being financially dependent on the lump sum, often for the rest of their lives. The adjustment is achieved by applying a 'discount rate', a percentage linked to returns on the lowest-risk investments – typically index-linked gilts. This rate had remained unchanged at 2.5 per cent since 2001. However, from 20 March 2017 a new discount rate of minus 0.75 per cent was introduced to take account of historically low returns on investments.
The move will not only see compensation payments rise but is also likely to have a significant impact on the insurance industry and a knock-on effect on public services with large personal injury liabilities – particularly the NHS.
On 30 March, in the face of adverse reaction from the insurance industry, the Ministry of Justice published a promised consultation into the personal injury discount rate framework. This will consider whether the current system is fair to both claimants and defendants, whether changes to how the rate is set are needed and whether it should be set by an independent body. The consultation closes on 11 May.
A recent settlement that was negotiated in the light of the change in the discount rate will see a young boy who suffers from cerebral palsy as a result of oxygen starvation during his birth paid a lump sum of £6,874,283, plus index-linked and tax-free annual sums to cover the costs of his lifelong care. Those payments will start at £155,000, rising in steps to £215,000 when he reaches the age of 60. If he attains the age of 70, the total compensation package will be worth in the region of £18 million.