The Personal Injury Discount Rate Under Review

The Personal Injury Discount Rate (PIDR) is under review which could lead to significant changes for seriously injured people.

The purpose of the PIDR is to make sure Claimants who have been wrongfully injured are put in the same position they would have been in if their accident had not taken place. The PIDR is a percentage figure used to discount awards of damages for future losses and expenses to take account of investment returns from the lump sum they often receive and which they are assumed to invest on the open market, adjusted for future inflation and taxation.

The discount rate was set at 2.5% for many years but in 2017 falling returns on investments prompted the Lord Chancellor to change the rate to -0.75%. This effectively topped up the injured person’s futures award to reflect the likelihood of their lump sum being eroded over time by inflation. This decision was met with significant backlash from insurers who warned of soaring settlement costs and increased insurance premiums. The reality was that for many years the rate had been too high and had effectively meant victims were undercompensated.

In July 2019, following a government review, the PIDR was increased to -0.25%. Under the Civil Liability Act 2018 the PIDR has to be reviewed within a five-year period, with an expert panel being assembled to advise the government. To assist in the review, the government put out a call for evidence ending in April 2024. The questions to stakeholders included questions relating to claimant characteristics, to help identify a representative claimant profile; inflation of claimant damages over time; investments and investment strategy of claimants; investor expenses and taxation. The consultation provides evidence for the expert panel to tailor the assumptions which must be made in order to estimate whether the discount rate will balance predicted rates of under and over-compensation.

A certain level of under-compensation is expected by the government, with a predicted third of claimants not being fully compensated under the current rate. Furthermore, the predicted rates of compensation are based on the assumption that claimants are low risk investors, rather than very low risk investors, as had previously been assumed in the House of Lords decision in Wells v Wells [1999] 1 AC 345. This new assumption has been challenged by the Association of Personal Injury Lawyers who note that injured people are not ordinary investors and are inherently risk averse as they are investing to meet their needs for the rest of their lives.

In addition to setting the PIDR, the government is considering introducing dual or multiple rates. A proposal for a dual rate system was presented by the Government Actuary with the July 2019 PIDR review, recommending setting a lower short-term rate, where returns are expected to be lower, and then moving to a higher long-term rate following an appropriate switchover period, where expected returns are higher. Changing rates could address issues with the single rate, such as higher investment risk for those with shorter awards and different rates of inflation for different heads of loss being inadequately accounted for under a single PIDR. The government consulted stakeholders on this issue in 2023, seeking views on a number of different models. The government response shows that, whilst stakeholders see potential benefits to those with short term losses, there are significant concerns that a dual or multiple rate will add complexity, cause uncertainty and delay, and prejudice younger and more seriously injured claimants. In the latest PIDR consultation, the government has asked stakeholders further specific questions on this topic and appears to be leaning towards a dual rate model based on the system used in Ontario, Canada.

The expert panel, chaired by the Government Actuary, will commence its review by 15 July 2024. We trust the interests of all parties, and not just those of insurers, will have an equal bearing on the outcome.

If you have had an accident that is not your fault, it is important for you to seek advice from a specialist personal injury lawyer to ensure that you get advice on all of the potential issues that could affect your claim. Call our experts now on 0330 822 3451 or request a callback online.