The Ministry of Justice (MoJ) yesterday raised the prospect of replacing the single personal injury discount rate with a dual or multiple rates, in the run-up to next year’s full-scale review.
In a call for evidence, the MoJ said different rates could be calculated by duration, with different short-term and long-term rates, or by heads of loss, with different rates for future care and future earnings.
Before the current discount rate was set at -0.25% by Lord Chancellor David Gauke in July 2019, the MoJ said the government actuary provided him with a “working model” based on dual rates.
This would have involved setting a lower short-term rate, then moving to a higher long-term rate following a “switchover period”, for example of 15 years.
Officials described the case for a dual rate as an “interesting one”, with the analysis “providing some promising indications, particularly in relation to addressing the position of short-term claimants”.
However, it was felt that “the lack of supporting evidence meant that it would not be appropriate to adopt a dual rate at that time”.
The MoJ said all the submissions received during the call for evidence, which runs until 11 April 2023, would be “considered and used to inform the work of the expert panel who will be advising on the next discount rate”.
The main criticisms of the current single discount rate highlighted in the call for evidence related to claimants with shorter term awards and the impact on different heads of loss.
Claimants with shorter-term awards faced higher investment risk, with limited time to recoup losses, and because investment returns rose over time they could fall further behind. There was also the risk of outliving the award.
On heads of loss, although claimants should bear “little or no investment risk” for care and care managements costs, they could be expected to bear a higher level for future earnings. Care costs were likely to be more vulnerable to inflation than future earnings.
However, support for dual or multiple rates was limited during the government’s 2017 consultation on the discount rate, although “several respondents” argued that it deserved further consideration.
Summarising arguments in favour of a single rate, the MoJ said: “The simplicity of the single rate approach provides practical advantages for parties and the courts.
“It is relatively easy to calculate, provides a degree of certainty on the level of damages that may be awarded and forms a basis for negotiations between parties to reach settlements in cases.”
The MoJ said the Canadian province of Ontario had relied on a dual rate system since 1999, with a lower short-term rate (0.5%) and higher long-term rate (2.5%), and a switching point period fixed at 15 years.
In Hong Kong, where the discount rate is set by the courts, there is a “three-fold approach”, set at -0.5% for the first five years of loss, 1% for losses up to 10 years and 2.5% for periods in excess of 10 years.
Meanwhile in Ireland, where again the rate is set by the courts, the rate is calculated according to heads of loss, with 1.5% for future pecuniary loss and 1% for future care costs.
International experience suggested that the short-term rate was “more volatile and sensitive to fluctuations in inflation”.
The MoJ said the government actuary suggested in the 2019 consultation that, if dual rates based on duration were adopted, a short-term rate of -0.75% should apply for the first 15 years, followed by a long-term rate of plus 1.5%.
Justice minister Lord Bellamy commented: “Historically, there has been a single discount rate used for all cases, regardless of the size and duration of the damages awarded.
“This differs, however, from the approach used in other common law jurisdictions, and it has been argued that it can result in unfairness to claimants.”