The latest in our Friday rule series – from Ailie Brown, Trainee Solicitor at our Edinburgh office.
The Government has introduced recent changes to the Personal Injury Discount Rate, or Discount Rate. We break down what this all means, and why it matters.
What is the Discount Rate?
The Discount Rate is a figure used to help calculate how much defenders have to pay in higher value cases.
The Discount Rate is set as a percentage. It is a devolved matter, so it can differ between different parts of the UK. We will be discussing the rate in Scotland.
When personal injury cases settle, there is usually a lump sum payment made to the injured person – including on cases where their injuries or losses are very serious and going to continue into the future, or permanently. A Discount Rate is used to try and ensure that pursuers are compensated properly and to avoid over-compensating and under-compensating people. Most large damages awards are invested – and over time, that investment will generate returns. Those future returns need to be factored in when deciding on the lump sum.
For example, if the Discount Rate is a low figure, that would anticipate future investment returns will be smaller and so will mean a higher lump sum payout is required to last the person until e.g. retirement. A higher Discount Rate suggests the investment will generate a higher return, indicating that the claimant will need a lower lump sum to cover their future financial needs.
Gildeas Director, David McKee explained: “When the Discount Rate was first introduced, it was assumed pursuers would invest in low-risk assets, such as government bonds – which seems sensible as most people would not wish to take risks with money that is intended to last them years or even decades into the future.”
In the government’s 2024 review, they have revised the assumptions made about how lump sums are invested. The default position now is that the investment will be assumed to be in a more diverse investment portfolio as per the example below:
| Asset Class: | Percentage Allocated: |
| Cash or equivalents | 10% |
| Nominal gilts | 15% |
| Index-linked gilts | 10% |
| UK equities | 7.5% |
| Overseas equities | 12.5% |
| High yield bonds | 5% |
| Investment-grade credit | 30% |
| Property | 5% |
| Other types, e.g., infrastructure, commodities, hedge funds, and absolute return funds | 5% |
Previous changes to the Discount Rate
The rate in 2001 was set at 2.5%, which reflected the economic conditions at the time, meaning that pursuers could expect reasonable returns on low-risk investments. This remained unchanged for some time, even through difficult economic times such as the global financial crisis in 2008.
Eventually, the rate was updated in 2017 to – 0.75% (negative 0.75%), which was a notable change. This meant higher compensation awards for pursuers, but the returns being generated were expected to be lower.
Finally, in 2019, the Damages (Investment Return and Periodical Payments) (Scotland) Act was introduced which formalised a new way to calculate the Discount Rate. This introduced a new process to review it every 5 years.
The 2024 Review to the PIDR
In June 2023, the devolved administrations in Scotland and Northern Ireland issued a consultation on whether changes should be made to the rate. The rate was reviewed by economic and financial experts, legal experts, and the government.
It was subsequently changed to +0.50%, to reflect current economic and market conditions.
What Does This Mean in Practice?
Understanding how a change to the Discount Rate could affect your claim might seem complicated. There are various factors considered which affect the actuarial tables and figures used: e.g. current age; expected retirement age; life expectancy; employment status; educational background, and so on.
A worked example might be a better way to understand the difference a change to the Discount Rate can make. Imagine a 45-year-old man who was earning £30,000 per year before his accident, expecting to retire at 65.
Using the previous rate of -0.75%, the actuarial tables produce a multiplier of 20.87, so the lump sum that pursuer might have expected to receive would be:
£30,000 x 20.87 = £626,100.
However, using the new rate of +0.50%, the actuarial tables produce a multiplier of 18.43, so the calculation changes to:
£30,000 x 18.43 = £552,900.
As we can see, the client would be awarded £73,200 less than before due to the new +0.50% rate being in place.
These figures are a simplified example and don’t consider all the factors which could make a substantial difference to the final claim.
Conclusion
The Discount Rate is not consistent across the UK, and the old rate was not reviewed for some time. However, Northern Ireland also recently updated its rate to +0.50% and a review is in progress in England & Wales.
Overall, changes to the Discount Rate are designed to ensure pursuers are properly compensated – and to avoid over or under compensation – by taking into account the prevailing economic circumstances at the time.
There is now a mechanism in place to make sure reviews are undertaken at least every 5 years, so we should not see situations where a review doesn’t take place for 16 years.
Established in 1989, Gildeas Solicitors is a Scottish law firm that specialises in personal injury claims, including motorcycle and cycling accidents. We make personal injury personal. We go the extra mile for our clients by providing services such as roadside assistance, vehicle repairs, and hire vehicles. Considering our services? Call our dedicated New Claims team to make the process easy for you at 0141 331 6070.