27th February 2017
Discount Rate
Announcement
KEY MESSAGES:The wait is over!
Lord Chancellor Elizabeth
Truss announces
reduction in the ‘Discount
Rate’ to -0.75%
Roberts V Johnstone
calculations are dead
Mark Holt, Commercial
Director and Head of
Expert Witness at Frenkel
Topping Limited
comments on the impact
of today’s announcement.
As all practitioners in Personal
Injury and Clinical Negligence
cases, whether acting for the
claimant or defendant are aware,
the industry has long since been
awaiting an announcement from
the Lord Chancellor as to what
the review of the ‘Discount Rate’
would be.
The discount rate is a figure used
to calculate lump sum payments
for people who suffer a severe
personal injury, taking into
account what return they are
likely to receive when the sum is
invested.
Following the case of ‘Wells v
Wells et al’ in 1999 the rate was
set on the basis that recipients’
of damages awards should not
be treated as ordinary investors.
Taking into account an
appropriate rate for inflation
and an arbitrary calculation for
tax, the rate has remained static
at 2.5% since amended by the
then Lord Chancellor Lord Irvine
in 2001.
The methodology of calculating
an appropriate rate for claimants
was to evaluate the three year
average gross yield on indexlinked gilts and apply a marginal
deduction for tax. This was on
the basis of course that the
claimant would actually invest
solely into a basket of index
linked gilts either directly on the
primary market or via other
investment instruments within
the secondary marketplace.
On 8th November 2010 the
‘TSol’ announced that the Lord
Chancellor would commence a
review ‘Shortly’. Noteworthy at
that point is that the equivalent
discount rate had already fallen
to 0.75% on the same basis of
calculation utilising ILGS as the
benchmark.
Frenkel Topping Independent Financial Advisor – 4th Floor, Statham House, Talbot Road, Old Trafford, Manchester, M32 0FP
T: 0161 886 8000 F: 0161 886 8002 DX 20340 Salford Broadway E: [email protected]
Frenkel Topping Group Plc Registered in England No: 04726826
Frenkel Topping Ltd is a subsidiary of Frenkel Topping Group Plc and is authorised and regulated by the Financial Conduct Authority, no145186
27th February 2017
Discount Rate
Announcement
There followed two
consultations.
Consultation 1 ran from 1st
August 2012 to 23rd October
2012 and was concerned with
how the discount rate should be
set.
Consultation 2 ran from 12th
February 2013 to 7th May 2013
and was concerned with the
legal framework.
Everyone expected that the
announcement would follow the
completion of consultation 2 but
as we all know too well,
particularly when attempting the
very complex process of advising
claimants and defendants alike,
as to what an appropriate
settlement of damages should
be, the uncertainty of whether
the discount rate would change
caused many a headache.
Still the industry, with lots of
cajoling from APIL and
resistance from the ABI awaited
an announcement from the then
Lord Chancellor Rt Hon Chris
Grayling MP.
So over 6 years and 5 months
after the announcement of a
review by TSOL the wait is
finally over!
This morning on Monday 27th
February 2017 our current Lord
Chancellor Elizabeth Truss
announced that the rate would
be reduced to -0.75% having
given full consideration to the
consultations.
This is clearly a huge reduction
and one that was beyond the
campaign of APIL themselves,
who were pushing for a rate
circa -0.5%.
This rate will come into effect
from the 20th March 2017.
The initial reaction for claimants
is clearly positive as this would
now give a lifetime multiplier for
a 35 year old male with normal
life expectation as 63.36 as
opposed to 28.15. These
numbers are huge when
considering future heads of
damage over the lifetime of a
claimant particularly when
looking at large future recurrent
heads of damage such as Care
and Case Management where
required.
I mention the above two heads of
damage in particular as these are
often settled by way of
Periodical Payments (generally a
series of annual tax free indexed
payments) to the claimant as
opposed to the capital lump sum
equivalent.
I have undertaken analysis over
the course of today on a number
of large loss cases that we are
currently advising on and can
confirm that the increase ranges
in total quantum from 30% to
90% in one example. The
average increase in overall value
seems to be in the region of 4550%, something I have read
consistently throughout the day
from various reporters from
within the legal marketplace.
