Change to the Personal Injury Discount Rate – An Increase in Damages for Future Loss

The Lord Chancellor has announced that the Discount Rate will be changed from 2.5% to minus 0.75% from 20 March 2017. The main effect of this change is that claimants will now be awarded higher damages for future financial losses.

What is the Discount Rate?

In personal injury and fatal accident claims where a claimant is likely to suffer a continuing financial loss, a Court may award the Claimant a lump sum payment to compensate them for that future loss. Any such lump sum payment is calculated by multiplying the amount the Court considers the Claimant will lose each year (the “multiplicand”) by a multiplier which is calculated by reference to the Ogden Tables.

The multiplier varies depending on the age of the Claimant, their projected mortality rate and the rate of return they are expected to achieve by investing the lump sum awarded (this is the Discount Rate).

 Why has the Discount Rate changed?

The Discount Rate has been 2.5% since 2001 when the Lord Chancellor stated that the Discount Rate should be calculated based on the average return on Index-Linked Government Stock (Government Bonds) over three years. Government Bonds were chosen as the basis for this calculation as they are a safe long term investment and one that a conservative investor was likely to use as it offers a guaranteed return.

The economic climate has however changed significantly since 2001 and the return on Government Bonds is less than in 2001. The Lord Chancellor, Liz Truss, has therefore announced that she is satisfied that the rate should be changed to minus 0.75% to reflect this change.

Examples of the effect of the change in the Discount Rate

The effect of this change will be to increase the value of claims for future financial loss. The change is most significant for young claimants. For example, an 18 year old female claiming care for the rest of her life will see the value of her claim increase by almost 300%.

The value of a Claim brought by a 43 year old man claiming lost earnings of £37,500 up to 65 years old will see his claim increase from £616,500 to £864,375 (before taking into account any deduction for contingencies other than mortality, which varies on a case by case basis); an increase of £247,875. If the same man were to pursue a care claim of £10,000 per annum until his death, that claim would increase from £264,900 to £518,900; an increase of £254,000. The change in the Discount Rate has increased the overall value of the claims under these heads of loss by nearly 57%.

Whilst the exact percentage increase will vary from claim to claim, the effect will be to increase the value of future financial losses significantly.

Watch this space…

In her statement, the Lord Chancellor added that the Government will review the framework under which she has set the rate to ensure that it remains fit for purpose, including whether the methodology, which in effect assumes that claimants will invest only in Index-Linked Government Bonds, is appropriate for the future. A consultation will be held before Easter to consider these issues. It is not likely that we will have to wait a further 16 years before the next change to the Discount Rate.

This article is filed under:  Industry news

About the contributors

  • James Severn Partner

    James is a sport and litigation solicitor and a partner in our Marine Commercial Litigation group. James has a broad commercial litigation and dispute resolution practice with a particular focus on shipping and insurance disputes...

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  • William Wilson Solicitor

    William specialises in litigation and is a solicitor in our Marine Commercial Litigation department.

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