Personal injury lawyers have warned the Ministry of Justice to avoid approaching the discount rate for PI damages as though it were a ‘hypothetical maths problem’, ahead of a planned review.
The Association of Personal Injury Lawyers (APIL) said unrealistic assumptions about how severely injured people invest their compensation could mean that the actual cost to claimants of investing their money is not being taken into account.
Personal injury awards are currently subject to a discount rate set at -0.25% - effectively topping up the claimant’s lump sum – after the last adjustment in 2019.
The rate is designed to ensure the ‘100% principle’ of claimants being in the same position they would have been if their accident had not taken place, and calculates what (if any) discount should apply to take account of investment returns from their lump sum.
But the Damages Act upon which the discount rate was introduced provides the flexibility for different rates to be set for different types of cases, and the government has put out a call for evidence as it explores whether this approach should be adopted, as it has in other jurisdictions.
Responding to the consultation, APIL’s president Jonathan Scarsbrook, said: 'The Civil Liability Act requires the assumption that damages are invested in a portfolio which is less risky than that of an ordinary investor. The government did not do that when the rate was set in 2019. At that time, even with the lord chancellor’s 0.5 per cent adjustment to reduce the projected level of under-compensation, a third of claimants were still expected to be unable meet their total financial losses,’ Scarsbrook said.
'One of the realities is that claimants are usually advised to invest through a discretionary fund manager who can actively manage the portfolio,’ he added. 'The actual cost of this must be taken into account, as must the increased tax burden, with personal allowance not moving over time and with capital gains tax and dividend allowances falling back significantly since 2019.’
The cumulative impact of these factors on catastrophic injury claims 'can be huge', he said.
Scarsbrook argued that the current 0.75% allowance to account for tax and investment management is ‘woefully inaccurate’ and that around 2.5% each year would be more appropriate.
‘Compensation is not a lottery win and neither is setting the discount rate a hypothetical maths problem’, Scarsbrook said. ‘We are talking about very unfortunate individuals - and one day any of us could be in that position - who have suffered the most devastating injuries. Damages are often required to meet all financial needs for the rest of an individual’s life.’
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