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The long awaited announcement this week from the Lord Chancellor of the discount rate reduction was no damp squib. A reduction from 2.5% to minus 0.75% is a seismic change. The figure is used to work out the compensation that needs to be provided for Claimant’s suffering future losses, for example loss of earnings. Due to the compensation being given up front for the future the money is discounted to reflect the fact that the sum could be invested. 

It is the investment return that this is set as the discount rate and this is based on Indexed-Linked Government Stock. So before the announcement, the rate of return would have to be above 2.5% to take into account inflation and tax. Over the years the Indexed- linked Government Stock has reduced considerably and you are today not able to get this level of return. Claimant’s would need to get a return on investment net of tax and inflation of 2.5% year in year out to get the correct amount of compensation. Hilton Obery, NewLaw solicitors serious injury solicitor, said, “The only way to do this would be to put the money into riskier asset classes to try and get the return, or suffer the risk of not having enough money in later life.”   

The differentials are dramatic. For for example, the loss of earnings multiplier to retirement age 70 for a 25 year old man will almost double, from 26.4 to around 51.33 (before applying the non-mortality discount factors). Using a simple example of a man who has a loss of earnings of say net £20,000 then in the past his loss of earning would have been £20,000 x 26.4 = £528,000 now under the new discount rate the calculation will be £20,000 x 51.33 = £1,026,600.

So where do we go now? The sting in the tail of the Lord Chancellor’s announcement is the strong hint that the case of Wells v Wells is likely to be reversed by legislation, following the necessary consultation, the Lord Chancellor in her announcement said, ‘The Government will review the framework under which I have set the rate today to ensure that it remains fit for purpose in the future… Following the consultation, which will consider whether there is a better or fairer framework for claimants and defendants, the Government will bring forward any necessary legislation at an early stage.’ The strong likelihood must be that investments other than Index-Linked Government Stock will be brought into the mix, with more frequent reviews of the discount rate thereafter.

Hilton Obery continued, “The conclusion of the announcement is that Claimants will no longer have to worry about how they will make their damages last for the future especially those who have been seriously injured. However, the journey of the discount rate has not yet reached its final destination.”