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Editorial: Seeing Negatives in the Discount Rate - Aidan Ellis, Temple Garden Chambers

29/03/17. No personal injury lawyer will be unaware that on 27 February 2017, the Lord Chancellor lowered the discount rate from 2.5% to -0.75%. It was a dramatic change and immediately had a polarising effect. Insurers denounced the reduction as ‘crazy’ and began calculating what cost they could pass on to consumers. Meanwhile, Schedules and Counter-Schedules, offers and advices, must be recalculated. Now that the initial outcry has passed and the initial adjustments have been made, perhaps we can safely offer some thoughts on the Lord Chancellor’s announcement.

It is difficult to argue that the discount rate should have stayed the same. It had not been changed since 2001. If the meagre returns on my humble savings are anything to go by, the days when the risk-averse investor could expect a 2.5% return are long gone. In fact, the effect of keeping the rate fixed at 2.5% for more than 15 years must have been to the detriment of seriously injured claimants. Change was overdue. And if the Lord Chancellor had delayed any further, it seems likely that judicial review proceedings would have forced her hand.

On the other hand, the discount rate was lowered by more than 3%. That is a staggering drop to negotiate in a single step. It is also a little surprising to see a negative rate. That might well be justified given the current state of interest rates and inflation. But it leads to the counter-intuitive result that Claimants would now have a more valuable claim if they choose not to incur any costs before settlement or trial, instead pushing expenses not only into the future but as far into the future as possible.

Finally, I note that the Lord Chancellor announced that she was “clear” that a rate of -0.75% was “the only legally acceptable rate I can set”. It seems unlikely that the calculation is so accurate that there was only one legally acceptable rate and therefore that -0.5%, for example, would have been legally unacceptable. But if -0.75% is now the only legally acceptable rate, on the assumption that market conditions did not change suddenly one day in February 2017, that must mean that for much of the past say 10 years, the rate has also not been legally acceptable.

One reading of these events is that the need to announce a immediate reduction from 2.5% to -0.75% shows that the process for setting the discount rate had failed. A system which required regular review every six months, may well have led to the same result (a -0.75% discount rate). But it would have reached that level by a series of gradual reductions, which would not have significantly disadvantaged claimants in the intervening years and would not have confronted insurers with the cliff-edge of a sudden 3.25% change. It is perhaps not entirely clear that the Lord Chancellor’s workload is so heavy that it would be impossible for her to review the discount rate at regular intervals. But if it is, then surely in the interests of both claimants and defendants, the power to set the discount rate needs to be given to a body which is capable of providing a regular review.

Aidan Ellis
Temple Garden Chambers

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