On 12 February Justice Minister Helen Grant has this week stated that initial evidence from consultation period on the discount rate used to calculate deductions from compensation awards may support a rise in the rate.

However, Katie Wilson, advice policy manager at financial advisors Towry (pictured), has called on the Government to reduce the discount rate, to ensure catastrophically injured claimants are adequately compensated for their financial losses.

She explained: "The Government's second consultation period into discount rates...which will address the legal framework for setting the rate, opened this week and its introductory paragraphs include the statement, 'The main criticism of the present law regarding the setting of the discount rate seems to be that the types of investments used as a basis for setting the discount rate are too cautious. Their rates of return are therefore too low. A less risk averse set of investments would, it is argued, be a more realistic reflection of the way that claimants actually invest and a better basis on which to set the discount rate.'

"This extract highlights a fundamental misunderstanding of the reasons why claimants currently invest in mixed portfolios. The truth is that they do it because, if they expect their award to be able to fund anticipated future expenses, they have no alternative but to take risks.

"The current discount rate of 2.5% does not reflect real returns on index linked gilts (as the current law says it should); nor does it reflect the returns available from a cautious portfolio of investments. The reality is that if claimants expect to achieve returns of 2.5% (plus inflation and net of tax and charges), then they are entering the realms of sophisticated and high-risk investment strategies which, under Financial Services Authority (FSA) rules, must not be recommended to investors who cannot afford to lose their capital. Indeed, the FSA's own rules regarding investment return assumptions would, after taking account of inflation, tax and charges, support a reduction in the current discount rate.

"These aren't recent revelations. Studies suggested that for a defendant insurer to fund periodical payments for the rest of a claimant's lifetime, they would need to reserve an amount of money well in excess of the lump sum they would be required to pay the same claimant under the Ogden tables."

She quoted a paragraph in the consultation document which identifies a specific criticism of the present law in relation to periodical payments.

The document states: "...it is said, the claimant who takes a lump sum settlement is turning his or her back on a risk free way to protect his or her position and, as a result, ought not to be able to benefit from a discount rate that assumes the claimant will only invest in low risk investments. Instead, it is argued, the discount rate should be set on a basis that assumes the claimant will invest in higher risk investments."

Ms Wilson continued: "In our experience, every catastrophically injured claimant who has regular future losses that can be matched by periodical payments would, in principle, prefer to receive periodical payments. But periodical payments aren't always viable; they are not suited to ad hoc future costs such as replacing expensive OT equipment or prosthetic limbs, they may not be viable where settlement has been compromised, the defendant may fail to meet the required security, etc.
"Such claimants are clearly not 'turning their back' on a risk free solution, and should not be penalised by a discount rate that forces them to take inappropriate investment risks.

She went on to identify a further issue associated with encouraging high-risk investments.

"One aspect that appears to have been overlooked is the associated cost of investment advice and whether it is recoverable," she said. "This was last considered by the Court of Appeal in Eagle v Chambers (2004). Waller LJ said: 'A defendant must pay by way of compensation damages assessed on the basis that the return on the money will be by way of investment in gilts even though the practice is to gain a higher return by investing more broadly. To order the defendant to pay the costs of taking the advice so as to enable the investment to be made more broadly...is to make the defendant lose both on the swings and roundabouts and to provide the claimant with a head of damage which flows from a decision as to how to invest and not from the accident.'

"But if future claimants are required to invest in a mixed portfolio of investments, won't they also need to take, and pay for, investment advice? Irrespective of whether the government decides to keep it simple and stick with index-linked gilts or opt for the relative complexity of a mixed portfolio approach, it's clear that if the claimant is to be compensated for their losses then the discount rate needs to go down.

"In the meantime, an increasing number of disabled claimants are likely to run out of money within their lifetimes. They will then be forced to accept whatever support the state can provide and the British taxpayer, rather than those responsible for their injury, will continue to pick up the tab."