The Discount Rate is applied by the Court when calculating lump sum compensation payments to be awarded to Claimants who have suffered life-changing injuries. On 20th March 2017 the rate was reduced from 2.5% to -0.75%.
What is the Discount Rate?
In Personal Injury Claims where a Claimant is likely to suffer a continuing financial loss, Courts may award the Claimant a lump sum payment to compensate them for those future losses such as loss of earnings, further treatment and future care needs. Such lump sum payment is calculated by multiplying the amount the Court considers the Claimant will lose each year (“the multiplicand”) by a multiplier which is calculated by reference to the “Ogden” Tables. The “Ogden” tables help actuaries, lawyers and others calculate the lump sum compensation due in personal injury and fatal accident cases.
The multiplier varies depending on the age of the Claimant, their projected mortality rate and the rate of return they are expected to achieve by investing the lump sum awarded.
Applying the discount rate to the compensation award is intended to put the Claimant into the same financial position had they not suffered an injury. The Claimant is expected to invest this money and receive a return, which they can then use for their future needs. The Discount Rate reflects the likely rate of return on the investment.
A 30 year old Engineer is seriously injured during the course of his employment on a cross channel ferry. The medical experts appointed by the parties agree that he will not be able to work at sea again but that he will be able to undertake some form of shore-based employment using his engineering knowledge and skills. His net annual income as a seafarer was £30,000 whereas he is only expected to be able to earn £20,000 net ashore. He expects to retire at the age of 60.
In order to calculate the value of his future loss of earnings claim, his annual net loss (the multiplicand) is multiplied by a multiplier to produce a lump sum payment. This is done with the aim that, if invested, the lump sum will provide a sufficient return. In this example the lump sum would produce £10,000 per annum for 30 years.
Applying the Ogden Tables to future loss of earnings using the 2.5% discount rate (before 20 March 2017):
DAMAGES AWARDED: £207,800
Applying the Ogden Tables to future loss of earnings using the -0.75% discount rate (from 20 March 2017):
DAMAGES AWARDED: £328,700
Whilst the exact percentage increase will vary from claim to claim, the effect will be to increase the value of future financial losses significantly, meaning that Claimants will now receive higher damages than before the discount rate change. This is obviously more advantageous for Claimants and not good news for Defendants and Insurers.
Government Green Paper
Subsequent to this Discount Rate change, the government announced that it was running a consultation from 30th March to 11th May 2017 to consider how the Discount Rate should be set in the future. This Green Paper will consider the possibilities of how, when and by whom the Discount Rate should be set, but did not make specific proposals.
The Green Paper will also consider whether sufficient use is being made of Periodical Payment Orders.
The outcome of the consultation is awaited.