Personal Injury Discount Rate – change afoot!

The Personal Injury Discount Rate (PIDR)

The Personal Injury Discount Rate (PIDR) is used to assess lump-sum awards of damages – for future period lost earnings, pensions, and care costs. A review of the PIDR is underway and from January 2025, a new PIDR is likely to be in place.

There are different PIDR rates, and review processes, for England & Wales, Northern Ireland, Scotland (collectively the UK) and Isle of Man, Jersey, and Guernsey (the latter divided by 27 miles of water) are their own jurisdictions.

Implications of Changes to the PIDR

The spectre of change to the PIDR has huge implications for the settlement of injury cases over the next few months in the UK, and it is worth reflecting on the background and what change to the PIDR potentially means.

Aim of Financial Compensation in Personal Injury Cases

The aim of financial compensation with personal injury cases in England & Wales is to put the claimant in the position they would have been but for the negligent event to the extent money can achieve that.

Obviously, lawyers are aware of that, but I find claimants do not always appreciate how this principle plays out within their claim.

Importance of Future Losses and Special Damages

In most of the cases I deal with, future losses and special damages are by far the largest part of the financial settlement:

we are often talking of very significant ‘life-changing’ sums of money – and that can be the case with an offer of settlement that can be and should be higher.

Challenges in Assessing Compensation

Taking our forensic quantum reports (maybe addressing business-related lost profits), the ranges addressed can significantly increase the potential values of a case, often way beyond what may have been first envisaged.

So, a claimant may be trying to understand the pros & cons of what a bewildering array of potential compensation sums may be – ‘picking the bones’ from that is not easy if you are the one that is injured and must make the compensation last.

Even more troubling if it is not a case of 100% liability – and there are significant future care needs.

The Emotional Impact of Large Settlements

So, for the claimant (and often their close family) there may be times where the talk will be about ‘eye wateringly’ large sums of money. This can be ‘heady stuff’ for people that may have in the past lived for pay-day, juggling bills, ever-increasing living costs, and taking care to ‘make ends meet’.

This can rear its head when dealing with the Schedule of Loss – that may be putting a best case. Then along comes paperwork putting the counterclaim at a significantly lower value.

I’m aware that good claimant legal teams work hard to manage these issues as a claim progresses, and particularly ahead of a JSM, Mediation, or Trial.

Ok let’s get back to the issue of the PIDR

At the macro-level, the challenge is that, depending on the portfolio investment risks taken, advanced receipt of compensation means that damages can be invested such that returns exceed inflation.

With more recent higher interest rates, there are concerns that in the UK, claimants are overcompensated for their future losses.

Understanding the Multiplier/Multiplicand Process

With personal injury loss quantum, the value of a future losses lump sum is set by a process of “multiplier/multiplicand”.

• The Multiplicand: The multiplicand is the annual loss the claimant is expected to suffer at current values.

• The Multiplier: The multiplier comes from actuarial tables that take account of statistical data (mortality, age at trial, gender, some other risk characteristics) and the personal injury discount rate (PIDR).

The Purpose of the PIDR

The PIDR is meant to be the rate of return (after management costs and taxes) of an investment portfolio (with an appropriate level of risk) operating over the claimant’s lifetime such that there is £nil left when the claimant reaches the end of their life. So, nothing theoretical about that!

Practical Adjustments via the PIDR

In more practical terms, the PIDR adjusts the amount of compensation that a claimant will receive to the Net Present Value (or NPV) as at the date of trial. It adjusts for the ‘time value of money’, on the basis that elements of a damages award can be invested and generate a return until the money is needed.

Current PIDR and It’s Implications

The current PIDR is minus 0.25%. Being a minus figure means that future losses have to be ‘topped up’ because it is expected that the investment portfolio the claimant will use (with the appropriate level of risk) will lose value over time.

The Historical Context: How Did We Get Here?

Well, the Damages Act 1996 requires that a Court takes account of the rate of return prescribed from time to time by the Lord Chancellor. By 1999, no such rate had been prescribed.

The Wells v Wells Case and Initial PIDR Setting

In 1999, the House of Lords (in Wells v Wells) assumed that claimants would invest in very low-risk products and mapped the discount rate to index-linked government stocks. A 3% discount rate was applied.

Changes in the Early 2000s

In 2001, the Lord Chancellor prescribed a rate of 2.5%. However, because market interest rates and inflation were relatively low, in 2017 this was revised to a rate of minus 0.75%.

The Impact of the 2017 PIDR Change

At the time, the impact of the PIDR change (swinging to a minus figure) was staggering. Imagine having settled a catastrophic claim in 2016 – compared with 2017 or 2018.

I well recall receiving frantic telephone calls asking me to recalculate Loss Quantum using a PIDR of minus 0.75% – ahead of JSMs happening – that week.

The Civil Liability Act 2018 and Its Consequences

Next up was the Civil Liability Act 2018. This altered the formulation of the discount rate. The Lord Chancellor now has to assume investment in a mixed portfolio of low risk, rather than very low-risk investments as had previously been the case – so not just government-linked stocks.

Also, account must be taken for tax, inflation, and investment management costs. There are variations in the requirements between the different legal jurisdictions.

The 2019 PIDR Revision And The Imminent 2024 PIDR Review

Now we come to 2019 – and the Lord Chancellor prescribed the rate to be minus 0.25% and determined that this would be reviewed 5 years thereafter.

Well, here we are in the Summer of 2024 – and the Lord Chancellor must determine the PIDR rate by January 2025. So, change is about to happen.

What about dual or blended PIDRs?

Exploring Dual or Blended PIDRs

So far, I have talked about one PIDR – one interest rate. It is worth noting that there has been a consultation process about Single vs Dual/Multiple PIDRs.

The idea behind Dual, Multiple, or Blended PIDRs is that these can better accommodate individual circumstances facing claimants.

Considerations in Investment Risks and Inflation

Issues at play are, for example, that generally, investment risk tends to be higher over shorter periods, and running short on the care costs part of the damages award has a greater implication than running short on lost profits.

Or where different rates of inflation apply to different heads of loss – where perhaps at play are different inflation pressures for future care costs versus future earnings.

Examples of Multi-PIDRs in Practice

Multi-PIDRs are already in use elsewhere – close to home, Jersey has two PIDRs based on the length of future loss claims; Ireland differentiates between future care costs and non-care cost future losses; Hong Kong applies different PIDRs for 5-years, 10-years, and over 10-years (reflecting that investment risks change over time).

An Illustration Of The Impact Of Various Single PIDRs

The table below gives an illustration of the impact of different PIDRs on an annual future earnings loss of £1,000 for a male aged 30 at trial, retiring at age 68.

So, what will happen with the PIDR from January 2025?

May be It’s worth noting that in November 2023 The Isle of Man’s Treasury Department, supported by the UK Government’ Actuary’s Department completed its review and moved their PIDR from minus 0.25% to 1% Source 

When it comes to what will happen with the PIDR from January 2025, I make no further comment. Your guess is as good as mine!