Oggy, Oggy, Ogden

The Impact of the Reduction of the Discount Rate

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Background

The Ogden Tables are actuarial tables used by lawyers to calculate damages for future losses in personal injury and fatal accident claims.

The tables set out the relevant multipliers applied to the present day value of a future annual loss. There are tables for future loss of earnings to different pension ages, lifetime losses for damages, including care claims, and to reflect a period of deferment. The multipliers take into account accelerated receipt of lump sum payments and mortality risks.

The relevant multiplier is selected by reference to the ‘discount rate’ set by the Lord Chancellor pursuant to their powers under the Damages Act 1996. The courts have determined that the discount rate should reflect the yields on low risk index-linked Gilts as it is currently assumed that claimants are totally risk-averse investors. The discount rate was set at plus 2.5 per cent in 2001. Since then, yields on Gilts have reduced markedly and there have long been calls from claimant lobbying bodies to reduce the discount rate accordingly.

The Lord Chancellor Liz Truss announced on 27 February 2017 that the discount rate was to be reduced to minus 0.75 per cent effective from 20 March 2017 - a movement of 3.25 per cent downwards.

The examples below demonstrate that claimants will now see substantial increases in the awards they receive for future losses. This in turn impacts insurers’ reserves significantly and thus premiums are likely to increase markedly for motor, employers liability and product liability insurances.

The following examples are for illustration purposes only, but demonstrate the impact of the discount rate change. Discounts for contingencies other than mortality are not factored in, but would be in practice.

Scenario A
A was an employed scaffolder. He worked long hours and travelled throughout the country with work. He earned £40,000 net p/a when he was involved in an accident at work.

A colleague negligently dropped a scaffold pole from a height of 3 metres. The pole landed on A’s right ankle, resulting in a complex fracture dislocation. As a result of his injury, he is unable to manage ladders or undertake any heavy lifting.

At the trial date, A is aged 28. It is accepted that but for the accident, he would have continued to work as a scaffolder until retirement aged 65. Since the accident, he has returned to employment in a sedentary role. However, he has no qualifications and his residual earning capacity is agreed at £20,000 net p/a.

Therefore, the multiplicand for A’s future loss of earnings claim is the difference between his pre-accident earning capacity and his residual earning capacity, amounting to £20,000 net p/a (£40,000 less £20,000).

Future loss of earnings claim
Using Table 9 of the Ogden Tables, multipliers for loss of earnings to pension aged 65 (Males),  and adopting the soon to be old discount rate of 2.5 per cent, gives a multiplier of 23.67.
Old:
£20,000 multiplied by 23.67 equals £473,400

Using the same table but the soon to be new discount rate of minus 0.75 per cent, we get a multiplier of 41.29.
New:
£20,000 multiplied by 41.29 equals £825,800

An increase of over 150 per cent!

Scenario B
B is a child. She was at a swimming lesson when she got into difficulty, but the fact she was in difficulty went unnoticed, resulting in her brain being starved of oxygen for several minutes.

B suffered life-changing brain injuries. As a result of the accident, she will never be able to live independently and has complex care requirements.

A comprehensive lifetime care package has been agreed at £100,000 p/a.

At the trial date, B is aged five.

Future care claim
Using Table 2 of the Ogden Tables, multipliers for pecuniary loss for life (Females), and the old discount rate of 2.5 per cent, we get a multiplier of 35.47.

Old:
£100,000 multiplied by 35.47 equals £3,547,000

Using the same table but the new rate of minus 0.75 per cent, we get a multiplier of 125.2.

New:
£100,000 multiplied by 125.2 equals £12,520,00

An increase of over 250 per cent!

What next?
The Lord Chancellor’s announcement came as a huge surprise to lawyers and the insurance industry alike. The decision has been described as “crazy” by Huw Evans, Director General of the Association of British Insurers, and Direct Line Insurance Group has announced that 2016 pre-tax profits will be reduced by between £215 million and £230 million as a result. The biggest impact of this rate reduction, however, will be seen by the NHS, which will need billions ploughed in by the government to cover clinical negligence ‘care for life’ claims.

Whether the discount rate will remain at minus 0.75 per cent in the long term is uncertain. However, within 48-hours of the announcement, Chancellor of the Exchequer Philip Hammond met with senior figures from the insurance industry and announced that the government would urgently launch a consultation on the framework for setting future rates and bring forward any legislation at an early stage.

As the examples above demonstrate, the result of the discount rate reduction is that from 20 March 2017, the level of damages claimants will recover for certain future losses will be substantially higher than they are now. Clearly, the way in which damages for future losses are calculated needs to be reviewed in order to make it fair for claimants and defendants.

Our view is that basing the discount rate on yields on Gilts is unrealistic and does not reflect the reality that upon receiving a substantial lump sum settlement, claimants will seek financial advice in order to maximise returns on their compensation. IFAs/wealth managers will be employed to invest the damages in a variety of investment vehicles to seek the best possible returns. Hopefully, the outcome of consultation will reflect that and the discount rate will be amended again to defendants’ benefit.

About the author

Andrew Trott
Senior Associate
Plexus Law 0344 245 5315 Email

Connie Cobb
Partner
Plexus Law 0344 245 5431 Email