The stark choice facing the Lord Chancellor over how to set the discount rate was laid out yesterday as the Ministry of Justice consultation closed.
While claimant lawyers argued in their response to the consultation that injured people should not be forced to invest in “volatile stock markets”, defendant lawyers said using a mixed portfolio of investments as the benchmark matched the reality of how claimants deal with their damages.
The discount rate is used to reduce an injured person’s lump sum compensation to factor in income from investment of those damages in future years. In 2001, the then Lord Chancellor set it at 2.5% by reference to index-linked government stock (ILGS). However, the low return from ILGS in recent times has prompted calls from claimants, led by the Association of Personal Injury Lawyers (APIL), to cut the discount rate and thus increase the damages they receive.
The consultation sought views on the methodology to be used in setting the rate, putting forward two broad options: to use an ILGS-based methodology applied to current data; and to move from an ILGS-based calculation to “one based on a mixed portfolio of appropriate investments applied to current data”.
APIL president Karl Tonks said: “If the discount rate is not set accurately a victim of a catastrophic spinal injury, for instance, who may need round-the-clock nursing care for the rest of his life, could be short of hundreds of thousands, if not millions of pounds, and left unable to finance his future needs.”
He said the mixed portfolio approach is far more risky. “It is simply unacceptable and inconceivable that a vulnerable, injured person, who needs every penny of his damages to work hard for his future should be forced to take the same risks as a speculative investor on the stock market.
“If an investment goes wrong, an injured person can’t simply cut back on his medical or care needs. Unlike an ordinary investor, it’s money which he simply cannot afford to lose. The government must understand the seriousness of this situation for injured people. It must change the discount rate as a matter of urgency to stop people being under-compensated, and the rate must be based on low-risk government stock.”
APIL illustrated its case with the example of a 61-year-old left tetraplegic by a car crash who in January 2012 was awarded £5.5m in compensation after the 2.5% rate had been applied. But it said at the start of 2012, yields on ILGS stood at around 0.5% – had this been the rate applied, the claimant would have received £7.3m, it said.
However, Christopher Malla, a partner at City firm Kennedys, which acts for defendants and has been campaigning on the issue, said: “To assume a claimant only invests in ILGS is to ignore what actually takes place and this could over-compensate the claimant. Ultimately this could lead to higher costs for defendant bodies, such as the NHS and local authorities, and have a detrimental impact on already reduced public sector budgets.
“The reality is that claimants put their damages in a mixed portfolio of investments, and 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% that way.”
He said the Ministry of Justice also had to adjust its assumptions around the return from ILGS to allow for an increase in the ILGS yield as the current financial crisis eases. “Otherwise, the basis upon which any decision is made today will be unfairly distorted by recent investment behaviour.”
The Kennedys response said there was a risk that if the discount rate falls and lump sums become attractive as a result, claimants may stop settling their cases by way of a periodical payment order, which it described as “clearly the fairest and most appropriate way of ensuring adequate funds are available over what can be a very long period of time”.
The Ministry of Justice is expected to publish a separate consultation before the end of the year to review the present legal basis for the setting of the rate and to seek views on whether the restrictions imposed by the present law on the factors that can be taken into account in the setting of the rate are still appropriate.