Following the 2024 Personal Injury Discount Rate (DR) review, the current DR of -0.25% will change to +0.5%, effective from 11 January 2025.
In this article, Michael Rivelin addresses the basics of how the discount rate works, what the change means for our clients and the impact on existing schedules as well as some in-depth worked examples and links to useful resources.
The basics – what is the DR?
- When a personal injury claimant receives damages for future losses, they receive a lump sum of money now, but may not have to spend it for many years (or at all, if the harm never comes to pass).
- For example, a claimant might need care and assistance, at a cost of £1,000 per year, for the rest of their life (say, 30 years). The cost of all thirty years is given to the claimant now. We hope that claimants will do something sensible with their damages awards (such as invest them in a relatively low-risk scheme) and therefore make a decent return that future-proofs them against inflation. There’s also a chance that the return on the invested lump sum is many times greater than the claimant’s future losses.
- Conversely, the rate of return on a lump sum might be net negative (because investing opportunities are poor, and the rate of inflation is high). Claimants receive a lump sum now, but the real terms value of that pot of money will go down year on year. They still need to pay for their care, though, and so they will end up out of pocket.
- In order to prevent claimants being over or under compensated, a DR is set by the Lord Chancellor, who is advised by experts. The DR reduces or increases the pot of money. The Lord Chancellor, in determining the rate, considers what claimants actually do with their damages awards, the investing strategies they use, the effects of inflation, and decides how likely it is that claimants (as a whole) will be under or over compensated.
What is the impact of this change?
5. In essence, it is a windfall for defendants. The previous DR assumed that claimants were undercompensated by receiving a lump sum, so it bumped up the amount they were awarded.
6. The new discount rate assumes the opposite.
7. Taking the 30-year care claim I outlined above by way of example
(a) The claimant’s loss is £1,000 per year.
(b) The claimant will incur this loss every year for 30 years. Rather than multiplying £1,000 by 30, the multiplier is adjusted in accordance with the discount rate to avoid over or under compensation.
(c) The amount of the adjustment is set out in the Ogden Tables (see resources).
(d) Under the old DR (-0.25%) the multiplier for 30 years was 31.16. So, the claimant would be awarded £31,160.
(e) Under the new DR (+0.5%) the multiplier for 30 years is 27.86. So, the claimant would be awarded £27,860.
(f) Consequently, if the Claimant is awarded their damages on 11 January 2025, when the new rate comes into force, they will receive £3,300 (10.6%) less than if they were awarded damages on 10 January 2025.
8. The Lord Chancellor’s Impact Assessment predicts a reduction in £350m per annum in damages to claimants across England and Wales (£200m saving to the NHS, and £150m saving to insurers).
What should I tell my claimant clients?
9. Claimants that have seen draft schedules under the -0.25% DR might be disappointed to see their potential damages decrease dramatically.
10. Whilst they have undoubtedly lost out by the change, this is arguably because there was a good chance they would have been over-compensated by the -0.25% rate. (Although whether this is true or not will always be a topic of debate. The Lord Chancellor sets out her reasoning, with worked examples, in the Impact Assessment. See resources below.)
- Nonetheless, claimants may (understandably) not see it that way.
- It would be helpful to emphasise with clients that:
- They are receiving a lump sum payment now for losses that they have not yet incurred (and may never incur), but they will benefit from the money immediately.
- One reason the discount rate has changed is because the experts believe investments are likely to perform better over time. This is a positive thing for claimants.
- Damages always needed to be invested to ensure enough remained in the pot for future expenses and contingencies. This has not changed.
- And, the change in the discount rate is out of the control of their lawyers(!)
What is the take home message?
13. Defendants should delay settling, or only agree to settle using the new DR. Counter-schedules should be updated to reflect the change.
14. Claimants are likely to only receive awards using the old DR if they are awarded at trial by 10 January 2025. Without prejudice schedules to inform settlement, even before the change comes into force, should be drafted using the new rate. Existing draft schedules should be updated.
Michael Rivelin, pupil barrister in the Personal Injury and Clinical Negligence team
Appendix 1: Worked examples
(1) Loss of earnings to pension age
Mr A is aged 40 and loses his job as a result of his catastrophic injuries. His previous income was £25,000 per annum (net). He was educated to degree level and previously not disabled. As a result of his injuries, he will never work again. He would have reached state pension age at 68 years old.
Under the old DR (-0.25%), the adjusted multiplier (Ogden Table 11 multiplier of 27.86 x Table A reduction factor of 0.86) was 23.96.
This would have yielded a future income loss of £599,000.
Under the new DR (+0.5%), the adjusted multiplier (Ogden Table 11 multiplier of 25.15 x Table A reduction factor of 0.86) is 21.63.
This yields a future income loss of £540,750.
This is £58,250 less (a 9.7% reduction).
(2) Loss for life
Mrs B is 65 and needs new prostheses each year, for life, at a cost of £4,000 per year.
Under the old DR (-0.25%), the Ogden Table 2 multiplier was 23.15, yielding damages of £92,600.
Under the new DR (+0.5%), the Ogden Table 2 multiplier is 21.03, yielding damages of £84,120.
This is £8,480 less (a 10.1% reduction).
Appendix 2: Resources
The Ogden Tables can be found here.
The Lord Chancellor’s announcement, explanatory material, and impact assessment can be found here.