The Ministry of Justice (MoJ) announced yesterday (February 12th) that it has opened a second part to a consultation with the legal and insurance professions that began last year on the potential rise in the discount rate used to calculate deductions from compensation awards.
In the paper accompanying the second consultation, the MoJ said there was evidence that the recipients of lump sums ‘do not invest in the cautious way that is envisaged by the guidelines’.
The current rate of 2.5 per cent was set in 2001 and was based on yields of Index-Linked Government Gilts (ILGs) but the Government emphasised in its introduction to the consultation that it had ‘no provisional preference’ about how to set the rate.
The MoJ paper said that the initial evidence indicates that successful claimants seem to invest in mixed portfolios, including higher risk investments, which may be the result of a number of factors, but it might suggest that the current legal parameters for setting the rate may produce a rate that is too low.
If that were the case, it would result in over-compensation for claimants and extra cost for defendants and those who fund them. These unnecessary costs could unfairly increase the burden on taxpayers and consumers as ultimately they have to fund the payments by state bodies and private insurers.
However, if the rate is too high, it is the victims of wrongful personal injury who will suffer.
Claimant groups have argued the rate is out of date and leaves some injured people under-compensated by hundreds of thousands of pounds. The Association of Personal Injury Lawyers had threatened a judicial review over the issue until the MoJ offered a consultation.
The Association of British Insurers has argued that a smaller discount to compensation payments would have an immediate cost to insurers that would likely be passed onto consumers through higher premiums.
The consultation will run to 7 May.