The personal injury discount rate (PIDR) is an actuarial tool that helps lawyers calculate the amount of compensation that should be paid to an injured claimant in a medical negligence or personal injury claim. The PIDR is used to adjust the amount of compensation that an injured claimant will receive for future expenses or financial losses that they will suffer over the course of their lifetime, to reflect the fact that they are receiving their full lifetime’s compensation early in one lump sum. When correctly pitched and applied, the PIDR is designed to ensure that the injured person is neither over-compensated nor under-compensated for their injury and its financial consequences, when factors such as their expected lifespan and the interest that they will receive from investing their compensation are taken into account. Why is a discount rate applied to future losses in medical negligence and personal injury claims? The personal injury discount rate (PIDR) is one of the ways in which the law ensures that injured claimants receive sufficient compensation to cover the losses that they will suffer over their lifetime as a result of a wrongfully caused injury, in full, but not more or less. The defendant must compensate the claimant fully for the injury that they have caused as a result of their negligence, but compensation is not intended to punish the defendant, as a fine would under criminal law. Applying the same principle, neither should compensation create a windfall situation for the claimant if their lump sum, when reasonably prudently invested, would actually put them (financially speaking) in a better position than they would have been without the injury. The PIDR adjusts the multiplier (the number of years by which an annual cost or loss is multiplied) to avoid the windfall scenario by factoring into the calculation the claimant’s early receipt and potential investment interest from their compensation. What impact does the personal injury discount rate (PIDR) have on compensation for serious injury? The PIDR has an enormous impact on the value of a medical negligence or personal injury compensation claim, particularly where the injured person’s claim includes a large element of future loss. In claims involving permanent severe disability, such as from injury to the brain or spinal cord or the loss of a limb, the claimant often has a substantial claim for future loss related to long-term loss of income, lifelong dependence on care, therapies, specialist vehicles and equipment, assistive technology and other support, resulting in significant annual costs. A lower or higher discount rate makes a huge difference to the amount of compensation that the injured person receives for those future losses, because it determines the ‘multiplier’ that is applied to the claimant’s annual loss. During the calculation of an injured claimant’s compensation claim, all recurring, annual losses and expenses that the claimant is expected to suffer in future, such as loss of earnings or costs of care, are multiplied by a multiplier. The multiplier is a figure which represents the number of years that the cost or financial loss will be suffered, for the purposes of arriving at a lump sum for the claim. Choosing the multiplier is rarely as simple as just identifying the number of years that the specific type of loss will be incurred, although that is an important starting point. The multiplier that is applied to the various types of annual loss has been adjusted by the PIDR to reflect the claimant’s early receipt of their compensation for their lifetime’s future loss, and the fact that they will invest it and earn interest on it. Given the very substantial costs of care and other future losses that follow severe disability, such as cerebral palsy, brain injury, amputation or spinal cord injury, even small differences in multipliers make a big difference to the value of a claim. For that reason, the factors that are considered in setting the multiplier take on great significance in a serious injury case and are often closely examined and disputed by the experts and lawyers on each side. Altering the multiplier is the most effective way to significantly increase or reduce the value of the claimant’s claim. When the discount rate is higher, claimants’ compensation awards are lower (owing to the multiplier being discounted by more), and when the discount rate is lower, compensation awards go up. How is the personal injury discount rate (PIDR) set? A discount rate could, in theory, be calculated for every individual case, but this would mean carrying out a detailed investigation of how the individual claimant is likely to invest their compensation throughout their life, their attitude to risk and any other economic factors which will affect their compensation fund in future. To do so in every case would unjustifiably increase the costs of the case, waste court time and reduce the likelihood of early settlements. To avoid these problems, the Damages Act 1996 provides for the Lord Chancellor to set a standard personal injury discount rate (PIDR) which is used by the court and the parties in most cases. The standard PIDR is set by the Lord Chancellor after consideration of the types of investments that are available, claimants’ investment behaviour, taxation, inflation and investment management costs. The PIDR is currently reviewed at intervals of not more than three years. The Lord Chancellor must take advice at each review from an independent panel of experts with experience in actuarial, investment management, economic and consumer investment practice, and chaired by the Government Actuary. Currently, the PIDR is set on the assumption that claimants are low risk (but not very low risk) investors. This is because, unlike other investors, who might accept a greater element of risk in the hope of higher returns on their savings and investments, most disabled claimants are totally dependent on their compensation fund to meet their nursing, housing and other essential needs for the rest of their lives. Given this dependency, it is generally accepted that claimants are risk averse and much more likely to adopt a cautious approach to their money and invest predominantly in low risk but low return investments. On the basis of this assumption, the PIDR now reflects the rate of return that a properly advised recipient of a lump sum of compensation for future financial loss could be expected to receive from a low risk, diversified investment portfolio. In cases where the claimant’s circumstances are unusual, such as where they expect to live and invest their compensation abroad, either party can challenge the general assumption that the standard PIDR should be applied, and make their case for a higher or lower discount rate to be applied to that individual case. Discount rate changes in current claims When the discount rate changes, any active compensation claims which include a future loss element must be recalculated to ensure that the claim takes into account the new discount rate and its impact on the multiplier. PIDR changes may have a significant impact on the value of a claim, but our specialist medical negligence and personal injury claims solicitors are skilled in anticipating discount rate changes and responding to discount rate challenges from defendants, such as NHS Resolution. Examples of recent claims in which we protected our severely disabled clients from personal injury discount rate challenges include: In a £31.5 million settlement in a birth injury claim for a young teenager with cerebral palsy, we successfully resisted NHS Resolution’s attempt to delay settlement negotiations pending PIDR changes which would have risked a significant reduction in our client’s compensation. We successfully defended NHS Resolution’s last-minute application for the court’s permission to rely on expert evidence to support an increase in the PIDR, which would have significantly reduced the value of our client’s future loss claim, in the reported case of CNZ -v- Royal United Hospitals Bath NHS Foundation Trust. If you have suffered severe disability as a result of medical negligence or negligence on the road, at work, at school or other public facility or have been contacted by HSSIB, MNSI or NHS Resolution, you can talk to a solicitor, free and confidentially, for advice about how to respond or make a claim by contacting us.
