The Discount Rate explained

The discount rate is used to calculate how much money an insurance company should pay to a person who has suffered life-changing injuries to compensate them for their future financial losses. The aim is to provide full compensation to reflect the claimant’s future loss of earnings, as well as covering any care costs and, in so far as money can, put the claimant in the same position as he or she would have been in, but for their injury – what is known as the 100% compensation principle. However, because it is paid in a lump sum which will be invested when it is received, the amount is adjusted to account for the interest they would expect to earn. This is where the discount rate comes in. 

Factors that are considered when setting the rate include how a claimant will invest his or her damages, the returns available on those investments and the period over which those returns are measured, as well as the effects of taxation and inflation.  

In 2019, the discount rate in England and Wales was adjusted to -0.25%. The current discount rates in Scotland and Northern Ireland are -0.75% and -1.5% respectively. The minus rates reflect a view that, in the current economic climate, a claimant’s lump sum is likely to depreciate over time even after investment in a low-risk portfolio. 

Whilst, to date, all 3 jurisdictions have stuck to single discount rates, legislation provides for the possibility of dual or multiple rates. In general terms, a claimant investing over a longer period can achieve a better return than a claimant investing over a short period and therefore differing rates may better reflect the pattern of future investment returns for claimants investing over different periods. In this way there is an argument that dual or multiple rates could provide a more effective mechanism for consistently achieving the 100% compensation principle. 

Under the Civil Liability Act 2018, the government is required to review the discount rate in England and Wales at least every 5 years, with the next review starting no later than summer 2024. The Act also requires the Lord Chancellor to appoint and consult a newly formed expert panel before the next review.  

On 3 November 2022, the Ministry of Justice (MoJ), announced a 'call for evidence' to look at the pros and cons of using dual or multiple discount rates vs a single fixed rate and therefore it is reasonable to expect that the evidence gathered will be used to inform the thinking of the Government in the run up to the 2024 rate review. 

If the England and Wales discount rate does change in this way, it will potentially mark the biggest change in approach since Wells v Wells, but as always it is very difficult to predict what direction the government, now advised by a new expert panel, may take.