Catastrophic injury: MoJ research on the discount rate, what is the value?
Where are we currently up to on the long running saga of the discount rate that has now been at 2.5% for 12 years?
It is of course going to be an important decision by Government when it comes as if it is to lower the rate, future loss claims are going to become much larger. The MoJ’s second consultation closed in May this year and considered the legal framework for setting the rate. While there is no response to that consultation from Government yet, there has been a recent development in the publishing by the MoJ of research carried out on its behalf by the Ipsos MORI Social Research Institute as part of its ongoing consideration of the level of the discount rate. What does it all mean?
The aim of the research is stated to be to:
- Understand the profile of settlements affected by the discount rate;
- Outline how, in practice, the discount rate is used when agreeing a lump sum settlement and how a change in the discount rate might impact on the process and the final settlement.
- Understand how any changes in the level of settlement will affect investment and other decisions made by claimants.
Only a very small sample was used to produce the report. There were two phases to the research, the first involving 14 stakeholders including, claimant and defendant lawyers, a Court of Protection representative together with a number of claimant financial advisers and case managers. The second phase comprised a more detailed review of claimant experiences. Participants in this phase included three professional deputies and nine claimants (or those representing them, including carers and lay deputies). The nine claimants had received lump sum settlements (i.e. there were no PPOs) and of those, six had been paid their settlements between 1990 and 2005, and three after 2005.
The research reveals some 70,000 plus cases settled per year on average between 2009-2012 were subject to the discount rate, these being the "higher value" cases, yet no definition is given as to what is meant by this value level. The figure for the number of settled cases is not broken down so it is impossible to be more accurate other than to say that obviously there will be substantially more cases settled at the lower end than those above £1m. In reality there are therefore far fewer cases than suggested which would be potentially affected by any variation to the discount rate. That said it is important that the report acknowledges as it does that even a small reduction would have a significant impact on the insurance industry and public bodies. The cases in fact looked at within the study appear to have been catastrophic type claims.
The report reveals more about the behavioural patterns of claimants post settlement and their attitude to risk rather than any influence the discount rate may have had during the negotiation process beforehand. Even when presented with the hypothetical situation of receiving a higher settlement, their approach to its investment did not usually differ. Those who expressed concern seemed more dissatisfied with the settlement as being low but no explanation is offered as to why; whether this was a consequence of the discount rate or for any other reason such as the risks faced in proving aspects of their case, the reasons are simply not known. Those claimants who were happy with compensation levels seem to be more accepting of a degree of risk with their investments.
The last consultation had accepted that there was evidence that claimants do not always invest cautiously with their settlements, but prefer a mixed range of investments, with a concern that this if true would lead to overcompensation. The new report says that claimants do not generally consult a financial adviser unless their lawyer strongly advises them to do so, but if they do then they would generally take on a mixed portfolio of investments chosen to meet their needs, and while there is unfortunately no detailed analysis carried out of these, examples given include lower risk products such as gilts, fixed interest accounts and National Savings, as well as higher risks investments such as equities, commodities, property and hedge funds.
The overall picture is that claimants worry that the money will not last, but there is nothing to say whether there is any basis for this fear or it is merely a subconscious concern. Either way, it has in turn often led claimants to adopt a very cautious investment strategy. The only example of when a more speculative approach has been taken was when it was recognised early on that the damages would not last. Again though, no details are provided as to why this may have been the case. Whereas the principle of a lump sum award in a catastrophic type claim is of course that it should last the claimant’s lifetime but no longer, some of the claimants in the study wanted to use the money in other ways, such as avoiding spending elements of it so as to leave money for their children to inherit. This type of approach is surely likely to run into difficulty whatever the level of the discount rate.
One of a number of disappointing aspects about the report is the lack of examples of any settlements from around 2001, when the current rate was set, highlighting the performance of the investments over this period but more importantly revealing whether the fund has been depleted more slowly or more quickly than intended, has seen net growth or worse still run out.
The compilers of the report recognise the short comings in their research due in no small part to the lack of readily available evidence and data out in the market. It is equally questionable whether the small sample interviewed could be truly representative of the 70,000 or so claims it is suggested are affected by the discount rate. It is surprising that the MoJ did not commission a more complete study on an important issue such as this.
The report must be seen as a lost opportunity to have considered more forensically the points covered, but also further aspects such as whether there were key differences between the sums claimed and awarded, and how the settlement was used in practice. There seemed a willingness of those interviewed to continue to use the State’s resources post settlement. Did this include for instance claiming for the costs of care to be paid privately but in fact using a publicly funded or voluntarily provided service?
As for next steps, the MoJ have not indicated what they propose and are still considering the options. Nor do we have any indication of when their response to the consultation process is due although the paucity of empirical data from this study will, we suspect, prevent a speedy response if they were looking for some more definitive conclusions. It looks as though we may hear nothing more now until 2014.
One thing clear from the report is that despite general dissatisfaction with current investment returns the approach taken by claimants would remain risk averse even if the discount rate were reduced. This surely provides no compelling reason to justify reducing the discount rate. If anything, the findings of the report probably give at least some pointers towards a decision being made in favour of the status quo being preserved at the end of the consultation process. If that was the final result, then uplifts in current reserve levels will not be needed by insurers and the long deliberation process in Government will probably be thought to have been worthwhile.
For more detailed information see the MoJ research on discount rates.
This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.