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I help people who have suffered spinal cord injuries. It seems this morning, the government might have as well.
It has been announced today that the discount rate will now be reduced from 2.5% to -0.75%.
If you have ongoing losses (perhaps future loss of income or life-long care costs for example) having suffered serious injury a lump sum compensation award is calculated using a multiplicand (the annual cost of the care for example) and a multiplier.
You could be forgiven for thinking the multiplier is the number of years the loss is predicted to last for. But the law works so that the amount received as a lump sum compensation award is calculated so as to reflect that by investing the money sensibly the Claimant is not over compensated.
The way that is achieved is to discount the multiplier by a percentage linked to the yield on index-linked gilts (sensible, low risk government securities).
The discount rate was last set 16 years ago at 2.5%. The problem is that in the period since then the yield or return on those gilts has fallen. That means that lump sum payments are always likely to be less than the amount of compensation the injured person and their financial advisor need in order to make the compensation last for as long as it needs to.
Today, after four years of exhausting consultation, it has been announced that the rate will be reduced from 2.5% to -0.75%. That means instead of a multiplier applied to an annual loss of say £200,000 (the sort of sum many of our clients need to cover their annual care costs) of 26.52 for a 40 year old male (£200,000 x 26.52 = £5.304 million) the new multiplier adopting a discount rate of -0.75% would be 55.84*. As a result of the announcement that part of the compensation award will increase to (£2000,000 x 55.84) £11,168,000.
[*The tables work on increments of half a percentage point so I have extrapolated here – it remains to be seen what the published figure will actually be.]
It is very early to predict what the fallout from this will be. Undoubtedly insurers will be very unhappy (premium prices will rise – despite the announcement last week that the small claims limit will rise to £2000 and £5000 for whiplash injuries which seems likely to mean more than half of those who claim compensation annually won’t any longer be able to recover their costs from the insurers of those who have caused the loss for which compensation is being paid).The NHS Litigation Authority has been promised additional funds to meet additional liabilities created by the announcement.
It seems that many Claimants will be channelled in to periodical payment orders or PPOs whereby compensation that would otherwise be paid on a lump sum basis is paid on a periodical (annual) basis, with the annual sum calculated with reference to the actual cost of the future loss and with reference to different actuarial data updated annually. That means the Claimant being tied to the paying party for as long as they live and potential pressure for the Government who guarantees payments after insurer (paying party) default. Some Claimants also prefer the lump sum so that in the event of early death their families are provided for with the residue of the lump sum forming part of their estate.
The way accommodation claims are resolved is also potentially thrown in to doubt. Those claims are calculated on the basis of a formula established in the 1989 case of Roberts v Johnstone. The calculation works so as to discount the amount paid for the difference in cost between the old house and the new house needed post injury. It takes the difference; multiplies it by the discount rate and then by the lifetime multiplier. But a negative discount rate sends the calculation in to negative territory. It is difficult to see how that could possibly work. More change likely there.
Notwithstanding today’s announcement, the Lord Chancellor Liz Truss has announced there will be a further consultation beginning before Easter that will consider options for reform including whether the rate should in future be set by an independent body, whether more frequent reviews would improve predictability and certainty for all parties and whether the methodology which assumes Claimant will only invest in index linked gilts is appropriate for the future.
If you would like to discuss any aspect of claiming compensation after spinal cord injury or other serious life changing injuries please don't hesitate to contact me via email or follow me on Twitter for future updates.