It is often the case that compensation payments for the more serious personal injuries include an element of damages to compensate for future loss. This can include, for example, future loss of earnings or future costs of care. When an injured party receives a lump sum award of damages for such future losses, a “discount rate” is applied by the courts when finalising the award. This is to reflect the fact that the injured party is receiving the money up front and can be expected to earn money on the lump sum by investing it.
The percentage discount rate is linked in law to returns on the lowest risk investments, typically index linked gilts. The discount rate was set at 2.5% in 2001 and has remained unchanged since, during which time interest rates and gilt returns have of course plummeted. As a result, the Lord Chancellor, Elizabeth Truss, announced on 27 February 2017 that the discount rate will be lowered from 2.5% to minus 0.75%. This change is to be welcomed as it will have the effect of increasing compensation payments for future losses and will be fairer to those receiving compensation for such losses.
The government also announced that it will launch a consultation in the coming weeks to consider options for reform, including whether the rate should in future be set by an independent body; whether more frequent reviews would improve predictability and certainty for all parties; and whether the methodology is appropriate for the future.
The new discount rate will come into effect on 20 March 2017.
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