The consultation paper, published yesterday, seeks views on two subjects relating to the setting of the discount rate under section 1 of the Damages Act 1996:
- Whether the legal parameters defining how the rate is set should be changed.
- Whether there is a case for encouraging the use of periodical payment orders instead of lump sum payments.
Christopher Malla, partner at Kennedys, which acts for a range of personal injury compensators, says:
“The government is now asking whether the current discount rate is too low. The consultation accepts there is evidence to show recipients of lump sum awards do not invest in index-linked government stocks (ILGS) but invest in a mixed portfolio where the rate of return is greater than ILGS and the current DR of 2.5 per cent. Our work on the first discount rate consultation also indicated this, and the onus must now be on claimants to provide real evidence they invest solely in ILGS and that their compensation runs out because it is insufficient.
“The government also wants to understand why periodical payments are not used more widely. We regularly ask the same question. If claimants want risk-free protection in high-value claims, they should avoid a lump-sum payment in favour of an annual periodical payment, which would be index linked, tax free and paid for the duration of their life regardless of actual life expectancy. If not, then they should not be treated as a special investor.
“Life expectancy is the other major constituent in calculating a claimant's lump sum award. The accuracy or otherwise of life expectancy estimates used to calculate lump sum awards may provide even greater reason for claimants to opt for periodical payments.”
Whilst this consultation acknowledges (paragraph 6) the potential increased cost to the tax payer and consumers if the rate is reduced, it does make clear (paragraph 35) that the identity and impact on the defendant is irrelevant.
Christopher Malla continues:
“We look forward to working with all parties with a stake in this important issue with a view to achieving a fair and balanced outcome."
This consultation follows the earlier consultation that closed in October 2012 on the methodology to be used in setting the personal injury discount rate. The consultation period runs for 12 weeks until 7 May 2013.
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