13 Nov A guide to navigating the discount rate and its impact on the future losses in PI Claims
Section 24 (1) of the Civil Liability and Courts Act 2004 states that “the Minister (for Justice) may prescribe the discount rate that shall apply for the purposes of the assessment of damages in respect of future financial loss”. Section 3 of the same act allows a Court to use a different rate where it considers that using the prescribed rate would “result in an injustice being done”.
This section of the act commenced on 31st March 2005 but eighteen years later no minister has yet made use of the powers given to them.
What is the discount rate and why is it important?
In serious personal injury cases, a plaintiff may suffer injuries which result in sizeable losses which stretch out into the future. The two major categories of such losses are the cost of future medical care and the loss of future earnings. The issue with these heads of damages is that while it is possible to assess the current amount of the annual financial loss, these losses can carry on for a significant time into the future – possibly for the whole lifetime of the injured person.
In such circumstances a Court receives assessments from expert witnesses of the amount of the victim’s current financial loss of earnings or the current cost of medical care. This sum is expressed as either an annual or monthly amount. The Court then needs to take further expert advice regarding the expected duration of these losses, and it will calculate a single lump sum amount to compensate the victim for the extent of these losses.
To take a simplified example, if an injured employee aged 45 has a loss of earnings of €50,000 per annum and he/she expects to work until retirement at age 65. The Court will calculate the plaintiff’s future loss of earnings as 20 years at €50,000 p.a. amounting to a lump sum award €1,000,000.
Many jurisdictions across the world use this simplified approach, however in the UK and Ireland a more equitable methodology has been utilised. It is inevitably more complex.
The simplified lump sum needs to be adjusted for a number of factors; firstly, the plaintiff may die before the expiry of his compensation period, also his earnings would have increased over the period, but he has the opportunity to invest the lump sum and increase it by earning interest. The result is that you take the simplified lump sum and discount it by a factor to allow for these three elements – uncertainty around the period of the losses, cost or earnings inflation and investment earnings.
In order to avoid the need to revisit the underlying calculations for each individual action, the Court has created an annualised adjustment fact known as the Discount Rate. This rate is then used in conjunction with mortality tables to derive an appropriate compensatory lump sum.
The history of the discount rate in Ireland and in the UK
The issue of an appropriate discount rate for future losses had been assessed by the UK Court of Appeal in the important case of Wells v Wells in 1998. The pre-existing discount rate of 4.5% was reduced on appeal to 3%. In 2001, the UK Lord Chancellor reduced this rate further to 2.5%.
In the subsequent Irish high court case of Boyne v Bus Atha Cliath in 2002, Mr. Justice Finnegan decided to apply the principles discussed in Wells v Wells to the Irish context. As a result, he determined that a discount rate of 3% should be applied in the calculation of future losses. This rate effectively means that a plaintiff should be able to invest his lump sum to achieve a 3% real rate of return in excess of inflation.
It soon became clear however that while this rate might have been appropriate for investment conditions during the 1990s, during the early 2000s investment returns had declined substantially. It had now become unrealistic to expect to achieve a 3% real rate of return. This position was exacerbated following the global financial crisis of 2007/2008 and many commentators and practitioners felt that plaintiffs were being significantly undercompensated by applying the 3% discount rate.
At around this time, in 2010, an important case occurred in Guernsey concerning a racing cyclist called Helmot who had received catastrophic injuries as a result of a motor accident.
At first instance he was awarded the very large sum of £9.3 million in compensation. However, the award was appealed on the basis that the discount rate applied insufficiently reflected the changing investment environment. The new discount rate was set at an unprecedented negative figure of -1.5% for loss of earnings and his need for 24-hour medical care and consequently the overall award was increased to £13.75 million. A further appeal to the House of Lords (sitting in Guernsey as the Privy Council) resulted in the award amount being unanimously upheld.
In Ireland, the case of Gill Russell v HSE in 2015 re-examined at considerable length the issue of the correct discount rate to be applied for catastrophic future losses. Here the Plaintiff was a minor who had suffered terrible injuries at birth and required constant care for the duration of his life. His life expectancy was assessed at 45 years from the date of trial and the Plaintiff’s lawyers argued that the Boyne v Dublin Bus discount rate of 3% was wholly inadequate to compensate the victim. The judge, Mr. Justice Cross, concluded that it was appropriate to make use of two discount rates; 1% for the future cost of care and 1.5% for the cost of appliances, equipment and so on.
The HSE appealed the case to the Court of Appeal and lost on each appeal. In its appeal the HSE made the observation that the new discount rates applied by Mr. Justice Cross would result in a 38% increase in the special damages for future losses with a collateral negative impact on many claims being defended by the State Claims Agency. However, the Court held that the overwhelming principle was the need to give an injured Plaintiff the “correct” level of compensation to meet their future needs to include the significant care costs.
Consequently, the currently prevailing discount rates applying in Ireland following Gill Russell v HSE are 1% for future wage related care costs and 1.5% for non-wage related costs. Although it was not an issue at the trial and so was obiter dicta, the Court recommended that the 1.5% discount rate should also apply to future loss of earnings claims.
Despite the fact that Russell v The HSE represents the current law in Ireland, in a recent catastrophic claim involving a teenage boy with cerebral palsy, Molloy v The HSE, the HSE agreed a discount rate of minus -1.5% when the matter was Ruled before the Court.
The Future position in Ireland
During 2018, there was considerable further discussion on the discount rate in the UK which culminated in the Civil Liability Act 2018. This mandated a formal review to apply from August 2019 with subsequent reviews to be held at least every five years. The review in August 2019 reduced the discount rate in the UK further to a single figure of -0.25%. The same year Scotland adopted a rate of -0.75%. In Northern Ireland the discount rate is -1.5%. The next formal review in the UK is for summer 2024.
In June 2020 in Ireland, the Minister for Justice instituted a formal consultation process to examine whether the Irish rate, still at 1.5%, should be reviewed and whether there was a need for a two-tier rating system as instituted by Gill v Russell. Submissions were required by August 2020.
The Society of Actuaries made a lengthy submission examining a range of alternative scenarios. Ultimately it recommended that a regular review of the discount rate was required, and it also pointed out the significance of different figures. A Plaintiff who suffered future losses of €100,000 per annum and with a life expectancy of 45 years would receive a lump sum of €3.3 million if the discount rate was set at the current level of 1.5%. However, if the discount rate was set at -1.0% the lump sum award would need to increase to €5.6 million. This represents an increase of 70%.
Clearly there is an imperative to ensure that the discount rate used is regularly reviewed and updated to ensure that Plaintiffs secure fair compensation.
We have already observed that successive Ministers for Justice have never made use of the powers invested in them under the 2004 Civil Liabilities Act. Sadly, it appears that this propensity for inaction continues to this day.
The 2020 consultation on the discount rate concluded in August 2020. On 17th February 2022, the Minister for Justice responded to a Dail written question regarding the outcome of this consultation with the following statement:
“I am currently considering this matter and I expect to be in a position to make a decision on the way forward in the coming weeks”.
Now, in October 2023, 87 further weeks have passed and no further statement on the matter has been forthcoming. With the impact of the pandemic and the more recent financial turmoil and earnings inflation, an updated formal review is urgently required.
It is an indictment of the government’s failure to legislate in this area that innocent victims face the prospect of inadequate compensation while they wait for the State to fix appropriate discount rates. The fact that the HSE was prepared to accept a minus rate of -1.5% in the recent Ruling is in itself recognition that the current regime is not fit for purpose.