1. The Discount Rate - where are we and what lies ahead?
Gabriel Farmer

2. What is the “Discount Rate”?
More appropriately – the Net Rate of Return:
Lump sum awards for future loss
Investment yield on damages invested (and mortality)
[less cost of financial advice]
Less inflation
Less taxation
= net yield

3. Examples @ 2.5% producing £1M
Child (aged 2) Needing 12 hrs care per day for life = £30,000 per annum Loss = £30K x (88.31) = £1M Man aged 30 loses £47.5k p.a. earnings to 65 Loss = £47.5k x (56.34) x 0.92 = £1M

4. : 2.5% reduced to -0.75%

5. % ...
Child (aged 2) Needing 12 hrs care per day for life = £30,000 per annum Loss = £30K x (88.31) = £3.7M Man aged 30 loses £47.5k p.a. earnings to 65 Loss = £47.5k x (56.34) x 0.92 = £3.1M

6. Ok- but what happens now?
Nils Bohr: “Prediction is very difficult, especially if it is about the future”

7. A brief history of, er, Multipliers
The Dark Ages (1970’s and before): “take the life expectancy, divide it by 2 and then subtract 2” The renaissance (1980’s) Advent of ILGS (1981) The Ogden tables 1st Edn (1984) - ILGS Law Commission Report No.224 (1994) - ILGS Assume 4.5% - a mixed portfolio And finally ....

8. Wells v Wells [1998] UKHL 27 Upholds 100% compensation principle
Endorsed adherence to science underpinning Ogden – no more “finger in the air” assessments
Accepted that claimants would invest via low risk ILGS – “remember 1974”
Rate of return analysed and assessed at 3%

9. Wells v Wells [1998] UKHL 27
In May 1997 [the average gross return of ILGS] was 3.68%, by May 1998 it was only 2.8%. Less tax at say 15% would give a net return of 2.38%... Over the last 6 and 12 months to March 1998 the average return has been 3.02 and 3.28%, respectively... These figures justify a guideline rate of return of 3%

10. Damages Act 1996
s.1(1) 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.

11. Lord Irvine of Lairg, 2001, 2.5%

12. The value of your investment (return) may go up as well as down...

13. Inaction by the Lard Chancellor ?
APIL MASS begin lobbying / JR April 11
MOJ consultation 2012
Methodology of setting the rate
Legal framework
Inconclusive, widely divergent views
2015 Grayling “expert panel”
2016:unaminmous agreement: ILGS
But minority 25-50% “non risk free”

14. Finally:
Liz Truss – Lord Chancellor’s ministerial statement: Having completed the process of statutory consultation, I am satisfied that the rate should be based on a three year average of real returns on Index Linked Gilts. Therefore I am setting it at minus 0.75%. Came into force

15. One day later...
Joint statement Philip: Hammond, and the Director General of the Association of British Insurers, Huw Evans: “Claimants must get the money they’re entitled to following an injury in order to support their future needs”. “It is important that going forward, personal injury discount rates are set at a level that is fair to both claimants and consumers”.

16. Effect of -0.75% - its expensive
Consumers
PWC: £50-£75 on an average comprehensive motor insurance policy, with higher increases for younger and older drivers – potentially up to £1,000 for younger
Insurers
OBR: Cost to insurers: £2 billion a year. Admiral pre-tax profits down £92m (to £284m). Direct Line profits down by £157m. Aviva £385m “impact”.
NHS:
£1.2B per year

17. And so yet another consultation
Opened , closes on, er,
These are significant additional costs for the public and private sectors and they flow from the application of the present law. It is therefore legitimate to examine the basis on which the discount rate is set.
Parliament can make judgments as to the balance to be struck between different interests.
The 100% rule will continue to apply

18. The 2017 consultation Raises the following questions:
How should the rate be set?
[How frequently should it be reviewed?]
[Can better use be made of PPO’s?]

19. How should the rate be set?
Issues:
Are the present principles fit for purpose?
What should the principles be?
What investment return should be taken into account?
Should the possibility of a PPO affect the decision as to relevant investments?
Evidence needed: how C’s invest & the use if PPO’s + views on making the system “fairer”

20. Evidence? Haven’t we done that?
During the consultation period the MoJ will engage with experts and stakeholders and carry out research and other enquiries…”

21. Erroneous assumptions?
Where claimants adopt a different investment strategy with the potential to outperform the risk free rate, they have the potential to place themselves in a better financial position than had the incident not occurred. In practice claimants will pursue a range of investment strategies, but if on average they adopt a higher risk profile than ILGS and as a consequence have the potential for higher returns, then on aggregate the current law is at risk of overcompensating claimants

22. Erroneous assumptions?
C’s will accept greater investment risk for awards for lost earnings “which may be thought to be always at risk for people generally, who may be affected by redundancy...”

23. Known unknowns?
“we do not know to what extent the most vulnerable claimant (that is those most dependent upon their awards) adopt the most cautious investment policies” “ILGS or mixed portfolio?” “what advice do claimants receive as to expected rates of return and risk”

24. Defendant criticisms:
C’s not as risk averse as has been assumed
All C’s treated as vulnerable (and risk averse) when many less dependent on the award and so less risk averse
Must set the rate realistically – by reference to how C’s do or are advised to invest
ILGS distorted by special factors
Irrational to invest in products guaranteed to make a loss
No appetite for risk? PPO...

25. Counter-arguments
If C is to invest with risk who pays for the financial advice? Built in? “assumed to be properly advised”
Page v Plymouth Hospitals NHS Trust [2004] PIQR Q6 – Financial management of the award and transaction costs:
for 2.5M = £0.5M,
for 5M = £0.93M
Divides rich from poor?
Flexibility of CoP?

26. Potential outcomes:
Allow s.1 Damages Act 1996 to be used more freely? (Court assesses appropriate rate?) Warriner v Warriner [2002] EWCA civ 81
Hong Kong / Ontario models: (no)
< 5 years: -.05%
5<10 years: 1%
> 10 years: 2.5%

27. Potential outcomes: Enforcement of PPO (+ 4.5%)
Back to the mixed portfolio (but not 4.5%)
(2015 expert panel: 50-75% ILGS)

28. Crystal ball gazing Flavour of the consultation paper?
Timing of and ABI involvement?
Recent history re ABI and the IPT issue
Pressure on the exchequer and JAMS?
Probable truth in assertion that (less vulnerable) accept investment risk?
Fact that zero risk available via PPO: if you don’t take a PPO then why should D be saddled with negative rate of return?

29. “Risk free” / :best risk” split
Potential outcomes:
Back to the mixed portfolio (but not 4.5%) Eg: (2015 expert panel: 50-75% ILGS) 2017 figures?
“Risk free” / :best risk” split
Metric
100/0
75/25
50/50
0/100
Return
-1.0%
-0.125%
0.75%
2.5%
St Dev 0%
1.25% 5%

30. Practical aspects
Negative rate of return = the death of Roberts v Johnstone [1989] QB 878

31. The End
Gabriel Farmer