16 October 2012Print This Post

Compensators urged to make clear “strength of feeling” over discount rate

Malla: claimants do not really invest in government gilts

A leading defendant law firm has called on insurers, public bodies and other compensators to respond to the government consultation on changing the discount rate.

With the consultation closing in a week, City firm Kennedys said it is vital that the Ministry of Justice is aware of “the strength of feeling among compensators that it should change the basis on which the rate is calculated”.

It said that having taken soundings from the likes of public bodies, composite insurers and those who self-insure, “there are signs that some think this consultation, with its detailed review of the financial returns on investment, is one for accountants and financial experts only”.

However, Kennedys partner Christopher Malla said general principles of investment management and what happens in reality are just as important.

He said: “This is an issue of critical importance to claimant and defendants alike, and the government needs to understand the impact of any decision it makes from both sides. Traditionally defendants have been less active than claimants when it comes to responding to consultations, but we think the government needs to see how seriously compensators are taking the discount rate consultation.”

The rate is currently 2.5%. The basis for calculating it is index-linked government gilts (ILGS), on the basis that they provide secure investment protected against inflation. The low return from ILGS in recent times has prompted calls from claimants to cut the discount rate and thus increase the damages they receive.

Mr Malla argued that this assumption fails to recognise the reality that claimants do not invest their damages in such stock. Instead they typically put their money into a mixed portfolio of investments, which is the other option canvassed in the consultation.

He explained: “There is good evidence that claimants have been able to achieve real rates of return, net of tax, of up to and above 2.5%. Therefore adopting a discount rate of lower than 2.5% risks over-compensating some claimants.

“It would be unfortunate if the government took the view that investing in government gilts is the panacea of investment models. There are so many variables at play that there would be real dangers in adopting a ‘one size fits all’ approach. It is vital that the government looks at what claimants really do with their money before making a decision to change the discount rate.”

 

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