I wrote about the personal injury discount rate (PIDR) way back in 2017 when the rate was changing from 2.5% to 0.75%. The personal injury discount rate supposedly ensures that claimants who have been wrongfully injured receive full compensation. It is a percentage figure which calculates the amount defendants must pay in damages, in a lump sum, to claimants who have suffered from life-changing injuries. The Lord Chancellor is responsible for setting the rate and may review it whenever they see fit.

The new Lord Chancellor, Shabana Mahmood, has adjusted the discount rate again and from 11 January 2025 it is being set at 0.5%. This discount rate is applied when calculating future financial losses in personal injury and medical negligence claims. A key premise when calculating compensation is that the claimant should not end up with a windfall, as in, they should not receive a lump sum that is greater than their carefully calculated losses. A way to ensure that this does not happen is to reduce the future losses by a percentage to take into account that the claimant is getting a lump sum payment now which can be invested. The “discount rate” sets this percentage.

For a long time, the discount rate was 2.5% which meant a significant reduction to claimants’ compensation. This wasn’t fair on claimants given the relatively poor return on investments and the low interest rate until recent years. The discount rate is linked to returns on low-risk investments as the law makes it clear that claimants should not be expected to put their money into risky investments. This positive discount rate meant the claimants were getting less than full compensation and so eventually, in 2017, the Lord Chancellor reduced the discount rate so that it was a minus figure (first -0.75% and then -0.25%). This meant that for every £100 of future loss, a claimant was awarded slightly more than that to account for poor returns on investment.

However, as interest rates have increased over the last few years there has been a lot of pressure on the government by insurers and the NHS to reconsider the rate again to make it a positive figure. The counter argument to this of course is that inflation has also been unusually high over recent years, thereby eroding the value of awards over time. The higher the discount rate, the lower the compensation will be. This upcoming change from -0.25 to 0.5% will therefore reduce compensation in claims where there is future loss. The assumption is that the difference in any loss will be made up by investing the payment received. The reality is that the government is slowly moving the dial so that claimants now have to invest in moderately risky investments to try to ensure their awards will allow them to purchase much needed care and equipment in the future.

I recently amended a schedule of loss in a case to reflect the new discount rate and there was a reduction of over £5 million to the total compensation. What is clear is that this change impacts young claimants who have a long life-expectancy the most. The most significant reductions are where there is a “deferred” loss, i.e. where treatment or purchases are recommended to be made a long time in the future. The further away that loss is the bigger the reduction will be. This is because by investing £100 now, the claimant is expected to make a return on that investment. This return is likely to be higher the longer a claimant waits.

It is not as dire as it seems at first glance because in cases where there will be the biggest reductions, e.g. young children with severe brain injuries who have a normal life expectancy, a large proportion of the future claim is paid out as annual payments (called “periodical payments”) which is not linked to the discount rate. However, it is clear that claimants will be worse off at least in the short term as a result of these changes and it is up to us as claimant solicitors to properly advise our clients of these changes.

Coupled with the extension of Fixed Recoverable Costs regime in October 2023 to claims worth under £100,000, which means claimants will no longer recover a reasonable proportion of their legal costs from the defendants, this is yet another step in the wrong direction for claimants. And another victory for the insurance industry. Oh, and for those who did read my original blog and have been waiting with baited breath, my car insurance did indeed increase in April 2017.