The Justice Committee’s scrutiny of the proposed discount rate legislation

The Justice Committee’s scrutiny of the proposed discount rate legislation

Lois Norris – Legal Services Manager of GMQC Ltd & Legal Assistant to Gerard McDermott QC

Yesterday, the Justice Committee published a scrutinising report on the draft legislation in relation to the personal injury discount rate.

As we know, the discount rate is currently set at -0.75%, following a revision by the then Lord Chancellor, Rt Hon Elizabeth Truss MP, in February. Prior to this the discount rate had been set by the Government at 2.5% since 2001.

This blog sets out and highlights some of the main issues addressed in the report. This is by no means intended to be legal guidance or opinion but is instead a summary of some of the points addressed and submissions made. The report, which is entitled “Pre-legislative scrutiny: draft personal injury discount rate clause” can be found here.

What were the proposed changes?

(1)   Expert Panel chaired by Government Actuary;

 

(2)   Discount rate set at least every 3 years rather than no fixed review;

 

(3)   Assumptions about investments to derive from legislation and not case law;

 

(4)   Low risk investment assumption rather than very low risk.

 

What evidence did the committee look at?

The committee received 41 submissions and they held one evidence session, hearing from eight people. Amongst those giving evidence were Richard Cropper (of Personal Financial Planning Ltd), Brett Dixon (President of APIL), Huw Evans (Direct General of the ABI) and Professor Victoria Wass (Member of the Ogden Working Party). The Committee also had copies of the responses to the proposals which the Government had received from stakeholders.

What is “full compensation”?

The draft clause noted that the Government’s proposals would support the 100% compensation rule so that Claimants receive full compensation. Whilst the principle of full compensation was agreed, submissions expressed that it is unclear what this exactly means.

Among the submissions, the IFoA noted that “in reality, very few individuals will live exactly for their expected future lifetime…as such compensation can only ever meet the expectation of future lifetime costs in aggregate.”[1]

The Justice Committee recommended that the government clarifies what it means by 100% compensation. In practice a lump sum award will nearly always either under or over-compensate Claimants.”[2]

Should the Discount Rate reflect actual investment behaviour?

The proposed new schedule requires the Lord Chancellor to have regards to actual returns and investments made by Claimants.  This is a marked departure from the system we are accustomed to, which has set the rate according to the return on ILGS.

The Government’s stance is that the present rate may provide awards larger than 100% because claimants are investing in low risk rather than very low risk investments.

Professor Victoria Wass argued that this is not overcompensation and that “If, ex poste, the claimant accepts a greater risk in return for the opportunity for financial gain that is up to the claimant.”[3]

She further explored the issue of how the discount rate affected investment behaviour, as did APIL when they noted: “While the discount rate was high.. Claimants were often forced into the invidious position of having either to take chances with their compensation by putting it into higher risk investments, or struggling to make ends meet.”[4]

The Justice Committee concluded that the proposal of the discount rate reflecting actual investment behaviour should not be adopted without further critical examination and noted that “investment by Claimants in higher risk portfolios could indicate that they are under-compensated and forced into higher risk investments.”[5]

Is more data needed?

When considering whether more data is needed on actual investment behaviour of Claimants, Advantage Insurance Company submitted that the legislation be amended so “all professional deputies acting for Claimants in personal injury claims file annual returns.”[6]

The Justice Committee noted that they did not think the present evidence was adequate and recommended “clear and unambiguous evidence is gathered about the way Claimants invest their lump sum damages before legislation changes.”[7]

The Justice Committee did take account of the fact that some Claimants will not have professional financial advice and/or management of funds and noted that if a method is introduced which takes account of investment behaviour it “must ensure it captures the behaviour of those Claimants.”[8]

PPO’s

In relation to periodical payment orders, submissions were made both in relation to their uptake and appropriateness.

Huw Evans of ABI reported that insurers were “disappointed”[9] and that their indications show it is “about 10% take-up at the moment”[10] in relation to PPO’s,  whilst Brett Dixon of APIL noted in his evidence that “For a claimant, there often is not a choice.. if a Defendant makes an offer to settle on a lump sum basis that puts the Claimant at risk.”[11]

Several submissions proposed the CPR should be amended ensuring that any lump sum offer should also be made on PPO terms.

