Tuesday, 21 March 2017

The Discount Rate and Misreporting Compensation Payments

How do we counter misleading legal stories in the press? I am well aware that the number who will read this blog is a tiny fraction of those who will have read the story below, and that fewer still will read this blog to the end. This blog post may be true, but it is boring, technical stuff. Nevertheless, here it is:

The Guardian has led the way in reporting a remarkable increase in a compensation award to a claimant in a clinical negligence claim:

NHS trust triples injury payout to £9.3m under controversial new rules
Compensation for 10-year-old girl left with cerebral palsy will cause shockwaves in health service and insurance companies

The headline and story are completely inaccurate. The "payout" (horrible term) was not £9.3m nor did it triple under new rules. 

The "controversial new rules" are a change in the discount rate announced by the Lord Chancellor, taking effect on 20 March 2017. The discount rate is, or should be, set to reflect the real rate of return a risk-adverse investor could get for their money in the current market. It is assumed that they would rely on index-linked government stock. The average real yields for that stock over the last three years has been -0.75% (to the nearest one quarter of one per cent). That is the new discount rate set by the Lord Chancellor. Previously, and since 2001, it has been 2.5%. So it is a big change, all the bigger because there has been no change to reflect the changing market for 16 years. Most significantly, it has gone from a positive to a negative rate. What consequences does that have?


If I am unable to work and I need care for the remainder of my life because you have negligently injured me, I claim from you, say, £100,000 per year. Suppose I am likely to suffer that loss for 30 years. If you gave me £100,000 x 30, I would have £3m. If you gave me £3m now I would invest it. Since I need the money to pay for my care I will invest it in low risk investments. When the discount rate was 2.5% it was assumed that I would get a positive return for my money. Hence I did not need £3m to compensate me for payments of £100,000 per year for 30 years, even allowing for inflation. Instead I needed roughly £2.1m. I could invest that sum and draw down from it so that I would have £100,000 available to buy the care I need for 30 years. Then I would have no more money.

In fact, as set out above, for some time the real rate of return on risk free investments has been negative, and so, belatedly, the discount rate has been changed to minus 0.75% I don't need £2.1m to allow me to pay £100,000 a year for 30 years, I need £3.4m. The figure that the annual sum is multiplied by is called the multiplier. The lower the discount rate, the higher the multiplier. That's mathematics (and economics).

The impact of the change in the discount rate is very considerable on increasing the value of future awards for young adults and children where they are assessed as a single lump sum using a multiplier. Multipliers for some teenagers do indeed triple.

However, there is a problem with assessing future awards using a multiplier. Such assessments assume that we know how long the claimant is going to live. We don't. So after 30 years the money runs out, even if I live for 40 or 50 years. On the other hand, if I am run over by a bus after five years, I still have about £3m left and my beneficiaries receive that remaining sum under my will. That wasn't the aim of the compensation but it is the result of receiving all the compensation as a lump sum.

Periodical Payments

To avoid these unwanted consequences, many claims for substantial future losses in made against the NHS are resolved by an agreement that the NHSLA will pay, say, £100,000 per annum to the Claimant, index linked so that in keeps pace with increased costs of buying care, for so long as the Claimant lives. If the Claimant lives five years, the payments stop then - they don't need to buy care anymore. If they live to 100, the payments continue to then and they can be assured that they will always have the money they need to buy care, but no more than they need.

Whatever other consequences the Lord Chancellor's announcement has had, it will not change how long we all live. 

The Claimant referred to in the Guardian story received some of her compensation as a lump sum and some as a periodical payment order - an agreement to pay a certain amount every year for so long as she lives. The change in the discount rate did not increase that amount nor for how long the NHSLA will have to pay it. I have it on very good authority that the Discount Rate change did indeed lead to an increase in the lump sum from £1.32m to £2.12m - an increase of £800,000. Not insubstantial but not the £6m claimed by the Guardian. The PPOs remained the same as previously agreed. So the NHSLA's liability increased from £1.32m and (I believe) about £200,000 per year for so long as the Claimant shall live, to £2.12m and £200,000 per year for so long as the Claimant shall live. That is not a tripling of the award.

Shockwaves? If any, they are much further down the Richter scale than the media has reported.

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