The government today rejected the idea that it has insufficient evidence to proceed with legislation overhauling how the discount rate applied to personal injury damages is calculated.
The Ministry of Justice said it did not accept the view of the House of Commons justice select committee that it needs more proof before reforming the method for calculating reductions to take account of returns on investments. In November, the cross-party group of MPs was critical of the approach taken by the government and called for ministers to prove how they intended to balance the interests of victims and defendants.
In a delayed response – convention is that departments usually respond to committee reports within two months – the MoJ accepted that its evidence was ‘not fully comprehensive’ but noted that extensive steps had been taken to gather information through public consultation and research.
The response was published on the same day that the government announced it would proceed with discount rate reform as part of the Civil Liability Bill, setting the rate with reference to ‘low risk’ rather than ‘very low risk’ investments, meaning a larger percentage can be deducted on the assumption of higher interest rates.
The response said: ‘The government’s evidence shows that the present system is very likely to be producing significant levels of over-compensation relative to the amount of compensation that would, in the setting of the discount rate, be expected to be produced under the 100% compensation principle.’
Research by government’s actuary department indicated that average awards may exceed the expected return by around 35% at present, with that figure falling to 20-25% after allowances are made for necessary expenses on tax and investment management.
The response added: ‘Evidence demonstrates that claimants do not invest as the present law assumes and that they use diversified low risk portfolios. There may be limits to the amount of evidence that it is realistic to be collectable… however, the evidence that has come to light is clear and convincing as to the case for change and strongly supports the need for the new framework.’
Under proposals outlined today the rate would reviewed every three years by an independent expert panel chaired by the government actuary advising the lord chancellor on the rate.
When the revised method was mooted last September, the MoJ estimated that the discount would be around 1%.