In January 2023 the Ministry of Justice (MOJ) issued a call for evidence to explore the option of a dual or multiple personal injury discount rate (PIDR). Our response applies the firm’s extensive experience in preparing future loss claims for our seriously injured clients.
Future losses are by some distance the largest compensation component in complex injury claims. The discount rate affects the calculation of the hundreds of loss items that we project for the remainder of our clients’ lifetimes. If the discount rate is not set at a fair level, claimants with life changing injuries will not be fairly compensated, and even small adjustments to the discount rate might alter our clients’ compensation by hundreds of thousands or millions of pounds.
The full response is available to read here.
We agree with the responses of FOCIS and APIL, that it would be preferable to remain with a single PIDR. Should there be a change, the best option is a dual rate to reflect long-term earnings inflation on care needs as it would be fairer, more predictable and simpler than if it were by duration.
A major deterrent to adopting a dual rate by duration is the impossibility of predicting the long-term economic outlook with sufficient precision to set a discount rate for that period. The MOJ refers to 5-15 years being the potential range for a switching point, but anything less than 15 years would in our view would be dangerously short when the timescale for recovery of losses following recessionary economic cycles is considered. There is no widely accepted approach to projecting long-term investment returns. Any projections that are made are liable to change quickly and frequently. Many economists and actuaries are doubtful that the last 15-25 years are a reliable predictor of what will happen in the next 15-25 years, let alone for the majority of Claimants with materially longer life expectancy than that. Setting a long-term PIDR for a period which does not commence for many years is laden with risk, but attempting to commence the “long-term” rate after a dangerously short period would also be too risky. Together these risks vividly illustrate some of the insurmountable problems associated with the concept of dual or multiple rates by duration.
The current economic assumptions made when setting the PIDR also depart from the reality of Claimant investment practices. Most Claimants are not in a position to invest their funds immediately. Funds held for short-term needs are likely to be heavily weighted towards cash, with returns fluctuating frequently based on the immediate economic and inflationary cycle. Any losses in that initial period (against the returns assumed when setting the rate) need to be made up in order to achieve the anticipated returns and avoid under-compensation. This places significant demands on the Claimant’s portfolio and is likely to be incompatible with the professional and regulatory obligations of their investment advisors.
These risks will be exaggerated when the target rate of return has been set many years in advance. Then, as the Claimant is approaching the latter stages of life, any investment portfolio has to be de-risked, resulting in much lower returns than appear to have been assumed. Consequently, we agree with the submission of Personal Financial Planning Ltd that “a dual rate based on duration that actually reflects a claimant’s investment journey over time is unworkable in practice”.
Introducing dual rates by duration is likely to significantly complicate the preparation of schedules of loss, and the making and appraising of any offers to settle. As in Ontario it is likely to require the involvement of an expert to perform calculations in many claims, adding significant cost and delay. The potential benefit of closer matching offered by a dual rate by duration are unclear, but the greater complexities and cost are obvious and significant. So that approach fails to satisfy a cost-benefit analysis and carries with it considerable uncertainties.
We therefore support the continuation of a single PIDR but taking the opportunity of the upcoming expert panel review to look for refinements to minimise the proportion of claimants who do not receive full compensation. In this review it will be crucial to consider the evidence on the investment advice and management charges incurred by seriously injured claimants, as the evidence points to a much higher allowance for this than was adopted in 2019. In addition, a minimum -0.5% adjustment to reflect taxation on the investment portfolio is required (or higher if a short term rate were adopted).
We suggest that the GAD should include ONS longevity statistics into further analysis and modelling to inform the upcoming review by the expert panel. A final model portfolio and discount rate could then be determined, with longevity factor incorporated, to ensure no less than 5-10% of Claimants are under-compensated. Individual Claimants only have one claim and are not able to spread the economic impact of these changes across many claims and years, like institutional paying parties can.
Alongside the current PIDR review, we also suggest a review of the Periodical Payment regime to increase the use of PPOs. In our experience many Claimants wish to receive part of their compensation for future loss as a PPO (typically future care costs), but most insurers are reluctant to offer them. More can be done to require the parties to frame offers with a PPO option in appropriate cases, and to give the Court a more proactive role in determining the form of award during the case management stages.
The case for the government to make policy decisions which encourage the use of PPOs is compelling. In contrast, the policy reasons and evidence for a dual rate are mixed. If any change to the PIDR were to make PPOs less attractive, it would be a serious backward step.
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