The call for evidence on dual or multiple discount rates closes on 11 April 2023. Head of Aviation and International Injury and chairman of the Forum of Complex Injuries Solicitors (FOCIS) Julian Chamberlayne wrote for the 24 March edition of New Law Journal about the call for evidence, encouraging interested parties to submit before the deadline.
Doesn’t time fly? It feels like the blink of an eye since July 2019 when the Lord Chancellor set the current personal injury discount rate (PIDR) of -0.25% using his revised powers under the Civil Liability Act 2018 (CLA 2018). But here we are in 2023, with the five-year review of the PIDR just over a year away.
In his statement of reasons, the Lord Chancellor expressed his interest in the Government Actuary’s analysis of the case for a dual rate, which he thought showed “some promising indications, particularly in relation to addressing the position of short-term claimants”. He asked his officials to set in train a consultation to examine this in greater depth.
That train has now left the station as, on 17 January, the Ministry of Justice (MoJ) issued a call for evidence, not a consultation, on whether it would be fairer to have dual or multiple discount rates. The call for evidence consists of 23 questions, which explore various issues, including whether different rates could be set by either duration or heads of loss and summarises several alternative dual/multiple rate models currently in operation in other jurisdictions.
So, what is the international experience of dual or multiple rates?
The answer is, pretty thin. The modest list of jurisdictions the MoJ has identified as adopting such an approach is Ontario, Hong Kong, Ireland and Jersey. The triple rates by duration used in Hong Kong since 2013 are based on case law and reflect investment and inflationary issues. Ireland has adopted a dual rate through judicial decision (upheld in 2017 by the Irish Supreme Court in Russell v HSE) but split by head of loss rather than duration. This approach reflects the long-term differential between earnings and prices inflation that affects at least two of the most significant heads of future loss in catastrophic injury claims: care and loss of earnings.
The MoJ does not mention Guernsey and Bermuda, whose courts have set precedents for heavily negative discount rates split by type of loss. In 2019, Jersey rushed through legislation to introduce a dual rate by duration, with highly questionable assumptions on investment returns. The consequence is that both the short-term and long-term rates are too high to provide anything close to full compensation to claimants. Their dual rates also have a cliff edge that will likely produce inequitable results for claimants falling just the wrong side of the 20-year dividing line between their short and long-term rates.
The eldest example of a dual rate comes from Ontario, where legislation was passed in 1999 for a dual rate with a 15-year switching point. However, their experience hardly supports England following their lead 25 years later. In 2020 and again in 2021, an experienced sub-committee of their Civil Rules committee submitted detailed reports recommending a return to a single discount rate based on an average of yields from Government of Canada real return bonds (which are indexed to inflation). In doing so, they commented that “in large part, our reasons for opting for a single rate have to do with the difficulty of establishing a rate for a period that will only begin 15 years in the future”. The question of what inflation will look like in the future only added to the difficulty of coming up with an appropriate discount rate.
They insightfully commentated: “Inevitably, some individual plaintiffs would be overcompensated and some undercompensated but our objective was to maximize the chances of full compensation while removing any inherent mechanisms that would produce overcompensation.”
What about the US, Europe (aside from Ireland) and the rest of the world? The majority of the world favours a single PIDR, or no discount rate at all, so claimants’ future losses are simply multiplied by the applicable number of years.
Dual, triple or by heads of loss?
If, despite the 25 years of experience from Ontario and the collective wisdom of most of the rest of the world, the Lord Chancellor were to adopt a dual (or multiple) rate approach, should that be by duration or head of loss? This question requires consideration of many factors on which it is inherently unlikely there will be a consensus or much solid evidence.
It is tempting for the claimant and defendant camps to try and guess which approach would result in more or less damages for the majority of seriously injured claimants. However, that is a difficult prediction to make. I would caution anyone from relying too much on the Government Actuary’s indication of a possible short-term rate of -0.75% followed by a long-term rate from losses exceeding 15 years of +1.5%. Those indicative dual rates were premised on 50% prospects of under compensation ignoring mortality.
In contrast, the current rate was arrived at after applying a -0.5% adjustment to reduce the scope of under-compensation to more like 33%.To compare like for like, a similar reduction would be needed to these 2019 indicative dual rates. You must also consider how much the economic landscape has changed since the Economic Scenario Generator (ESG) was run on 31 December 2018. In the assumptions section of his July 2019 report, the Government Actuary said: “Under the assumptions used in my modelling, a claimant settling towards the end of this five years would be expected to be investing in more favourable economic conditions than a claimant investing in the next year. As such, it might be argued that a slightly higher PI discount rate would better reflect the possible investment conditions over the whole period until the next review”.
Four years on, we are in a somewhat less optimistic economic climate. So, when the ESG is re-run in 2024, I would expect lower rather than higher discount rates, whether on a single or dual system. It also reinforces the concern of the Ontario sub-committee about how confident we can be about making accurate predictions for a long-term rate applicable from 15 years into the future.
Some, but not all, of those in the defendant camp are attracted to dual rates by duration. They should be mindful of the MoJ’s comment in the call for evidence that the short-term rate might have to be set at a very low investment risk level, which would have an impact on compensators. As an aside, some may think it reveals a partisan approach from the MoJ for this to have been included in the “disadvantages” section without listing any counter balancing “advantage” to claimants.
