The discount rate: some defects in the Ministry’s Consultation Paper

Four weeks ago I explained the origins of the Lord Chancellor’s powers to fix the discount rate that is used in calculating general damages for future pecuniary loss in personal injury cases.  I explained how they could be found in a report published by the Law Commission in 1994[1], following a period of meticulous research and consultation.

I ended that piece by saying that I certainly welcomed the idea of a new study, nearly 25 years after the study we directed, so long as it was conducted with the independence and thoroughness of a Law Commission study, supplemented by research of the quality of the study Professor Hazel Genn conducted for us all those years ago.[2]

Last Thursday the Ministry of Justice, in collaboration with the Scottish Government, initiated a consultation process which is the antithesis of the scholarly process we had conducted. Despite the complexity of the subject-matter and the fact that no similar in-depth research study has been conducted since ours, the Ministry has reduced what used to be the standard three-month consultation period to six weeks, which includes both the ten-day Easter holiday and the May Day Bank Holiday weekend. It states that during this period the Ministry will engage with experts and stakeholders and will also carry out “research and other inquiries”, and that final decisions on any changes to the law will be made in the light of the response to the consultation “and other evidence”.

In the light of the breakneck speed with which this consultation is being conducted, one would have hoped that the Ministry would have set out accurately the history of the discount rate issue. It is perhaps understandable that overworked civil servants in the ministry did not access my blog during the very short time they were given to produce this paper, but they made a number of mistakes as a result of the rush with which this paper was obviously prepared.

It is, for instance, not true that the Lord Chancellor was given the power to fix the discount rate

“because the court was not in a position to take expert evidence as to what the rate should be in the round.[3]

As I explained in my last blog, the Law Commission had proposed a scheme by which the courts would simply adopt the rate fixed for the most recent issue of inflation-linked gilts. This would have avoided all the trouble that has subsequently ensued. However, the then Conservative Government preferred the formula that found its way into the Damages Act 1996.

Although the Lord Chancellor continued to be head of the judiciary until 2006, it is also not true that in 1996 he was

“actively participating in hearing cases in the Judicial Committee of the House of Lords” [sic].[4]

The Ministry has produced the welcome news that no attempt is to be made to scale down the size of the awards on “affordability grounds”. What they call “the 100% rule” should continue to apply[5], but the effect of this clear-cut statement of policy is then neutered by the Lord Chancellor’s confusing remark in the Foreword to the effect that

“in the interests of society as a whole and the services that underpin it, I want to be sure that the system of compensation is one that compensates claimants properly, but is fair to consumers, business and taxpayers.”

What on earth does this mean?

It appears that the research the Ministry has commissioned for the six-week consultation period relates to a study by the British Institute of International and Comparative Law of the techniques used in seven jurisdictions, selected so as to “ensure the representation of common and civil law jurisdictions, a diverse geographical spread and a range of approaches and rates”[6].

Time will surely not allow for a study of the history leading to the adoption of particular arrangements in each jurisdiction (which are apparently also to include various Canadian provinces and Australian states) as opposed to a definitive statement of the current state of the law in that jurisdiction.   And even if time were allowed for a meaningful study, no opportunity will be given to anyone outside the Ministry to comment on the outcome, contrary to the Law Commission’s universal practice.

The Ministry goes on to admit its complete ignorance about important features of the personal injuries scene today:

“In applying the principle of 100% compensation we do not know whether and to what extent the class of personal injury claimants in receipt of awards to which the discount rate is applied is homogeneous or varied. All are likely to be seriously injured individuals but their injuries, needs and circumstances will differ. Some may be totally dependent on the award, others may not. Some who are totally dependent on the award may adopt different investment strategies from other claimants.

We do not know to what extent the most vulnerable claimants (that is those most dependent on their awards) adopt the most cautious investment policies.

We also do not know whether and to what extent claimants currently taking a lump sum might be better protected taking a Periodical Payments Order (PPO), or if so whether those claimants would actually be offered a PPO or take it up if it was offered.”

After admitting the scale of its ignorance, the Ministry hopes to fill the gap not by commissioning rigorously independent research, as the Law Commission did 25 years ago, but by inviting respondents to fill all the gaps in their knowledge in a consultation period limited to 23 working days (excluding weekends and holiday periods).

The scale of the Ministry’s ignorance is further revealed by its statement that the assumption on which the current discount rate is based

“was not derived from and was not intended to reflect actual claimant investment behaviour.”

In fact the Law Commission made it crystal clear, and the same evidence strongly influenced the House of Lords in the leading case of Wells v Wells four years later, that it was basing its recommendation on Professor Genn’s finding that the recipients of very large damages awards tended to be the most risk averse of the entre cohort of claimants whose cases she and her team had studied.

