Discount Rate Reduction – Plus 2.5% to Minus 0.75%
The Lord Chancellor has today (27th February, 2017) announced to the London Stock Exchange that the discount rate last set in 2001 is now being reduced from +2.5% to -0.75%. This downwards movement of a huge 3.25% will become effective on 20 March 2017.
The Lord Chancellor’s announcement states that, having completed the Statutory Consultation, the reasons for the significant reduction are:
- Discount rates should be based on a 3 year average of real returns on Index Linked Gilts
- It is recognised that there are significant implications across the Public and Private Sector. The Government has committed to ensuring that the NHS Litigation Authority has appropriate funding to cover the increased clinical negligence costs (no details are provided but they must run into billions)
- The Government will review the framework under which the discount rate is set and forward a consultation before Easter which will consider:
- Whether the rate in future should be set by an independent body.
- Whether more frequent reviews would improve predictability and certainty for all parties.
- Very importantly whether the methodology which assumes that Claimants only invest in Index Linked Gilts is appropriate for the future i.e. are all Claimants risk averse investors or invest in other investment vehicles where returns are far greater.
- Urgent meetings with the Insurance Industry representatives are being arranged by the Lord Chancellor.
The practical effect is that rather than awards of damages being discounted for accelerated receipt they will now be uplifted for accelerated receipt.
This obviously has a huge impact for the insurance and risk management industry given that returns on premium income also remain so low.
Some future loss claims could double in value and an uncomplicated worked example without other reduction factors is:
- A 40 year old man losing £20k PA until retirement age 65 years would previously have a future loss of £362k (unadjusted working life multiplier of 18.09).
- The multiplier is now 26.5 and the losses are £530k i.e. a 46% increase.
PPOs (Periodical Payment Orders) could become more attractive again now to insurers.
This announcement by the Lord Chancellor will make a very significant difference indeed in respect of future losses for Large Loss claims. Although a Judicial Review may be considered there are urgent strategies that need to be deployed including:
- A review of all reserves where future losses are being claimed to ensure that they are increased where appropriate.
- Where a Claimant has previously made a CPR Part 36 offer to settle then these should be urgently reviewed and accepted in appropriate cases.
- Where a Defendant CPR part 36 offer has previously been made then such offers should be reassessed and increased as appropriate.
- Review strategies for upcoming without prejudice JSMs (Joint Settlement Meetings), mediations or Trials.
- Review and amend Counter Schedule of Loss.
- Consider the benefit of PPOs.
- At present the Ogden Tables do not have a -0.75% column but we have a spreadsheet with appropriate multipliers for this discount rate if required.
- Consider delaying any large lump sum settlement until after the Lord Chancellor has determined the further consultation regarding how Claimants actually invest damages awards?
NB: The Scottish Government are also looking at Discount Rate and when they make an announcement a further Legal Update will be provided.
Anthony Baker, Partner
DDI: 0344 245 4202
M: 07811 545 32