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Published 18 July 2019
To the disappointment of compensators, the MOJ has announced a new discount rate of minus 0.25%, to come into effect in England and Wales from 5 August 2019.
As an upwards variation of the discount rate from the existing minus 0.75% value, the new discount rate will benefit compensators to a modest degree but certainly not to the extent that was anticipated. Many will consider that this new discount rate still falls short of a real-world valuation of what claimants will be able to achieve in terms of a net return on the investment of damages awards.
The Civil Liability Act 2018 has allowed a move away from the unrealistic assumption of claimants investing, or being advised to invest their damages awards in ILGS as a single asset class. However, compensators will be likely to feel that the manner in which the Lord Chancellor has applied the new methodology for the calculation of the discount rate has fallen short of the mark in terms of restoring a more rational approach to how future damages awards are assessed.
In terms of the financial impact of the new discount rate, the discount rate does not have a linear impact on individual claims. By way of example, a 33 year old male with serious brain injury from a road traffic accident and with impairment of both his physical and cognitive function, might have received an award of £6,200,000 under the pre-2017 discount rate (2.5%), which would have risen to £10,400,000 under the current minus 0.75% discount rate. After 5th August 2019, the award would work out at £9,500,000 under the newly announced discount rate. Further analysis of the financial impact of the new discount rate can be found below.
The provisions of Part 2 of the Civil Liability Act 2018 require that the discount rate must be reviewed at least every five years. It is open to the Lord Chancellor to review the discount rate earlier than five years from today’s announcement although there is no immediately obvious reason why a new Lord Chancellor (David Gauke is expected to step down imminently) would be minded to do so (more details available below).
The courts retain a discretion over whether they apply the discount rate in the context of individual cases but the reality is that this new discount rate will be used in the vast majority of future damages calculations form 5th August 2019 (more details available below). In terms of the day to day practical implications of that for compensators but fundamentally compensators would be well advised to review the implications of all Part 36 Offers that they have either made or received in the context of handling individual claims. Variation of the discount rate will not negate existing offers or otherwise prevent a party from accepting the same (more detail on this point is available below).
In view of the requirement that the discount rate be revisited at least once every five years, the discount rate will remain a more constant consideration for compensators going forward. The fact of this review having resulted in the imposition of a negative discount rate for the second time will only serve to underscore the importance of the expert panel, which will advise Lord Chancellors in future reviews, being properly constituted and non-partisan in their approach (see below for more detail and for commentary around some other issues for compensators to keep a track of going forward).
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