Setting the Personal Injury Discount Rate (PIDR)

What is the PIDR?

The discount rate is used to quantify and calculate future losses or lump sum payments in personal injury and clinical negligence compensation claims. It is determined based on assumed investment returns for recipients of these awards. The rate aims to value future losses, considering whether a claimant can invest the money and achieve net returns that exceed inflation.

Setting the PIDR

The Government implemented reforms to the personal injury discount rate through the Civil Liability Act 2018. This legislation introduced fixed intervals for reviewing the discount rate, now set to occur every five years by an expert panel. Consequently, the next review is currently underway, as it must begin within five years of the previous review. Each review must be initiated and completed within 180 days of its commencement. We can expect to know the new rate in England & Wales by no later than 11 January 2025.

To assist the Chancellor in setting the rate for the first review under the new legislation, a call for evidence was issued, lasting 12 weeks, and closed on 9^th April 2024. The evidence sought covered the following areas:

• Investments available to claimants
• Investment advice provided to claimants
• Taxation
• Inflation
• Investment management costs
• Model investment portfolios
• Other relevant considerations

This comprehensive approach aims to ensure the discount rate is set based on robust and relevant data.

An increase in Scotland and Northern Ireland

The Government Actuary has announced that the discount rate in Scotland will move from -1.75% to +0.50% and the rate in Northern Ireland will move from -1.50% to +0.50%.

In reaching that conclusion for both jurisdictions, the following assumptions were made:

• Gross return on investments from the notional portfolio = CPI+3.5%
• Adjustment for tax and the cost of investment advice and management = -1.25%
• Adjustment for inflation equivalent to Average Weekly Earnings = CPI+1.25%
• Adjustment for further margin involved in relation to the rate of return = -0.5%

Were the same assumptions to be adopted in England & Wales (and they may not be as the notional portfolio in Scotland is different to that currently assumed in England & Wales) AND the margin of prudence remained the same at -0.5%, the new discount rate in England & Wales would be +0.5%

It does seem as though there is a desire on the part of the Government Actuary to harmonise the discount rates across the UK. Of course, the process in England & Wales is different and the decision is one made by the Lord Chancellor having reviewed the recommendations of the expert panel and advice from the Government Actuary. But there is some sense in having the same discount rate wherever in the UK a person is injured.

The impact of a higher discount rate

If England and Wales adopt a similar approach, which seems likely, there could be a stronger emphasis on periodical payments for future losses. This method, according to data from The Institute and Faculty of Actuaries, has declined in popularity in recent years. To elaborate on the point;

1. Reduced Lump Sum Value: When the discount rate increases, the present value of future losses decreases. This means that the lump sum awarded to a claimant will be lower because it assumes that the claimant can invest the money and earn a higher return. Claimants might find this less attractive as it may not adequately cover their long-term needs.
2. Financial Security: Periodical payments provide a steady, guaranteed income over time, which can be more reassuring for claimants. This is especially important for those with significant, ongoing care needs or those who are concerned about the risks associated with managing a large lump sum.
3. Inflation Protection: Periodical payments are often linked to inflation indices, ensuring that the payments keep pace with expense they’re designed to meet. This can be particularly beneficial in a high inflation environment, providing claimants with more predictable and stable financial support.
4. Investment Risk: With a higher discount rate, claimants might be expected to seek higher investment returns on their lump sum. However, not all claimants are comfortable with the volatility and uncertainty or an investment portfolio, and the risk of underperformance can be daunting. Periodical payments eliminate this risk by providing a fixed income.

Overall, the increase in the PIDR makes lump sum settlements less attractive and periodical payments more appealing due to their stability, predictability, and reduced financial risk.