Keoghs Insight


Andrew Underwood

Andrew Underwood


T:01204 677162

Personal Injury Discount Rate first review - they think it’s all over…


Not quite but we are hopefully getting there!

The Ministry of Justice (MOJ) has now published its terms of reference for the statutory consultation sought from the Government Actuary’s Department (GAD) and the Treasury. Whilst we can’t read much into either document as early indicators on the direction of travel, we can make some observations.

GAD terms of reference

An opening remark that “The Lord Chancellor therefore considers that the setting of the rate requires a significant degree of aggregation of circumstances and approximation of outcomes; and that the possible characteristics and approaches of claimants will have to be considered in the round” serves to highlight that one off war stories of woe will not be of assistance and that the Lord Chancellor (LC) will look at broad outcomes within a spectrum/range (the word range features heavily).   

The LC may look at the impact on different types of claimants facing different circumstances and making different decisions. For example does he have in mind short life cases, or cases where the future losses are variable and not fixed? Our view is that there must be a limit to the range of claimants/losses that can be separated out in this way and we would hope that the aggregation approach mentioned above will trump most of the options.   

Modelling on outcomes will look at the risk of over and under compensation and aim for a middle ground. This should rule out extremes of the type the previous LC landed us with.

The GAD is asked to disclose assumptions made in the preparation of his advice. Context is critical; the LC is not bound to follow the advice of the GAD and the fact that the GAD must set out the assumptions it makes will enable the LC to explain or differentiate its decision to the rate proposed.   

GAD considerations

In setting out the range of considerations it is important to note the latitude that the LC is seeking in the advice sought. The decision he has to make is not binary but within a range

The range of considerations are:

  1. The range of portfolios that could satisfy the assumptions under the Act
  2. The range of periods over which claimants might be required to invest
  3. The different rates of inflation with which claimants’ damages might inflate
  4. The potential range of costs that claimants might be expected to meet in maintaining their portfolio in terms of investment management expenses, advice and tax.

Importantly the LC wants the returns compared to CPI, not RPI. Whilst he references other inflation within the terms for comparison, this primary link is important as CPI is running below RPI.

Investment portfolios should illustrate the range of investment risk approaches permitted by the Act. This is important and moves away from a hybrid simplistic low risk portfolio but rather will look at investment methodology that fits with the views expressed by Scott Ingham of Heartwood Investment Management at the Keoghs workshop earlier in the year.

Investment term

The LC wants to look at “long” and “short” term returns. He has not suggested what term is meant in either case. We hope the reality will have landed from the consultation that within the range of claimants the majority will have more than 30 years investment to play with. Logic suggests that 30 years is the middle term rather than the long.

In terms of charges the LC has identified the variation between active and passive funds. Again this accords with our own enquiries which suggested that a range of charges applied in what is a competitive market. Much of the investment will be in passive, low risk funds, with lower fees as a result.

Multiple rates

The terms ask the GSD how the advice would change if multiple rates were set with reference to the duration of the award, rather than a single rate being set and the relevant considerations that the LC might consider when deciding whether to adopt a single rate or multiple rates. This may telegraph a view that more than one rate will be implemented. Our view is that this would be unnecessarily complicated in most cases and could prove a nightmare in practical terms both for reserves and resolutions. Myriad – or even just more than one – would be unhelpful.

Treasury terms of reference

The terms follow the broad pattern of the terms to the GAD. Our immediate reaction related to what was not said, rather than what was actually in the terms. There is no reference to affordability or the public purse. At the heart of any view from the Treasury will be the cost to UK PLC and public bodies. The terms are broad enough to enable such issues to be covered within the response (“any other matters that the Treasury considers relevant to the setting of the rate”). The reference also makes it clear that the Treasury can give advice at any time outside of the statutory consultation.

Three points jump out from these documents:

  1. The aggregation approach to outcomes – swings and roundabouts
  2. CPI not RPI is the reference point
  3. Multiple rates for different types of claimant or losses: if this is seriously under consideration it is a worry at a practical claims level

The issue of cost and affordability are not within the Damages Act as relevant and so are outside the consultation, but the door is open for the Treasury if relevant as and when the range rate crystalises. We mustn’t forget the politics at play here. Whilst we wouldn’t expect this to be explicitly set out, any canny politician would bear this in mind, particularly given Liz Truss MP’s lack of foresight is how we arrived at this juncture in the first place.

The horizon

This is no more than speculation but we need to be alive to any move to review the current PPO provisions and related rules. The government might want to encourage their use as part of a move to lessen the level of lump sum awards. The rules could be changed to move PPOs to the default form of award. We must be alert to any such move to ensure that changes are practical and practicable.

In addition other reforms could be brought into play. These could be a judicial power to order a reverse indemnity to avoid double recovery, and/or a power for a single defendant to initiate joinder of a co-defendant just for the PPO stage (which would mean that the exposure is broadened when there is more than one party on the hook for the damages).

As always, we will keep you up to date as matters proceed.