Policy background Personal Injury Discount Rate
Personal injury damages are intended to compensate the claimant for all the losses, past and future, caused by the injury ("the 100% rule"). Damages for future financial loss (e.g. loss of income and costs of care) can be paid by a lump sum or a stream of future payments under a Periodical Payments Order ("PPO"), or a mixture of both.
	The calculation of a lump sum for future financial loss includes applying a discount rate which represents the rate of return that claimants are expected to earn when investing it. The discount rate is intended to ensure that the opportunity to invest does not result in either over or under compensation. At present, following the leading House of Lords case of Wells v Wells5 the rate is calculated on the basis that the claimant is a very risk averse investor. The rate has, in accordance with this principle, been set by reference to yields on Index Linked Gilts ("ILGs") since 1998.
	A discount rate could, in theory, be individually set on a case-by-case basis. However, to simplify the administration of justice, the practice has been for the court to refer to a single rate unless persuaded in the proceedings that another rate should apply (since 2001 no court is thought to have departed from the standard rate). This rate was originally set by the courts. Section 1 of the Damages Act\ 1996 ("the 1996 Act") gives the Lord Chancellor power to set a rate, which the court is to apply unless the court is persuaded another rate is more appropriate for the case before it. The power under section 1 extends to setting different rates for different classes of cases (although only single rates, covering all cases, have been prescribed to date). The power can be exercised from time to time, with no provision for specific intervals between reviews. Before setting the rate, the Lord Chancellor must consult the Government Actuary and HM Treasury. Section 1 does not specify the methodology to be applied in the setting of the rate – this is largely governed by principles set down in case law by the courts (in particular, the decision of the House of Lords in Wells v Wells). Even small changes in the rate can make a significant difference to the size of an individual award.
	The Lord Chancellor is under a continuing legal duty to ensure that the rate prescribed is not inappropriate by reference to the requirements of the law. The rate prescribed by the Lord Chancellor applies only to England and Wales (separate provision being made in section 1 for specifying the rate in relation to Scotland6 and Northern Ireland).
	The Lord Chancellor’s power has only been exercised twice. The rate was set at 2.5% in June 2001 and at minus 0.75% in March 2017. Both rates are "real", that is to say representing a return over inflation as measured by the Retail Price Index, and a lower discount rate means higher awards .
	In announcing the setting of the rate at minus 0.75% on 27 February 2017 the then Lord Chancellor said:
	"There will clearly be significant implications across the public and private sector. The Government has committed to ensuring that the NHS Litigation Authority has appropriate funding to cover changes to hospitals’ clinical negligence costs. The Department of Health will also work closely with General Practitioners (GPs) and Medical Defence Organisations to ensure that appropriate funding is available to meet additional costs to GPs, recognising the crucial role they play in the delivery of NHS care."
	She added that:
	"The Government will review the framework under which I have set the rate today to ensure that it remains fit for purpose in the future. I will bring forward a consultation before Easter that will consider options for reform including: whether the rate should in future be set by an independent body; whether more frequent reviews would improve predictability and certainty for all parties; and whether the methodology – which in effect assumes that claimants would invest only in index-linked gilts – is appropriate for the future. Following the consultation, which will consider whether there is a better or fairer framework for claimants and defendants, the Government will bring forward any necessary legislation at an early stage."
	Following this commitment, a consultation paper, "The personal injury discount rate: how it should be set in future", was published on 30 March 2017.7 This considered options on how, when and by whom the discount rate should be set. The consultation closed on 11 May 2017. A summary of the responses to the consultation has been published. In the light of the responses, and the further research undertaken, the Government has decided it is right that the present law on the setting of the discount rate should be changed.
	The principal proposals to be given effect by the Act are that:
The rate is to be set by reference to "low risk" rather than "very low risk" investments as at present. This will have the effect of increasing the expected rate of return compared to what it would have been under the present law. Lump sum payments of damages for future loss can thus be expected to be lower than they would have been had the law remained unchanged.
The rate is initially to be reviewed promptly after the legislation comes into force and, thereafter, at least every five years, with that period being re-set when a review is concluded. Reviews will be carried out and completed within specified periods.
The rate is to be set by the Lord Chancellor who will consult the Government Actuary on the first review and an independent expert panel chaired by the Government Actuary on subsequent reviews. HM Treasury will, as at present, also be a statutory consultee at every review.