The expert actuary Chris Daykin (a member of the Ogden Working Party and former Head of GAD) has commented: “Assumed higher mean returns on a longer-term investment portfolio are accompanied by much higher levels of potential volatility, so greatly enlarging the funnel of doubt for outcomes and increasing probabilities of running out of money during the claimant’s lifetime.”
Another member of the Ogden Working Party, an expert independent financial advisor, Richard Cropper, has made the powerful observation that “every long run ends with a short run”. His persuasive point is that just as it is appropriate to assume a less risk-based investment portfolio for shorter periods, the same applies towards the end of a longer period. In their later years seriously injured claimants have no ‘capacity for loss’ which would leave them unable to meet their needs, which may also be increasing with the impact of ageing. They and their advisers also must plan for the more than 50/50 chance they will outlive their life expectancy.
The MOJ seeks evidence on the appropriate duration of any short-term rate and refers to five to 15 years being the potential range. Five years strikes me as very short when you consider how long the impact of some recessionary economic cycles can last. Notably, the Government Actuary’s 2019 report included a chart to show how simulated returns on the central portfolio vary over time. The report said it showed the returns settle after around 15 to 25 years due to the modelling assumptions. Does that not mean any shorter period would be too short?
The frequency of review of the PIDR is a significant feature of any shift to duration-based rates. Both the GA and the MoJ accept that short-term losses are more volatile to inflationary changes. Notably, in the 22 years since the dual rate system was introduced in Ontario, the short-term rate has been amended 16 times. Such frequent reviews could be disruptive and encourage gaming and delays in alternative dispute resolution. In contrast, if we stick with a single rate, then five-yearly reviews as prescribed by the CLA 2018 will likely suffice.
The MoJ refers to injury litigation as already being overly complex. Many complexities are necessary because of the many needs and variables in achieving a fair outcome for catastrophic injury claims. But what is clear is that a shift to dual, let alone multiple rates by duration, would significantly increase complexity, and hence scope for error, in schedules of loss. It may, in some cases, require expert input from an actuary and/or forensic accountant.
In contrast, a dual rate by heads of loss, notably for care claims, would provide a better match for earnings inflation without adding any significant complexity to preparing schedules of loss. It is also conceptually similar to PPO indexation. It is, for good reasons, the solution arrived at after careful consideration of the evidence by the common law courts who were not hamstrung by legislation, eg Ireland, Guernsey and Bermuda.
The call for evidence includes a surprising suggestion that for inflationary and/or investment risk reasons, there might be a higher discount rate for future loss of earnings than for care. That strikes me as incorrect in principle as it fails to apply the principle of restoration of losses. Such a change would be wholly unprincipled and would place an unfair burden of risk on claimants who are seriously injured by the defendant’s wrongdoing. This would not be full compensation and would relegate seriously injured claimants to a dwindling standard of living compared to their ‘but for’ position. It would also ignore the reasoning accepted by the Privy Council in Helmot v Simon and the Irish Supreme Court in Russell v HSE that loss of earnings claims are patently subject to earnings inflation. If earnings losses are to be treated differently, they warrant a lower rather than higher discount rate. However, there is much to be said for the MoJ’s comment in paragraph 121 of the call for evidence that the wider inflation issues are best left for the expert panel and full review in 2024.
A more contentious suggestion is that the discount rate on the lump sum should be increased in the worryingly small number of claims with a periodical payment order (PPO). The case for the government to make policy decisions that encourage the use of PPOs is compelling, whereas the policy reasons and evidence for a dual rate are, at best, mixed. Any change to the PIDR that makes PPOs less attractive would be a serious backward step. It would also add significant further complexity because, when drafting the schedule of losses and counter schedules, it would be unknown whether the court would award a PPO. So, both parties would have to produce variant calculations applying the standard and PPO variant PIDR for every one of the (often hundreds) of items of claim, then further variant calculations for both the short and long-term rates. Conversely, the MOJ accept this would not be an issue if a dual rate by head of loss approach were adopted, as that would be fully aligned with the current approach to PPOs for care. In any event, the issue of a variant PIDR for PPO cases strikes me as academic because under s4(3)(a) of Schedule A1 of CLA 2018, it is mandated that in determining the rate, the Lord Chancellor must assume the relevant damages are payable as a lump sum (rather than under an order for periodical payments).
What happens next?
The call for evidence closes on 11 April 2023, and I encourage interested parties to submit their evidence. We will all then face a wait as no decision on the standalone issue of dual rates is expected in 2023. Instead, the evidence gathered will be fed into the expert panel, which will shortly be appointed and then advise the Lord Chancellor on the full range of issues that feature in his 2024 review of the PIDR.
I sense the MOJ knows this is an issue with at least as many cons as pros, plus no real consensus (even within the traditional camps). No one knows whether it would ultimately work in favour of most claimants or defendants, but it would be an extra layer of complexity that will inevitably add to costs.
I predict that the most likely outcome of this call for evidence is that we will retain a single rate as it is a simple and known commodity used by most jurisdictions worldwide. It would only require reviews every five years rather than annually. The most significant underlying problem with a single PIDR is the unfairness of the current -0.25% rate for very short life expectancy cases. That is compounded by the acute nature of the longevity risk in such cases (eg the claimant is predicted to live seven years with huge care needs but lives 10 years). However, PPOs are already the better solution, and the MoJ should put effort into incentivising their broader use.
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