Assessing the impact of the discount rate

View profile for Christine Bunting
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The discount rate is the method used to calculate lump sum compensation awards for those who have experienced life-changing injuries.  

It adjusts the value of the compensation awarded, to take into account the interest that it would be expected to earn over the course of the recipient’s lifetime, if it was invested as a lump sum. 

Earlier this year, the Government announced its decision to reduce the discount rate from 2.5% to minus 0.75%. This welcome change took effect from 20 March 2017.

Up until that point, the rate had remained the same for 15 years! Back then, the rate was more or less accepted but in the past few years, we’ve had the financial crisis and an economic slowdown, which has meant the days of high interest rates are a long, distant memory.

Before the discount rate change, seriously injured people were being under-compensated and faced the possibility that the funds they needed to pay for their essential care and support would run out. The good news is that following the change, there will be an increase in the value of awards that the insurers of defendants will be required to pay.

However, it’s not all good news for claimants. The rate change has created challenges in other areas such as the calculation of the part of the award which deals with accommodation costs.

The insurance industry has been vocal in its opposition to the change. It would appear that many insurers are proposing to pass on the additional compensation costs to their policy holders by increasing insurance premiums.

To date, the discount rate remains under constant review and pending the outcome of that review, it seems likely that more heated arguments and challenges will ensue due to the impact it will have on both claimant and defendant personal injury lawyers, insurers and it seems, their policy holders.

Implications for deputies and trustees

In light of this, it’s important that both lay and professional Court of Protection deputies and trustees of Personal Injury Trusts consider the impact any proposed discount rate changes will have on the management of the funds for which they are responsible.

In cases where there is ongoing litigation, deputies and trustees will need to exercise caution when it comes to spending any available funds to take into account what the final compensation amount may be.

Given the uncertainty around discount rates, deputies and trustees should take nothing for granted and ensure any planned spend is budgeted accordingly as there are no guarantees about the level of funds that will be received.

In those cases where the compensation award has already been made and includes periodical payments, deputies or trustees should ensure that the payments they receive have been correctly calculated.  Some periodical payment awards are linked to the discount rate and additional payments may now be due.  The terms of the final settlement order should be reviewed and if necessary, specialist advice should be taken.

If you would like more advice on how the discount rate may impact on deputies and trustees or any aspect of Court of Protection deputyship services or Personal Injury Trusts, please contact Kelly Knight at Hyphen Law on 0845 160 2504 or email: info@hyphenlaw.co.uk.