The Department of Justice has announced it will change the personal injury discount rate, on an interim basis, from +2.5% to –1.75%. The Department intends to bring forward secondary legislation to implement the change and anticipates that this new rate will come into effect on 31st May 2021.

The proposed rate change is described as an “interim” rate on the basis that a further “stable longer term” rate change will come into effect in early 2022 under the framework proposed by The Damages (Return on Investment) Bill, which was introduced earlier this month.

Background

The latest announcement from the Department represents a change in position from October 2020, when the Department advised it would not proceed with a planned change to the discount rate under the current Wells v Wells legal framework. The Department instead sought to bring forward legislation to change the legal framework on how the rate was set allowing for a “stable longer term rate”.

The Department had anticipated that this legislation, introduced earlier this month through The Damages (Return on Investment) Bill, could be enacted by the summer of 2021, with a rate set under this new framework in place by the Autumn. The Department advised yesterday that “this had not proved possible…. It is now, therefore, anticipated that it will be into next year before the Bill is enacted and a rate can be set under a new framework.”

In view of the “significant change in the expected timescale”, the Department reconsidered its October decision and has now determined to “bring forward secondary legislation to change the rate under the current framework to –1.75%.” The rate of -1.75% had been proposed following a statutory consultation with the Government Actuary and Department of Finance undertaken in February 2020.

The decision to introduce an interim rate is linked to extension of time sought by the Committee for Justice to consider the Bill and has been taken against the background of an ongoing judicial review faced by the Department against its October decision.

Judicial review & Committee for Justice meeting

The Applicant, an individual, who had an ongoing personal injury claim impacted by the discount rate, claimed that the basis for the Department’s decision in October was “irrational” and the Department had created a “legitimate expectation” in February 2020 that an interim rate would be set, before “changing its mind”. There was also suggestion that the Department had been “unduly influenced” by the financial impact of an interim rate change on other governmental departments.

The case was heard by Mr Justice Colton on 11th March 2021 and to our knowledge no judgment has yet been issued. The fundamental question before the court was whether the Department’s decision not to introduce an interim rate was unlawful, in the context that a Bill proposing a new legal framework for setting the discount rate had been introduced by the date of hearing.

The Department defended the case on the basis that at all times, its decisions were made on the basis of securing 100% compensation for victims. The Department argued that an interim rate change, however, would not achieve this 100% compensation principle as it would likely lead to the overcompensation of claimants. The Department claimed it was in a very different situation from that which the then Lord Chancellor in England and Wales faced in 2017, when she felt compelled to introduce an interim rate under Wells v Wells as future changes to the legal framework for setting the rate were still under consultation and would take a minimum of 2 years to come into effect. By comparison, the Department had already tabled a formal Bill and anticipated a new legal framework could be in place as early as the end of June or, possibly, by Autumn 2021.

However, on the same day as the judicial review was heard, the Committee for Justice rejected the notion of a condensed Committee Stage proposed by the Minister and instead sought an extension to complete the Committee Stage review of the Bill by October 2021. Following the Committee Stage, the Bill will have to pass a number of subsequent stages, before it can be introduced. As a result the Department’s planned timetable to bring into effect a “stable and longer term” rate under the new framework within this calendar year took a serious blow.

The consequence appears to be that the Department has gone ahead and reconsidered its earlier decision, without waiting on a formal determination of the judicial review proceedings.

Next Steps

The announcement is disappointing for insurers and public body compensators. The proposed rate of -1.75% means that Northern Ireland has the lowest discount rate within the UK, by some considerable margin.   As a result the value of some claims here may be more than double that of England and Wales. For example an annual lifetime care claim of £100,000 for a 10 year old male in England and Wales, at a -0.25% discount rate would be valued at £8.7M; the same claim in Northern Ireland, at a discount rate of -1.75%, would be worth £17.7M.

This significant increase in the value of serious injury claims will in the short term have an adverse impact on public bodies such as local health trusts. It also means that limits of indemnity for certain types of insurance policy may no longer be adequate. A more stable and longer term rate under the legislative framework currently making its way through committee stage is unlikely to be implemented until the first, or possibly second quarter, of 2022. 

It is therefore essential that all complex personal injury claims which are likely to be listed for hearing in Northern Ireland with the next 12 months are carefully reviewed and adequately reserved.

The Committee for Justice has now issued a Call for Evidence on the Damages (Return on Investment) Bill , which can be accessed here and specifically has requested views on the following:

• Is the new statutory methodology to calculate the personal injury discount rate the most appropriate to achieve as close to 100% compensation as possible?
• Has the new methodology the potential to veer towards over compensation and if so how can this be rectified?
• Has the new methodology the potential to veer towards under compensation and if so how can this be rectified?
• Does the new statutory methodology reflect how a claimant would be advised to invest their award?
• What are the likely effects of using an investment period of 43 years rather than 30 years in the model and do you agree with this approach?
• What are the advantages or disadvantages of transferring responsibility for setting the rate from the Department of Justice to the Government Actuary and is there an appropriate level of accountability in the new statutory methodology?

The deadline for written submissions to the Committee on these issues is Friday 30th April 2021. If you would like to discuss any aspect of this further please don’t hesitate to contact us.