The Discount Rate is used to calculate damages for future losses in claims, such a future loss of earnings or care costs. In reality this generally only applies people with long term or permanent injuries who will suffer reduced earnings and an increased need for care, housing and other services after their claims have been settled.
So how is the discount rate used?
The purpose of the discount rate is to produce a figure known as a multiplier which in turn reduces a sum of damages in respect of future losses to take account of the likely interest that would be earned on the money if it were prudently invested, so that the injured person will be fully compensated for their future loss including the interest they will receive.
For example, a person aged 55 at the time of the settlement of their claim who intended to retire at 65 and was unable to work due to their injury would have a claim for ten years’ loss of future earnings. If those net earnings were £20,000 a year, then they would not receive 10 x £20,000 (£200,000) but using the actuarially-calculated multiplier of 8.59 which assumes the previous Discount Rate of 2.5%, they would receive 8.59 x £20,000, namely £171,800. The multiplier takes account of the injured person’s lump sum being invested at 2.5% per annum for 10 years, so that with the annually-accumulating interest, the injured person will received £200,000 in total.
The ‘current’ discount rate
The Discount Rate has been at 2.5% since 2001. This figure was based on the fact that in 2001, a person who invested in Government stocks (like National Savings) could expect interest (known as yields) of 5% per annum on the total of their investment.
The problem for Claimants since 2001, has been that yields have never been higher than 2% This left Claimants under-compensated, in some cases, by hundreds of thousands of pounds. This is because their lump sum damages payments were reduced by the Discount Rate of 2.5%, when in reality, they could not have hoped to obtain enough interest on their lump sums to reflect the discounted rates.
Discount rates moving forward
Following four years of Consultation on the issue, the Ministry of Justice announced on 27th February 2017 that the Discount Rate will be amended from 2.5% to – (minus) 0.75%
This means that, in principle, the long term or permanently injured should receive a lump sum payment which reflects the fact that any yields/interest they could expect from sensible investment of their lump sum would be negligible (as current interest rates are so low). Multipliers will increase. Using the example above, the multiplier will increase to approximately 10.4, so the injured person aged 55 would receive 10.4 x £20,000 namely £208,000, being an increase of 29k.
This is a common sense decision by the Government which will allow injured people to properly plan for their financial futures, and ensure that they will be able afford to support their families, or pay for private care, or necessary adaptations to their houses or cars throughout their lifetime.
The longer the period of future loss, the greater the increase in the multiplier. For an injured person aged 20, the multiplier for lost earnings to age 65 will increase from 26.64 to around 53.
For a change, this change in the law will be bad news for insurers who pay out claims as well as the NHS and self-insured local Councils.
At Taylor & Emmet LLP we have reviewed all of our current files, to ensure that our clients will receive the correct level of compensation following this decision by the Government. If you have any questions on this, or anything related to a personal injury claim, please get in touch on 0114 218 4000 or email us at P.I.Dept@tayloremmet.co.uk.