In an article first published in the 7 February edition of New Law Journal, Head of International Injury and Aviation Julian Chamberlayne reviews the new personal injury discount rate and highlights some potential weak spots.

On 11 January 2025, the personal injury discount rate (PIDR) for England and Wales increased from -0.25% to +0.5%. This was the first occasion on which this rate was set under the Civil Liability Act 2018 (CLA 2018) with reliance on a detailed report from an expert panel, who themselves were informed by an appended analytical report from the Government Actuary’s Department (GAD) and by economic scenario generator (ESG) modelling understood to have been performed by two external providers.

This preliminary analysis considers whether the decision-making in setting this rate is vulnerable to challenge by judicial review.

Earnings inflation

The first ground that appears vulnerable to challenge is the assumption of earnings inflation of just 1.25-1.5 percentage points (PP). This ground has already been probed by the Forum of Complex Injury Solicitors (FOCIS) and the Association of Personal Injury Lawyers (APIL), who made a Freedom of Information Act request in autumn 2024 relating to the similar, but not identical, decision made in the context of the Government Actuary (GA) setting the rate in Scotland and Northern Ireland.

I commented on this previously in NLJ, to query on what evidence had the GA felt able to materially depart from the projections of the Office of Budgetary Responsibility (OBR), whose longer-term outlook has earnings stabilising at CPI +1.8PP from 2036 (see ‘Crunching the numbers: the personal injury discount rate’, 174 NLJ 8092, pp15-17).

The GAD was unwilling to provide a response pending the announcement of the new rate for England and Wales, but has now confirmed that the additional evidential sources they relied on were their own technical committee and two economists who replied to the call for evidence. The first was Professor Victoria Wass, an expert who has given evidence accepted in many of the seminal injury cases relating to earnings inflation over the last 30 years. Acting in an independent capacity, she responded that ‘future trends in wage growth in care will be shaped by population ageing… my recommendation is for current care cost inflation at CPI+1.7PP rising to CPI+2.0PP for future care cost inflation’. The second was Oxford Economics, whose submission was commissioned by the Association of British Insurers (ABI). They expected long-run average earnings growth in the UK to be around 1.25PP higher than price inflation.

The GAD confirmed they did consult with the OBR, who pointed them to their above published longer-term outlook of 1.8PP. They also confirmed they did not consult with the Treasury, who would presumably have views on how inflation would affect long-term economic policy. If the same position prevailed a few months later, when the Lord Chancellor set the rate in England and Wales, then that would appear to breach the obligation under Sch A1, s 2(4), CLA 2018 to consult with the Treasury.

I also question why, having adopted a methodology of varying most of the other assumptions for the three core claimants, they do not adopt that for the earnings inflation differential when there appears to be consensus that it is expected to be higher over longer periods.

Without changing their methodology, and even if they had valid reasons for departing from the OBR’s projections, they could, say, have assumed 1.25PP for the 20-year claimant, 1.5PP for 40-year and 1.75PP for the 60-year claimant.

Assumed investment portfolios

The second potential ground relates to the risk profiles of assumed investment portfolios. The high point of this is whether the ‘less cautious’ portfolio for the 60Y claimant is compatible with CLA 2018. I posed this question to expert independent financial adviser Richard Cropper of PFP, who responded:

‘I do not consider it reasonable to assume that any vulnerable claimant investing in a manner that accepts more risk than a very low level of risk, but less risk than would ordinarily be accepted by a prudent and properly advised individual investor who has different financial aims, should be exposed to 60% “higher risk” assets… Furthermore, a claimant with a duration of 20 years should not be advised to hold 40% of their invested capital higher risk assets over that entire period. I consider that this is inconsistent with the assumed level of risk and with reasonably appropriate financial advice.’

De-risking over time

Thirdly, there is no justification for not modelling the reality of de-risking investment portfolios over time. As Richard Cropper explains:

‘For example, 20 years post-settlement, a claimant with a 60-year duration at the point of settlement would have 40 years of life remaining. At that point, it is reasonable to assume that the risk profile of the portfolio would be adjusted in line with the 40-year model. After a further 20 years, a claimant with a 60-year duration at the point of settlement would have 20 years of life remaining. At that point, it is reasonable to assume that the risk profile of the portfolio would be adjusted in line with the 20- year model.’

Methodology for the core claimants

Aspects of the methodology and the interpretation of the related evidence are questionable. Firstly, the experts have used the ABI dataset as their primary evidential source for the likely period and size of future loss awards. It was unquestionably the largest dataset they received, but it came with the serious acknowledged flaw of assuming normal life expectancy.

In my experience, the vast majority of multi-million-pound injury claims involve impaired life expectancy, or are fatal accident claims with the main loss period relating to retirement age. I also question the evidence that led to the assumption that the highest value claims have the longest duration of future losses.

