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Review announced of discount rate for PI damages

The Lord Chancellor has announced that the discount rate is to be reviewed and the result to be announced on 31st January 2017. The press release is instructive and is set out in full below:

The Lord Chancellor is today undertaking to review the discount rate for personal injury damages awards, and to announce the result of the review by 31 January 2017.

Under s.1(1) of the Damages Act 1996, the Lord Chancellor has the power to make an order prescribing "the return to be expected from the investment of a sum awarded as damages for future pecuniary loss in an action for personal injury…", which the courts in England and Wales shall take into account. That return is commonly known as the discount rate.

In 2001, the Lord Chancellor set a discount rate of 2.5% and published detailed reasons for doing so. As those reasons reflected, the exercise of setting the discount rate was complex. So, for example, the Lord Chancellor observed:

"Setting a single rate to cover all cases, whilst highly desirable for the reasons given above, has the effect that the discount rate has to cover a wide variety of different cases, and claimants with widely differing personal and financial characteristics. Moreover, as has become clear from the consultation exercise (including responses by expert financial analysts to questions which I posed them), the real rate of return on investments of any character (including investments in Index-Linked Government Securities) involves making assumptions for the future about a wide variety of factors affecting the economy as a whole, including for example the likely rate of inflation. In these circumstances, it is inevitable that any approach to setting the discount rate must be fairly broad-brush. Put shortly, there can be no single "right" answer as to what rate should be set."

Having arrived at a rate of 2.46% with reference to the yield on Index-Linked Government Stock and certain assumptions about inflation and other matters, the Lord Chancellor stated that the choice of whether to round up to 2.5% or round down to 2% was not a "simple arithmetical matter". Examining several factors in detail, such as the market's general expectation as to inflation, the Lord Chancellor concluded that it was appropriate to set the discount rate at 2.5%.

Although the courts may use a different discount rate if a party to the proceedings shows that it is more appropriate in the case in question (s.1(2) of the 1996 Act), the Court of Appeal has held that this power is to be reserved for cases falling into a category of cases, or containing special features, that the Lord Chancellor did not take into account in setting the discount rate in 2001: Warriner v Warriner [2002] EWCA Civ 81; 2002 1 WLR 1703 at [33] per Dyson LJ. In the event, there have been no such cases in England and Wales and, accordingly, the discount rate set by the Lord Chancellor in 2001 has governed the assessment of damages in every personal injury case in England and Wales since 2001 in which lump sum damages have been awarded by the courts for future losses.

It follows from the above that - even setting aside the profound financial consequences of even a marginal change to the discount rate - a decision of such complexity and importance as whether the rate should be changed, and if so to what extent, could only be taken after the kind of detailed and thorough review capable of commanding public confidence and, specifically, the confidence of all affected.

All this has taken significant time, including two public consultations and seeking the views of an expert panel. However, the remaining steps, such as the mandatory consultation with the Treasury and Government Actuary (pursuant to s.1(4) of the 1996 Act), should be completed in short order."

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