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Government announces changes to calculations of personal injury compensation

View profile for Robert Dempsey
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On the 27th February the Government announced an amendment as to how lump sum payments to Personal Injury Claimants are calculated.

In personal injury claims, where the Claimant’s injuries are long term, permanent or a person has died, they or their family may receive a lump sum award to account for their future financial losses and expenses. 

This could include loss of earnings, future medical costs or home adaptations.

Rather than receive the compensation over time, it is often more convenient for all concerned to receive the payment in a single one off lump sum.

Part of the equation to calculate the lump sum includes a “Discount Rate”.  It is this Discount Rate which is the focus of the recent Government announcement.

It was felt that to receive a full one off lump sum payment was financially advantageous to receiving compensation in increments over time, the logic being a sensible Claimant would invest the money wisely and actually receive more than the actual loss.  

This is contrary to the long standing principle the Claimants are not to profit from their injuries but should be put back in the financial position they would have been in had the accident not occurred. 

It is for this reason it was considered appropriate the lump sum should be discounted.

For example: under the present system, if a 55 year old woman, assumed to retire 15 years later at age 70 has an annual loss of earnings of £5,000, one would not calculate her losses by simply multiplying the £5,000 by the remaining 15 years leading to an award of £75,000.

Instead, the £5,000 a year is multiplied by a Discounted Rate of 12.12 (as opposed to 15) leaving a lump sum of £60,600 rather than £75,000.

As of the 20th March 2017 the Discount Rate will change resulting in more generous and arguably fairer levels of lump sum payments.    

Rather than apply a Discount Rate of 2.5%, the new figure will be minus 0.75%.  Using the same example above, the calculation would see the annual figure of £5,000 being multiplied by around 15.3 leading to a figure of £76,500.

So why has the Government varied the Discount Rate?

The Discount Rate was last set in 2001 and has remained at the same level for the last 16 years.  The 2.5% rate was based on index linked gilts, i.e. bonds issued by the Government.  Since 2001, the yields on index linked gilts have systematically fallen and so an investment made in 2001 would not produce the same yield as an investment made in 2017. The new figures represent the returns on an investment.

The Government has recognised this has led to a shortfall in compensation leaving injured parties wanting.

The changes still maintain the principle that somebody who is injured through no fault of their own should not profit from their loss but equally should be placed in the position they would have been in had the accident not occurred.

Whilst the decision has met with objections from the insurance industry who are aware of the financial implications of the changes, there is evidence to suggest they have factored in these changes.  Furthermore, the Government has announced money has been set aside to deal with any potential implications across the public and private sector.

Solicitors who represent the interests of individuals and families affected by injuries and fatalities welcome the changes as being long overdue.  The dwindling rates of return on investments have meant that people injured through no fault of their own have not received appropriate levels of compensation and in many cases have fallen to rely upon Government care and assistance rather than turn to the parties found at fault for their injuries.

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