Most of the claims for £5m or £10m will relate to impaired life future loss periods of between 20 and 40 years. Conversely, young claimants with unimpaired life expectancy who might have a 60-year period of loss will in my experience have a wider spread of losses, often with much lower annual needs. Reduced life expectancy usually correlates with higher needs.

This brings me to the next related point, which Richard Cropper has raised, that it is ‘inappropriate to predetermine the size of the award to be modelled, rather than the level of annual need, as the level of award will be impacted by the applied PIDR’, as illustrated by the following table:

The panel noted that, while a majority of lump sums would be less than £500k, the larger claims are those that are most significantly impacted by the PIDR and represent a large proportion of the total value of claims. As shown in table 17 in the expert panel report, even on the ABI dataset and focusing on size of award rather than annual need, 80% of claim value relates to claims >£1m; 33% are >£5m. The data submitted by FOCIS was that 69% of the total value of all those cases were in the ranges £3-10m (39%) or £10m+ (30%).

The GAD analytic report at 1.13 acknowledges that a claimant with a large lump sum of £10m+ would have a net median return marginally below the core range. Why was that not properly reflected in the assumed damages for the three core claimants?

It is arguable that both the selection of the core claimants by reference to the number of claims, rather than claim value, and the assumption that the higher value claims have 60-year loss periods, is discriminatory to those with disabling injuries, whose claims are likely to be higher value and are more likely to involve impaired life expectancy.

Evidence-based range

The fifth ground is that in the numerous instances where there is a range based on the evidence, the expert panel have adopted the least favourable figure to claimants rather than the mid-point. Examples of this include:

• The above point on the earnings inflation differential where the range was 1.25- 2PP, but was clipped to 1.25-1.5PP. It would seem the mid-point of that clipped range was then taken to arrive at the CPI+1% figure (assuming about 75% of future losses are earnings related).
• Why were £500k and £1m selected to represent two thirds of the core claimants, when by claim value they collectively amount to about 21% of the ABI dataset? Likewise, why were claims worth materially more than £5m (and £10m) unrepresented in the core claimants? On the adopted methodology, a more rational and representative spread of core claim values would have been £1m, £5m and £10m.
• In determining the composition of the ‘less cautious’ investment portfolio, reliance is placed on responses to the 2024 call for evidence which showed allocations to higher risk asset portfolios of around 40% to 60%. The mid-point is 50%, but 60% has been assumed.
• In relation to investment charges, table 5.5 shows a range of 0.6% to 1.3%. The mid-point of 0.9% is adopted for two of the three core claimants, with the bottom end of the range adopted for the 60-year claimant. Charges above the mid-point are not reflected in any of the core claimants.
• The assumption of just 0.2% tax for the 40-year claimant is surprisingly low and must represent the bottom end of the likely range on the assumptions adopted. This relates to the point that the assumed investment pot for this claimant at the centre of the range is millions lower than it ought to be; the tax drag on a more representative mid-point claim value would be materially higher.

I did not spot any examples of the expert panel adopting a figure more favourable to the claimant than the mid-point.

Full compensation

My final point (parking for now the important issue of longevity risk) is to question whether the decision-making in setting this rate is truly consistent with the ‘full compensation’ principle. The table on p7 shows that at the preceding PIDR of -0.25%, 76-89% of all three core claimants would achieve 100% compensation and 88-95% would achieve 90% compensation, which is closer to full compensation for all.

I acknowledge that the flipside, on these assumptions, is there is a more than 50% likelihood of significant over-compensation for the 40- and 60-year claimants—that appears to be a central justification for the panel’s recommendation for a change to the rate. However, this analysis would change if the core claimants had included, say, a 20-year claimant who recovers £5m+, any claimants recovering >£10m, and lower investment risk for 40-year and 60-year claimants.

Figure 7 in the GAD analytic report shows that 60-year claimants assumed to invest either £5m in a cautious portfolio or £10m in the central portfolio are both modelled to fall below the range of net returns assumed when setting the new PIDR. I find it a surprising omission that there was no modelling of a £10m investment in the cautious portfolio on any of the assumed durations. In my view, the choice of the three core claimants results in the risk of over-compensation being overstated and under-compensation being understated. It does not, in my view, amount to full compensation.

Concluding thoughts

I can do no better than to quote the economics expert Professor Victoria Wass that ‘determining the PIDR on the basis proposed in the CLA 2018 introduces a dubious and complex process which through obscure and unaccountable decisions is open to criticism at every turn’.

It remains to be seen whether anyone will challenge the Lord Chancellor’s decision based on some or all of these decisions, or whether the government may of its own volition realise this aspect of CLA 2018 was a mistake and that, as per the preceding Wells v Wells methodology, it is far simpler and better to avoid speculating about investment risk, behaviour and returns. Ironically, applying the Wells methodology, coupled with the CPI+1% adjustment, would have led to the same +0.5% discount rate, but by a much less contentious route.

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