The Justice Committee noted that PPOs are a useful alternative and observed that “it is perhaps telling that insurers must be “cautious” and reserve for PPOs at a significant negative discount rate.[12] Whilst they acknowledged the insurers lacked choice they noted that “if a rate based on zero-risk investment is mandated for them, it strengthens the case for that being viewed as an appropriate investment strategy for Claimants.”[13]

Clinical Negligence pay outs & insurance premiums

Whilst it accepts interests must be a balancing act, the Committee does think it is “reasonable for the Government to take into account the impact of the discount rate on clinical negligence payments and insurance premiums and it should be open on this.”[14]

They go further than this by proposing that the impact on motor insurance premiums is reported upon each time the discount rate is reviewed.

How often should it be reviewed?

The draft legislation suggests a review within 90 days of the legislation coming into force. Thereafter a review will be carried out at least every three years.

There were varying submissions in relation to this, stemming from annual reviews to one every ten years. The report noted that they were told “by Claimants’ and defendants’ lawyers that a review every 5 years might be the best approach..”[15] One reason for this was to allow certainty for Claimants in serious injury claims.

The Justice Committee seemingly made no specific recommendations in relation to this but did set out some potential pros and cons which can be seen on page 33 of the report.

What will the Discount Rate be?

There is certainly no definitive answer on what the discount rate will be and the report only emphasises that.

Whilst it was noted that “the Lord Chancellor indicated that a rate set now might now fall within the range of 0% to 1%”[16] Lord Keen of Elie QC (Ministry of Justice Spokesperson in the House of Lords) made it clear that this was by no means cemented. He explained how the figure was arrived at but said “I emphasise that it was not intended as an estimate of what the rate will be.”[17]

It seems that speculation will continue on the discount rate and accompanying legislation. The full pre legislative scrutiny report certainly makes for an interesting read on a highly stimulating topic for both Claimant and Defendant lawyers and the same can be accessed here.

 

Lois Norris

Legal Services Manager at GMQC Ltd & Legal Assistant to Gerard McDermott QC

[1] http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/justice-committee/prelegislative-scrutiny-draft-personal-injury-discount-rate-legislation/written/71443.pdf

 

[2] Justice Committee, (2017) Pre-legislative scrutiny: draft personal injury discount rate clause, paragraph 24.

[3] http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/justice-committee/prelegislative-scrutiny-draft-personal-injury-discount-rate-legislation/written/71211.pdf

[4] http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/justice-committee/prelegislative-scrutiny-draft-personal-injury-discount-rate-legislation/written/71052.pdf

[5] Justice Committee, (2017) Pre-legislative scrutiny: draft personal injury discount rate clause, paragraph 41

[6]http://data.parliament.uk/WrittenEvidence/CommitteeEvidence.svc/EvidenceDocument/Justice/Prelegislative%20scrutiny%20draft%20personal%20injury%20discount%20rate%20legislation/written/71269.html

[7] Justice Committee, (2017) Pre-legislative scrutiny: draft personal injury discount rate clause, paragraph 53.

[8] Justice Committee, (2017) Pre-legislative scrutiny: draft personal injury discount rate clause, paragraph 53.

 

[9] Justice Committee  Oral evidence: Pre-legislative scrutiny: draft clause on personal injury discount rate, HC 374, Q45

[10] Justice Committee  Oral evidence: Pre-legislative scrutiny: draft clause on personal injury discount rate, HC 374, Q45

[11] Justice Committee  Oral evidence: Pre-legislative scrutiny: draft clause on personal injury discount rate, HC 374, Q39

[12] House of Commons Justice Committee, (2017) Pre-legislative scrutiny: draft personal injury discount rate clause, paragraph 72

[13] Justice Committee, (2017) Pre-legislative scrutiny: draft personal injury discount rate clause, paragraph 72

[14] Justice Committee, (2017) Pre-legislative scrutiny: draft personal injury discount rate clause, paragraph 101

[15] Justice Committee, (2017) Pre-legislative scrutiny: draft personal injury discount rate clause, paragraph 111

[16] Justice Committee, (2017) Pre-legislative scrutiny: draft personal injury discount rate clause, paragraph 76

[17] Justice Committee  Oral evidence: Pre-legislative scrutiny: draft clause on personal injury discount rate, HC 374, Q98