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Certainty but at a heavy price and built on sand?
The Lord Chancellor’s decision to maintain a negative discount rate is a resounding fiscal own goal and a missed opportunity to rebalance the large loss compensation system. The need to protect vulnerable claimants against the risk of undercompensating is wholly understandable, but the decision made ignores economic reality by assuming that claimants will lose money on investment returns over the medium to long term (an average of over 43 years according to the Government Actuary).
One would assume that the best reference point for the Government to use would be past investment performance. The Government sought such data as part of their consultation process. However the statement of reasons published by the Lord Chancellor revealed that no meaningful data on this issue was collated whatsoever, or offered by any of the claimant respondents.
The reason quoted for this was privacy, but with respect, this reason is illusory. Data could have been offered on an anonymised basis from any of the major IFAs acting for large numbers of such claimants. Does the apparent silence on this issue possibly suggest that the investment return reality would be an inconvenient truth?
Having now taken this decision it is critical that the Government ensure that in five years’ time it has a sound source of hard data on real world returns. A method to do this would be to dovetail with tax return legal obligations and require annual returns to be submitted by every claimant recording the opening and closing investment positions of all capital investments emanating from the damages award, along with the levels of annual capital draw down year on year.
Ultimately, all stakeholders will wish to settle upon a fair and transparent mechanism for a future rate review, and it is our view that this aim simply cannot ever be achieved without full disclosure of the real world investment data. A further failure to do so risks perpetuating the false premise on which the current rate is based resulting in unnecessary cost to society as a whole.
The Keoghs Complex and Catastrophic Loss team will continue to support clients in dealing with the immediate actions necessary following Monday’s announcement. And whilst it may seem a long way off, we believe it’s important to look to the medium term by engaging on this topic now to influence future decisions.
With this in mind, together with the Market Affairs team, we will engage with industry and Government stakeholders to discuss the above possibilities.