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Nestor Partnership

Nestor Partnership

Jennifer Stone, Nick Leech, Andrew Sands and Nick Martin reflect on the implications of the change in the discount rate

In order to understand the current discount rate, it is useful to appreciate what has led us to this point. For a large portion of the last century, lawyers and judges were reluctant to utilise consistent calculations for the compensation for future losses. This created great uncertainty and arguably unfairness in awards of damages.

Nick Leech and Andrew Sands consider ‘the Brexit Effect’ on compensation schemes

Brexit is taking the blame for much that is negative in the news, often for political purposes. However, the result of the recent referendum may well have thrown into doubt established case-law and the ability of the court to make an order for periodical payments in certain circumstances.

Nick Leech and Andrew Sands build on their article in October’s issue with further exploration of the traditional lump sum award versus periodical payments

Despite all that has been written about the present discount rate and its impact upon the calculation of lump sum awards the reality can be a legacy of lifelong uncertainty for claimants. An attempt to explain how multipliers include factors such as discount for accelerated receipt, the vicissitudes of life, and an assumed rate of investment return is highly likely to result in blank expressions. Hans Christian Andersen would be hard pushed to dream up such an unlikely and mysterious tale. On that note, please do not attempt explaining the discount rate, multipliers or multiplicands to your children.

Andrew Sands and Nick Leech advocate greater use of periodical payments aided by case law, old and new

A brief reminder of the benefits of settlement inclusive of periodical payments is always a good starting point. A secure, tax-free, lifelong income linked to earnings related inflation, adds up to a huge head start when contrasted with the traditional lump sum award. The list of headwinds afflicting the latter settlement type is lengthy – tax on investment returns, the unavoidable and often underestimated risks in relation to mortality and investment, and the cost of investment advice. All of those factors are nullified when the claimant is compensated by way of periodical payment income.

Andrew Sands and Nick Leech explain what is involved in setting up an investment strategy aimed at ensuring that lump-sum awards of damages last as intended

We have written extensively in this publication over the years, explaining why, from a financial perspective, periodical payments make sense – particularly for personal injury claimants who are burdened with the very significant and lifelong risks related to investment and mortality in respect of lump-sum awards. Periodical payments simply do away with all of that. Linkage to earnings-related inflation and tax freedom make them a must consider in all high-value claims. Unfortunately, not all claimants can benefit from that form of compensation – the court can only order periodical payments if it is satisfied of the reasonable security of continuity of payment. Insurers that are Lloyds Syndicate members, where the policies pre-date January 2004, cannot satisfy the court for various technical reasons. Also, many employer and public liability policies have indemnity limits, often under £10m. Periodical payments designed to keep pace with inflation might, over a long life expectancy, add up to a sum that impacts upon the level of indemnity. Again, the court would have difficulty with that as periodical payments would stop once the indemnity level is reached.

A sign of movement in the discount rate saga takes the form of a Consultation Paper, inviting those with an interest in personal injury claims to respond by 23 October 2012. Andrew Sands and Nick Leech analyse the dual approach that the Consultation appears to be taking.

We strongly support the view shared by many others – that the present rate of 2.5% does not reflect (and never really has since it was set by the Lord Chancellor in 2001) the real return available from Index Linked Government Stock (ILGS). The catalyst for the setting of that rate came from the House of Lords case of Wells v Wells [1998], which recognised that recipients of personal injury awards are not ordinary investors, and should not, therefore, be exposed to investment risk in order to obtain a real return on their awards. Real return, of course, means a return net of tax (say 1%), inflation (say 3%) and the costs of investment advice (1.5% per annum). That all adds up to a gross return of about 8%, which is not at all easy to achieve, and is not consistent with a cautious approach to investment risk.

Andrew Sands and Nick Leech provide guidance on allocation between capital sum and periodical payments in high-value cases

Periodical payments represent tax-free, inflation-proof, secure, lifelong income, thereby eliminating mortality and investment risk, and should consequently be given proper consideration. This is particularly the case now the courts have ordered that periodical payments must be indexed to the Annual Survey of Hours and Earnings (ASHE) 6115, an index specifically tailored to increases in carers’ earnings. The cost of care forms a dominant part of compensation packages for severely disabled claimants.

Andrew Sands and Nicholas Martin examine the issues relating to the discount rate and conclude that a reduction in the rate should be inevitable

It is common knowledge that the Lord Chancellor, Kenneth Clarke, has announced a review of the current 2.5% discount rate. The review has mainly been brought about through pressure from APIL, which has threatened Judicial Review. The aim of this article is to explain what the discount rate is and to highlight the important reasons for its urgent need for review. There have been attacks ( Warriner v Warriner [2002] and Cooke v United Bristol Healthcare NHS Trust [2003]) on the discount rate, but the courts have consistently held that any change can only be made by the Lord Chancellor, pursuant to s1 of the Damages Act 1996.

Nick Leech and Andrew Sands outline recent developments in the protection of cash balances, and the impact for personal injury victims

Much of the economic and financial news over recent times has concentrated on the VAT rate rise, reducing debt, fiscal austerity and the possibility of a double-dip recession. Although the banking crisis and the credit crunch now make up less of the headlines, most professionals and their clients are still rightly concerned about financial security and investor protection for their cash deposits. Many have spread their cash between several intuitions for added security.