The new personal injury discount rate

On 2 December 2024, the Lord Chancellor announced that the personal injury discount rate (PIDR) would increase from -0.25% to +0.5%. The change took effect on 11 January 2025 and will significantly impact serious injury claims.

The announcement follows a lengthy review period of consultations with stakeholders, during which there was considerable uncertainty over what the rate would be, or whether there would even be a switch to dual or multiple rates, either by duration or type of loss. The determination of the new rate will enable both claimant and defendant lawyers to better assess and advise their clients on likely damages, as well as progressing settlement negotiations.

The PIDR plays a fundamental role in compensation for serious injury claimants and the new rate provides stability for the next five years and across the sector. Reactions to the new rate have been largely positive.

For defendants, the new rate has been viewed as a welcome outcome for insurers, offering stability for liability reserves and pricing. Some insurers have also restated the long-standing promise that lower levels of damages resulting from this new rate will allow the sector to meet the continued demand for lower insurance premiums.

The fear of the unknown, notably around the use of economic scenario generators in PIDR modelling had caused some claimant lawyers to worry that a rate of 1% or more may have been coming. However, the initial relief that it is not that bad is balanced against the fact that their clients with long-term disabling injuries will be recovering materially lower lump sum damages.

The new rate of +0.5% is, however, not without its drawbacks, with the practical effect of this increased rate reducing lump sum payments for claimants by up to about 25%, depending on the likely length of their future losses. For illustration purposes, a claimant with annual losses of £200,000 per year over an estimated period of 60 years would see a £2.58 million reduction in their lump sum compensation compared to the outgoing rate of -0.25%. 

Indeed, in the government’s own impact assessment, the reduction in damages was considered likely to produce ‘savings to insurers of around £150m per annum and expected savings to public bodies (mainly the NHS) of roughly £200m per annum’. 

How was the rate arrived at? 

Pursuant to the Civil Liability Act 2018 (CLA 2018), the Ministry of Justice (MOJ) convened an expert panel to advise the Lord Chancellor on setting the rate. This is the first time that this type of panel has advised on setting the rate under the CLA 2018, although under the previous regime the MOJ had convened an expert panel back in 2015. In contrast, the equivalent legislation in Northern Ireland and Scotland makes no provision for such a panel and has the Government Actuary rather than the Lord Chancellor as the rate setter.

The expert panel’s approach was to define three core claimants and then model the likely outcomes for them based on differing assumptions. The resulting new rate involves a significant risk of both under and over compensation for all three core claimants, which is inherent in the methodology under the CLA 2018 that requires claimants to take investment risk with their compensation to try and make it last. The resultant modelling revealed that 45% of claimants with a 20-year claim for £500,000 were, based on the applicable assumptions, projected to be under compensated and 25% of claimants with a 60-year claim for £5 million would be significantly under compensated. It could be said that with this degree of risk of under compensation is at odds with the principles of full compensation. Claimants unlike insurers do not pool their funds, so any over compensation for one claimant does not offset the under compensation of another. 

It was acknowledged that those with a short life expectancy and/or a high-value claim will be most adversely affected by the new rate. The expert panel’s report did not reveal what proportion of claims (or claim value) related to claimants with a life expectancy of lower than 20 years. This may in part be because they largely relied on ABI data, which did not allow for impaired life expectancy as is common in truly catastrophic injury claims. Table 17 of the GAD’s appended analysis shows that, while the proportion of total awards over £5m in the data submitted by the ABI was only 3%, it is the damages banding which forms the largest proportion of total lump sums, around 33%. Given the significance, both in value and importance, of these large and impaired life expectancy claims it is disappointing that they were not represented by a 4th core claimant. 

The new rate presents a conundrum for seriously injured claimants, their deputies, trustees and investment advisors as to whether they should seek to reduce their outgoings or take a greater level of investment risk to ensure their needs are met. Any downturn in investment returns, or rise in inflation, will increase the burden on claimant’s to either reduce their spending on care or increase their risk appetite to try to ensure that they are catered for throughout their lifetimes. The new rate also increases the chance of claimants ultimately being forced to fall back on the support of the NHS and the welfare state, which in turn places a renewed importance on the availability of periodical payment orders (PPOs). 

The expert panel acknowledged that ‘Claimants with a lump sum are exposed to longevity risks, in that they could live longer than is allowed for in the settlement. Where available, PPOs can provide greater certainty to a claimant and hence remove some investment and longevity risk’. It was also acknowledged by the government in the impact assessment that the reduction in the level of damages may cause ‘some reduction in the availability of Periodic Payment Orders (PPOs) to some claimants’, leaving perhaps a larger number of claimants having to balance lower damages awards against their needs for life.

PPOs continue to be under utilised in personal injury claims against insurers, whereas clinical negligence claims, in which the state (NHS) is the indemnifier, have a greater likelihood of a PPO being agreed. The experts acknowledged that a PPO can provide ‘greater certainty’ for claimants. Hopefully, the Civil Justice Council or Civil Procedure Rule Committee will now look into reform of the PPO regime to increase the adoption rate to ensure that claimants are not left without sufficient compensation to cover their care needs for life. 

Methodologies and the differing UK jurisdictions

Earlier this year, the new PIDR rates for Scotland and Northern Ireland were both set at +0.5%. Whilst the methodology across the UK differs, claimants and defendants alike are welcoming the move to a universal rate across England and Wales, Scotland and Northern Ireland. Most significantly for claimants, this reduces the risk of unfairness posed by a ‘postcode lottery’ of discount rates. However, such a disparity continues to persist in other areas, notably fatal accident claims, with bereavement damages in England remaining woefully below that allowed in Scotland.

The Forum of Complex Injury Solicitors (FOCIS) and the Association of Personal Injury Lawyers (APIL) had already made a joint Freedom of Information Act request relating to the Government Actuarial Department’s methodology used in calculating the Scottish and Northern Ireland rates, in which long-term earnings were estimated at a materially lower rate than the long-term projections of the Office of Budgetary Responsibility (OBR).

As a similar surprisingly low assumption has been made for England and Wales, that is likely to be an area of ongoing challenge. It is also questionable whether the assumption of the ‘less cautious’ investment portfolio for the 60-year claimant is in accordance with the requirement of ‘less risk than would ordinarily be accepted by a prudent and properly advised individual investor’ under the CLA 2018.

The practical implications for practitioners

For both claimants and defendants, the wait for this much anticipated change caused some negotiations to stall and there is understandable relief on both sides that the setting of the new rate will now enable the settlement discussions to progress in many claims.

A key aspect of the Lord Chancellor’s review was her decision not to adopt dual or multiple rates. Respondents to the call for evidence, from both the claimant and defendant side, overwhelmingly opposed the introduction of dual or multiple rates, largely due to the additional costs and complexity this would introduce. Looking forward, the expert panel’s report notes this conclusion is ‘likely to persist in future reviews’ unless there are significant changes in opinion or claim features. So, it looks like the single rate is here to stay for the foreseeable future.

The change will not have any impact on claims for the costs of purchasing and adapting accommodation as, following the decision in Swift v Carpenter, these calculations no longer utilise the PIDR. It is noteworthy that the expert panel adopted the recommendation by both FOCIS and Stewarts that accommodation should be excluded from the calculations of the weighting of earnings and prices inflationary losses. This resulted in the range of 65-85% being estimated as earnings related, but with residual uncertainty over how to assess inflation in medical treatment costs.

Finally, and very helpfully, the 8th edition of the Ogden Tables already includes appropriate multipliers, so practitioners will be able to adapt to the new rate from 11 January 2025 as seamlessly as possible.