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Government delivers discount rate consultation and puts every issue in play

Truss: we need a system that works for all

The government today launched its promised consultation [1] on how the discount rate should be set in the future, and has given just six weeks for responses.

Among the issues on which it is canvassing views is whether the rate should be set on the basis that claimants who opt for a lump sum over a periodical payments order (PPO) should be assumed to be willing to take some risk – the rate is currently set on the basis of claimants with no risk appetite.

The consultation follows the outcry from insurers and some politicians about the new rate of -0.75% set by Lord Chancellor Liz Truss, which came into force last week – it has led to warnings of increased insurance premiums, while the government put an extra £6bn aside to cover the NHS’s extra costs over the next five years.

The consultation asks for views on whether the rate should in future be set by an independent body, whether there should be more frequent reviews, whether there should be more than one rate, and whether the methodology – which in effect assumes that claimants would invest only in virtually risk-free index-linked government stock (ILGS) – is appropriate for the future.

The consultation includes a call for evidence on how investors in the position of personal injury claimants are likely to invest, and explores what an appropriate investment risk profile could look like for such investors, along with what the effect would be of moving from the current virtually risk-free model, to a low-risk model.

In a statement to Parliament, Ms Truss said: “We must have a justice system that works for all. I fully recognise the impact that the discount rate has, not just on claimants (including some of the most vulnerable in society), but also on defendants in both the public and private sectors, and the further impact this has on consumers’ insurance premiums and taxpayers.”

On PPOs, the consultation suggests that “if the basis of the setting of the discount rate were to be changed so that the rate is to be set by reference to riskier investments than at present, the ability of a claimant who has a lower risk profile than that assumed for the purposes of setting the rate to take a periodical payment could be a way for claimants to avoid the additional risk…

“If PPOs are offered and claimants do reject them in favour of a lump sum, there would be a strong case for saying that the offer of the PPO should have an effect on the discount rate, but the very availability of a PPO in principle as a means of receiving risk free compensation might itself mean the discount rate should be affected.”

Huw Evans, director general of the Association of British Insurers, said: “This consultation document is an important step forward in helping get a fair, modern way to set the discount rate which works for claimants, consumers, businesses and taxpayers.

“Only a month after the setting of an absurdly low rate, the government has moved swiftly to consider reform and we need to see this urgency maintained with a firm commitment to legislate in the Prisons and Courts Bill currently before Parliament.

“As the only major economy in the world with a negative rate, the UK will face significantly increased insurance and taxpayer costs until the system is reformed and a new rate can be set.”

Stuart Henderson, managing partner of personal injury at Irwin Mitchell, said: “Whilst we regret the period of uncertainty that this further consultation will bring, we do recognise the desire to create a methodology that provides for regular review ensuring that market changes are properly reflected.

“We will consider the consultation document carefully and respond in due course, whilst reflecting on the fact that government has already consulted on the underlying principles behind the setting of the discount rate in 2012 and 2013 and took no steps to change the present approach as a result.

“It is worth reminding ourselves that the reason that the change in rate was so significant was because the revision was long overdue.”

Mr Henderson also called on the Ministry of Justice to create “a period of absolute certainty” about the application of the current rate until the review is completed.

He explained: “They should also publicly challenge those insurers who are using every possible tactic to delay the resolution of cases in the hope of a better outcome on the discount rate following the consultation. The judiciary need to be aware of what is happening and be prepared to intervene to push cases forward and apply the current law.

“Present delays and tactical moves by some insurers are damaging to seriously injured individuals, disruptive to the administration of justice and highly likely to add to costs in the legal process.”

Neil Sugarman, president of the Association of Personal Injury Lawyers, said: “It was very important that the rate was reduced because people with serious, life-changing injuries were not receiving the compensation they desperately need.

“Having said that, we are always prepared to be involved in constructive debate and so we will be responding to the consultation. Following the insurance industry’s hysterical response to the recent rate change, we are also very encouraged by the Lord Chancellor’s obvious commitment to the fact that injured people must receive 100 per cent compensation – no more, no less.”