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Where does today's news on expert panel leave the discount rate issue?

26 August 2014

It was already the view of many that it was unlikely now that we would hear from the Ministry of Justice with a final conclusion to its on-going review of the discount rate before the General Election in May 2015. Today, news has been released by the MoJ of another step along the journey, but because of the time that will be needed to take that additional step in the process, we surely also now have confirmation that the current 2.5% level of the rate will remain unchanged during the remainder of this parliament.

Today’s announcement

The MoJ have today said that the Secretary of State, Mr Grayling, has decided to appoint a panel of three experts to work together and to prepare a report which gives him expert investment advice to use within the discount rate review. The three experts are to be an expert in the financial management of investments including as to what investment advice and services are provided to claimants; an actuary who can deal with issues regarding the rate; and an academic who knows the workings of the financial services market including aspects relevant to the economic cycle.

Positions to fill

MoJ Procurement is already on the job. Apparently created on 13 August but released today is their Invitation to Quote for the work. Applications for any of the three positions are required by 10 September. The planned date of the award of the contracts is 22 September. See Personal Injury Discount Rate - Expert Investment Advice

How long will the production of the report take?

The MoJ don’t seem sure. At one point they say that the estimated contract length is for two months until 22 November. At another, they say the required commencement date is October/November and that the duration of the engagement is six months. They say at another point in the papers that they expect a final report from the three experts combined to be released within six months of the award of the contract.

It’s likely in our view to take more time rather than less to complete this project. The MoJ will be doing well to award contracts in September. Instead, October or even November look more realistic for that first step. The length of time taken to consider the evidence and to write the report is unpredictable and will depend on who the experts are and how they approach their task. If they manage to do it in six months, then this takes us until April/May 2015 even with an October/November 2014 start date.

The next General Election is on 7 May 2015 and before that parliament will be dissolved on 30 March 2015. It seems to be guaranteed now that Mr Grayling will not, at least during this parliament, be the Minister who will make a decision on the level of the discount rate. Instead, the issue will fall into the in-box of whoever is appointed Secretary of State in the first post-election administration.

Why now?

It may be that the MoJ were getting ready with this release at this time anyway. Or it may be linked to the on-going attention of APIL in this area, who say that they wrote again to the MoJ in July enquiring as to progress, and threatening to bring forward another JR on the point because of what they see as further delay. Part of today’s announcement came with the release by APIL of the Secretary of State’s reply to their July letter, which in turn outlined today’s proposed way forward.

APIL are not happy at today’s news which they say they see as creating more delay, and they complain that it is just the case of the MoJ wanting to be seen to be being active. But in a situation where Mr Grayling says he needs expert input in a complex area, and where he thinks it would be premature to make a decision without that, APIL must know that it will now be difficult to take any legal challenge against the Minister, whose decision to proceed as he is doing will surely stand up to scrutiny.

The areas being considered

The MoJ require their panel to look at the types of investment which are suitable for a claimant, the risks attached to them, and if a balanced/mixed portfolio is recommended how that should be made up. They are to look at reasonable rates of return that can be expected, looking ahead as they do so at the economic outlook and where we are currently in the economic cycle. They are also to consider the issue of potential multiple rates, presumably for different heads of claim.

They are also to consider high level issues such as for how long a rate should remain in place, and the competing issues regarding having a rate that is simple to administer (and so presumably stable), or one that seeks to be as accurate as possible.

As to the evidence to work on, the MoJ require the panel to look at the results from their first consultation from 2012 which looked at how the rate should be set (but not the second from 2013 which looked at the legal framework surrounding the rate), as well the IPSOS Mori research from 2013 which received criticism at the time due in part to its limitations. They will also no doubt call on their own experiences.

A sensible approach?

Mr Grayling is right that this is a complex area. Careful thought is called for, notwithstanding APIL’s complaints. This remains a most important issue not only for insurers but also for government as a paymaster of claims, where any fall in the rate is likely to substantially increase the cost of the future loss aspect of claims, particularly for catastrophic injury.

It is worth having highlighted too as the MoJ’s terms of reference do, the importance of understanding that in the interests of both certainty and affordability, to ensure that any new rate which is set is able to take account of the fact that economic conditions will tend to fluctuate, as we have seen over recent years. But economic conditions will tend to be cyclical in nature, so that loud voices calling for change at one part of the cycle risk creating unnecessary pressures on the system where the perceived problem will improve by itself as the cycle moves on to another stage.

The key individuals

The identity of those appointed to the panel will be important to the outcome of their report. The decision on the appointment is a matter for government, but candidates with the right experience who clearly understand the issues should apply. As we have seen, the panel’s report is likely to fall onto another Secretary of State’s desk in spring 2015. This sometimes means a report of that type requested by a minister no longer in post will receive less weight. Here though, where a new Secretary of State will need to deal with the same issue, and where the panel will be grappling with the issue in what seems to be a sensibly laid out way, the report may be of considerable influence still.


For more information please contact Simon Denyer, Partner on +44 (0)161 604 1551 or email simon.denyer@dwf.co.uk

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.