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Change to the Discount Rate

Tuesday 09th May, 2017

CHANGE TO THE DISCOUNT RATE –

 

On 27th February 2017, the Government announced that the Discount rate will drop from 2.5% to -0.75% from 20 March 2017. This is a change of 3.25 percentage points.

 

The discount rate is very important when it comes to valuing a claim for future losses. Whenever we are considering a claim for future losses or a claim relating to a fatal accident, we adopt a method of valuation which takes into account a number of factors such as a person’s likely mortality and the fact that they are receiving the money early (‘accelerated receipt’.)  The discount rate is then applied to allow the Solicitor to calculate the sum to be claimed.

 

The discount rate is set by reference to yields on Index Linked Government Stocks or gilts and was last set in 2001. The likely yield from a Government backed investment in 2001 was far higher than an investor would achieve today. Claimants with serious injuries were faced with the fact that their lump sum payment would not produce enough of a return to fund everything they needed. In many cases of catastrophic injury, Claimants and their families were not left with enough to fund the care regimes they depended on.   

 

We at Aegis Legal had actively campaigned for an increase to the discount rate and were pleased when the Government finally recognised the fact that the rate was long out of date.

 

Example

Under the old discount rate if a man with a permanent injury aged 30 could not carry on with his pre-accident job earning, for instance £5000 a year, he would have expected to receive compensation of over £114,000 for his future loss of earnings.  

 

Under the new method of valuation, the same Claimant would expect to recover somewhere between £185,000 and £202,600.

 

Going forward

When news about the change was circulated, the media machines funded by insurance companies went into overdrive. They began to immediately circulate stories of rising premiums to fund the larger settlements. Indeed the insurers went straight to the Chancellor Philip Hammond to complain about the increase, by- passing the Lord Chancellor on the way.

 

In the furore which followed, the Ministry of Justice agreed to issue another Consultation on how the discount rate was to be set in future. The Consultation started on 30 March 2017 and the deadline for submissions is 11 May 2017 leaving little for the profession to respond.

 

So whilst further change was expected, it is not clear how the snap election will affect things  Whilst the position for Claimants has improved on a general basis, there are still many areas of concern particularly relating to a claim for future accommodation needs. Also in the uncertainty which has followed, many large claims which are close to settlement are being unfairly delayed as the insurance industry campaign for a u-turn.

 

We will continue to campaign on behalf of our most seriously injured clients. It is our view that even the larger awards based on the new discount rate will still not eliminate the problems posed by long-term inflation. 


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