Friday, December 9th, 2016
Lord Chancellor Undertakes Discount Rate Review
On 7th December 2016 the Ministry of Justice announced that the Lord Chancellor has undertaken a review of the discount rate, including two public consultations (CP12/2012 and CP3/2013) and the seeking of views of an unidentified “expert panel”. Certain remaining steps, including mandatory consultation with the Government Actuary, are required and it is intended that the results of the review will be announced by 31st January 2017. A copy of the Lord Chancellor's statement can be found here.
The Ogden Tables provide an aid for calculating the lump sums to be paid in compensation for future financial losses, expenses or costs resulting from personal injury or death.
According to the Explanatory Notes to the Tables, the basis of the multipliers set out in the Tables is that a lump sum will be invested and yield income. Over the period in question, it is expected that the claimant will gradually reduce the capital sum so that, at the end of the period, it is reduced to nil. In selecting the appropriate multiplier, the appropriate annual rate of return needs to be identified.
Section 1(1) of the Damages Act 1996, states that: “In determining the return to be expected from the investment of a sum awarded as damages for future pecuniary loss in an action for personal injury the court shall, subject to and in accordance with rules of court made for the purposes of this section, take into account such rate of return (if any) as may from time to time be prescribed by an order made by the Lord Chancellor”. That rate of return is known as “the discount rate”.
Section 1(2) of the 1996 Act provides that a rate of return other than 2.5% may be taken by the court if any party to the proceedings shows that it is more appropriate to do so in the case in question.
Section 1(5) of the 1996 Act stipulates that, in Scotland, the discount rate falls to be prescribed by the Scottish Ministers following mandatory consultation with the Government Actuary.
In June 2001 the then Lord Chancellor set a discount rate of 2.5%. Broadly put, that figure was based on yields generated by what were then seen as “safe investments”, including index-linked government stock (ILGS). That 2.5% rate of return was adopted by the Scottish Ministers in 2002 (SSI 2002/46). In the accompanying Executive Note – Damages (Personal Injury)(Scotland) Order 2002, the Scottish Ministers expressed the view that they were setting a rate of return which: (i) the courts must take into account “unless a party to the action shows that another rate would be more appropriate”; and (ii) would not need to be “frequently changed barring any major economic changes”.
Following adoption of the 2.5% discount rate by the Scottish Ministers in 2002, there is no reported case in Scotland where any other rate of return has been applied by the court. There has, of course, been some legal argument on the issue (See for example: McGlone v Greater Glasgow Health Board  CSOH 190; and Tortolano v Ogilvie Construction Limited  CSIH 10).
Since 2002, yields have declined to the point where it has been argued that the set discount rate is too high and that, in consequence, claimants are being significantly undercompensated. Correspondingly, it has also been argued that recipients of large awards of damages do not necessarily invest in “safe investments” but, rather, in mixed portfolios including higher risk investments and that, in consequence, there is a risk of over-compensation and extra costs for defenders/insurers.
Towards the end of 2010 and in response to significant pressure, Kenneth Clarke agreed to initiate a review of the discount rate. Since then the baton has been passed (via Chris Grayling and Michael Gove) to Elizabeth Truss. Personal injury lawyers will await the results of the review with keen interest.
The Scottish Government were party to the public consultation processes referred to above and, no doubt, the results of the Lord Chancellor’s review will be considered by the Scottish Ministers and acted upon in due course.
Watch this space…