When a compensation award is made to the victim of an accident, the actual amount of the settlement is adjusted to take into account the interest the claimant can expect to earn by investing it. This is achieved by applying a ‘discount rate’, or ‘Ogden rate’ to the sum awarded. Traditionally, the percentage rate applied has been linked to returns on lowest-risk investments – typically index-linked gilts. The lower the rate, the higher the compensation award.
The rate also applies to compensation awards by way of damages made by an Employment Tribunal for personal injury where a claimant is found to have suffered ill health – physical or psychological – as a result of unlawful discrimination or detriment. Such an award is often in the form of a compensation payment for long-term loss of earnings.
The discount rate had remained unchanged at 2.5 per cent since 2001. However, in light of the low interest rates available to investors, a new discount rate of minus 0.75 per cent was introduced with effect from 20 March 2017 in an attempt to ensure fairness to those receiving compensation. The move was heavily criticised by the insurance industry, however, and a sharp increase in motor insurance premiums followed. The Government also had to make available additional sums to cope with the knock-on effect of the change on public services with large personal injury liabilities – particularly the NHS.
Following a consultation on this issue, the Lord Chancellor and Justice Secretary, David Lidington, has announced the Government’s intention to revise the way the discount rate is calculated. The proposal is that the rate should be based on ‘low risk’ rather than ‘very low risk’ investments. In addition, advice will be taken from a panel of experts and the rate will be reviewed at least every three years, with changes made when necessary.
If the proposals are approved by Parliament, the revised discount rate is likely to be somewhere between 0 per cent and 1 per cent.