What then does this mean for the
Insurance/Reinsurance
marketplace that have been
resistant to settling cases on a
periodical payment basis over
recent times due to the capital
reserves required to fund such
Frenkel Topping Independent Financial Advisor – 4th Floor, Statham House, Talbot Road, Old Trafford, Manchester, M32 0FP
T: 0161 886 8000 F: 0161 886 8002 DX 20340 Salford Broadway E: [email protected]
Frenkel Topping Group Plc Registered in England No: 04726826
Frenkel Topping Ltd is a subsidiary of Frenkel Topping Group Plc and is authorised and regulated by the Financial Conduct Authority, no145186
27th February 2017
Discount Rate
Announcement
payments and advised against by
their own Actuaries?
With the compounded impact of
such a large reduction in the
discount rate then many
claimants may well look to full
and final settlement by lump
sum without the inclusion of
PPO’s. In a strange world where
situations have been turned
upside down, if not inside out
then it might well be the
defendant insurers who are
pushing for periodical payment
settlements!
However the huge rate
deduction does pose a number of
additional areas for close
consideration.
What now for ‘Roberts V
Johnstone’ calculations? The
methodology for calculating
accommodation claims has long
since come under criticism and
with a negative rate, is it really
feasible that the claimant will
owe money back to the
Defendant for a property
purchase? Clearly not and in fact
a sensible approach may well be
to follow the jurisprudence in
‘George v Pinnock’ where
compensation for mortgage
payments and increased living
cost were sought. Could this now
be a future use of Periodical
Payment Orders and avoid a
windfall to the estate of the
claimant if a property were to be
purchased outright?
Are PPO’s now really defunct
with many, if not most claimants
preferring the ‘clean break’ from
the defendant insurer and taking
the inflated lump sum.
I would raise a cautionary word
to all practitioners and advisors
here that even though the
equivalent lump sum is now that
much larger, does it now provide
the complete piece of mind that
crucial future of heads of damage
will always be financially
covered?
The pros and cons of settlement
of cases with the inclusion of
PPO’s haven’t changed following
the Lord Chancellors
announcement and if anything,
the requirement to obtain
accurate and meaningful
financial advice has increased to
ensure optimal and fair
settlement.
Another impact of course is the
use of Table 27 within the Ogden
Tables. The rate now prescribed
would suggest that the term
‘discount for early receipt’ is
obsolete, moreover being
replaced with ‘enhancement for
early receipt’ given that the
present day value of future
losses surely is of greater value
given that it is assumed that the
value will diminish each year by
0.75%.
A final note to consider is given
that Liz Truss has herself stated
that having given consideration
to the methodology of
calculation and agreed that the
three year gross yield on ILGS is
still the most appropriate
method then the only legal rate
could be -0.75%. Does this mean
that since before the TSOL even
announced the review that the
rate being used was in fact
illegal?
Frenkel Topping Independent Financial Advisor – 4th Floor, Statham House, Talbot Road, Old Trafford, Manchester, M32 0FP
T: 0161 886 8000 F: 0161 886 8002 DX 20340 Salford Broadway E: [email protected]
Frenkel Topping Group Plc Registered in England No: 04726826
Frenkel Topping Ltd is a subsidiary of Frenkel Topping Group Plc and is authorised and regulated by the Financial Conduct Authority, no145186
27th February 2017
Discount Rate
Announcement
The days to follow will
undoubtedly give rise to many
discussions including what the
ABI’s next move will be.
If you require any urgent
assistance on current cases that
you have been working on then
either myself or one of my team
of ‘Expert Financial Consultants’
would be delighted to assist you.
Mark S. Holt MLIBF Dip
Commercial Director
07824 356083
[email protected]
Frenkel Topping Independent Financial Advisor – 4th Floor, Statham House, Talbot Road, Old Trafford, Manchester, M32 0FP
T: 0161 886 8000 F: 0161 886 8002 DX 20340 Salford Broadway E: [email protected]
Frenkel Topping Group Plc Registered in England No: 04726826
Frenkel Topping Ltd is a subsidiary of Frenkel Topping Group Plc and is authorised and regulated by the Financial Conduct Authority, no145186
Pensions for Carers
Frenkel Topping Independent Financial Advisor – 4th Floor, Statham House, Talbot Road, Old Trafford, Manchester, M32 0FP
T: 0161 886 8000 F: 0161 886 8002 DX 20340 Salford Broadway E: [email protected]
Frenkel Topping Group Plc Registered in England No: 04726826
Frenkel Topping Ltd is a subsidiary of Frenkel Topping Group Plc and is authorised and regulated by the Financial Conduct Authority, no145186