Re-counting the discount rate

personal injury

The 2.5% personal injury discount rate could be reduced to take account of the current value of Gilts yields.  A long-awaited Ministry of Justice (MoJ) consultation – “Damages Act 1996: the discount rate” – will examine whether the rate should be re-calculated using up-to-date data on Gilts, or whether the rate should be based on the returns from a mixed portfolio of investments.

The discount rate is applied because injured people usually receive their compensation, which is intended to make up for future loss of earnings, in a one-off lump sum payment. Claimants often invest this money, therefore the courts make adjustments to ensure the claimant is not over-compensated.

In making this calculation, the courts follow guidance laid down by the House of Lords in the case of Wells v Wells [1999] 1 AC 345. They apply a discount rate of 2.5%, although courts may decide a different rate is appropriate in individual cases.

This rate was set by the Lord Chancellor in 2001, under s 1 of the Damages Act 1996, and is based on predicted yields from Index-Linked Government Gilts. However, yields from these have been declining for years and claimant lawyers have argued that the rate is now set too high. The consultation ends on 23 October 2012.
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