MPs report back on discount rate

The discount rate, which is set by the Lord Chancellor, assesses the expected rate of return on investment that claimants with serious injuries can expect over their lifetime, thus determining the level of damages that should be paid out.

A change to the rate earlier this year by the then Lord Chancellor, Liz Truss, prompted concern that it would impose too high a burden on the NHS, which funds compensation for most clinical negligence cases. Government research then found that claimants make riskier investments than assumed, and proposed draft legislation to change the way the rate is set, proposing that an expert panel advise the Lord Chancellor.

Reporting on the draft legislation this week, the MPs recommended that the government clarifies what is meant by the principle of full compensation for claimants, given that a lump sum always either over-compensates or under-compensates. They called for ‘clear and unambiguous evidence’ into the way claimants invest their lump sum damages before the legislation be changed, and ‘adequate safeguards’ to protect the most vulnerable claimants. They recommended that if the Lord Chancellor chooses to ignore the expert panel’s advice that he or she make their reasons known to the public.

Mark Burton, partner at Kennedys, said: ‘The main consequence of the report appears to be the prospect of yet further delay before any change in the rate.

‘The Committee recommends fresh evidence regarding real-world investment behaviours and a slower first review, requiring a decision of the full expert panel rather than just the Lord Chancellor, and involving mandatory consideration about whether to move to a mixed-rate methodology rather than the present single rate approach.

‘The Ministry of Justice consultation response showed that the current rate of -0.75% overcompensates and is based on unrealistic methodology. It will therefore be a source of considerable frustration to compensators that the reform process looks set to drag on for a long while and be prolonged further by the Committee’s intervention, especially as relevant evidence was submitted fairly recently for the consultation phase and we now appear to risk starting over again.’

However, Emma Hallinan, director of claims policy and legal at the Medical Protection Society, said: ‘The Justice Select Committee is right to acknowledge that a balance must be struck between the interests of the claimant, and the affordability of rising clinical negligence payments to society.

‘Without prompt action to change how the discount rate is set, the cost of clinical negligence to the NHS, society and healthcare professionals risks becoming unsustainable. The government has said it intends to legislate promptly, to ensure the way the discount rate is set is put on the best possible footing at the earliest practicable date. We would encourage the government to keep to their commitment to ensure this important legislation comes into force swiftly.’

Julian Chamberlayne, chairman of the Forum of Complex Injuries Solicitors ,said: ‘Seriously injured claimants rely on the Lord Chancellor to set the discount rate fairly to ensure their wellbeing over decades, so the Justice Select Committee are right that any further change should not be made without a solid evidential foundation.  The insurance lobby’s complaints about the time frame need to be seen against the background of the 16-year period in which the discount rate was manifestly too high causing them huge savings at the expense of claimants with life changing injuries. It remains open to insurers to offer to settle cases on a PPO [periodical payment orders] basis, but the reality is that they remain reluctant to do so because they know the ultimate cost often exceeds a lump sum calculated using the current discount rate. This exposes the myth that the current rate overcompensates.’