Perhaps in those days the memories of the 1972-4 period were fresher than they are today. Lord Lloyd observed in Wells v Wells that:

“A plaintiff who invested the whole of his award in equities would have found that their real value had fallen by 41% in 1973 and by a further 62% in 1974.”

After admitting some, but not all, of its ignorance, the Ministry concludes this passage of its Consultation Paper by saying:

“Whatever the portfolio adopted as the basis for setting the rate, the claimant should be assumed to be properly advised. We understand that most if not all recipients of significant awards of damages will receive expert financial advice.”

This may or may not be true today. It certainly was not true 25 years ago. And even if it is ascertained to be true, who is going to pay for this advice (which does not come cheap)? If it is to be the grievously injured claimant, then this expense will detract from “the principle of 100% compensation” on which the Ministry’s current proposals are founded. I ended my earlier blog by saying:

“It could well be that another Law Commission study might show that after a long period of low inflation some other formula might be more appropriate (so long as claimants were to be entitled to include the cost of an independent financial adviser within the sum awarded to them).”

This proviso is absolutely crucial if it is finally decided that every claimant should be assumed to be willing to invest in a mix of gilts and equities.

My overriding concern is that in the apparent rush to neutralise the main effect of the Lord Chancellor’s recent decision, sight will be lost of the fact that we are concerned with very seriously damaged people, for whom insurers have contracted for reward to provide a full indemnity for such injuries. They will have engaged solicitors to act for them in promoting their claim, but the damages they are awarded will not provide them with the ability to continue to retain those solicitors[7], still less to retain the services of independent financial advisers, whether to help them make their initial investments or to continue to help them for the rest of their lives, being the period over which their damages must be made to last.

There is not a word about this very obvious need in the Ministry’s Consultation Paper.

Recently, a blog of mine persuaded the Law Commission to restore a three-month consultation period for a particularly controversial study.

I have no such hope in this case, and there are now only 21 working days left in which to provide the Ministry with all the evidence and statistics it is looking for.

 

 

[1] Structured Settlements and Interim and Provisional Damages (1994) Law Com 224.

[2] I was referring to the study of the experiences of 750 people who had brought claims for damages for personal injuries, which was published in the Law Commission Report: Personal Injuries Compensation: How Much is Enough? (1994) Law Com 225.

[3] MoJ Consultation Paper, p 11.

[4] MoJ Consultation paper, p30. The Ministry ought to have referred to the “Appellate Committee”, not “the Judicial Committee”. I don’t think Lord Mackay sat there at all in 1996-7, and so far as I can recall his successor Lord Irvine hardly ever sat as a judge during his time as Lord Chancellor (I can recall only one case, concerned with the public’s rights to protest on pavements). In any event, as I explained in my last blog, at the time of the constitutional reforms in 2004-5 the then Government opted to retain for the Lord Chancellor the power to set the discount rate, rather than transfer it (with many other powers) to the Lord Chief Justice, although the responsibility for fixing the discount rate should have continued to be seen as a judicial function.

[5] MoJ Consultation Paper, p 13.

[6] MoJ Consultation Paper, p 15.

[7] Not, that is, without reducing the size of the capital sum they have been granted for quite different purposes.

6 thoughts on “The discount rate: some defects in the Ministry’s Consultation Paper

  1. Pingback: The discount rate: some defects in the Ministry’s Consultation Paper – PACSO – Justice Stuffed!

  2. Pingback: Sir Henry Brooke identifies flaws in the UK Government’s ‘discount rate’ consultation exercise – Bermuda Legal

  3. Jonathan

    I am sure that in the post-truth era that informed the crafting of this consultation the principal consultee will, from its One America Square library of facts, find all the evidence the previously supplicant Ministry needs for a return to more profit-generating bookmaking.

    Like

  4. Minesh

    If a recent retiree wanted to convert his pension fund into an index linked income stream, he/she could go to an insurance company and buy an index linked annuity. The prices of these annuities can be compared to the Ogden multipliers as they are both two sides of the same transaction. As it turns out, pension annuities are currently priced at a negative 2% discount rate. The companies that sell these annuities are often the same companies that are complaining about the personal injury discount rate. They justify the low annuity rates by blaming low investment yields, but they want their claimants to invest in riskier assets than they are willing to themselves. Also a company selling annuities has other advantages like the ability to pool the risk across thousands of annuitants and invest in asset classes like commercial property and infrastructure that an individual claimant could not invest in.

    Like

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