Minister Publishes Expert Group Reports on Indexation and Discount Rates

Alison Kelleher, Partner reviews the two key reports relating to compensation payments in personal injuries cases in Ireland published by Minister for Justice, Ms Helen McEntee TD yesterday. Firstly, a Report of the Independent Expert Working Group to Advise on an Appropriate Discount Rate and secondly, a Report of the Interdepartmental Group on the Indexation Rate for Periodic Payment Orders.

1             Report on the Discount Rate

The Expert Working Group on the Discount Rate was formed in June 2023 and was tasked with providing advice to the Minister on firstly, an appropriate discount rate for use in personal injury cases and secondly to advise the Minister on the assumed risk profile of claimants.

Discount Rate

The discount rate is the rate used by the courts in cases involving catastrophic injuries to determine the size of a lump sum award necessary to compensate a person for future loss.  In the Russell v HSE decisions of the High Court in 2014[1] and the Court of Appeal in 2015[2], the discount rate applied by the Courts has been 1% for future care costs and 1.5% for other economic or pecuniary losses.

Section 24 (1) of the Civil Liability and Courts Act 2004 gives the Minister for Justice and Equality the power to prescribe by regulation “the discount rate that shall apply for the purposes of the assessment of damages in respect of future financial loss”.

The section also provides that those regulations “may prescribe different rates in respect of different classes of financial loss or different periods of time” and that the court can apply a different rate if it considers that the application of the rate prescribed by the Minister would result in an injustice being done.

The Court of Appeal has noted that even where the Minister did prescribe regulations, the Act as it currently stands “would not entirely remove the uncertainty in relation to the return on lump sum investments”.

The power conferred on the Minister by the Act has not been exercised to date instead, the setting of the rate has been left at the discretion of the courts.

Expert Group Report

The Expert Group lead by Retired Mr Justice Brian McGovern comprised of members with actuarial, economic, investment and legal backgrounds, met on six occasions following its establishment.  In addition, a Sub-Group with economic expertise analysed the performance of index-linked bonds in the period since the rate was last changed in 2014.

The Expert Group made following recommendations;-

• The Group does not recommend, at this stage, any change in the discount rate set by the High Court, and confirmed by the Court of Appeal in Russell v HSE.
• As far as the assumed risk profile of plaintiffs is concerned, the Group takes the view that it is constrained by the judgment in the case of Russell v HSE and recommends that plaintiffs in catastrophic injury cases should be considered as having a risk averse profile.
• The discount rate should be kept under review. The Group recommends that an expert group should meet at a maximum of every three years to reassess the discount rate.
• The Group recommends that a “trigger” mechanism should be introduced to enable the commencement of a review of the discount rate if there is a marked change in economic circumstances or the rate is successfully challenged in court.

Trigger Mechanism

The trigger mechanism recommended by the Group is an interesting concept.    The Group suggests that for example, a set of index-linked Government bonds could be monitored and if a majority of those bonds move outside of a pre-determined range for two quarters in a row, then a review of the discount rate would be triggered. The Group also considered that the trigger could be where a new court judgment superseded the principles contained in the Russell judgements, thus leaving some uncertainty as to whether the discount rate could remain open to challenge through the courts, diminishing the certainty anticipated and desired by parties to litigation.   The trigger mechanism will no doubt be the carefully considered by parties on both sides of personal injuries litigation.

2             Report on Indexation Rates for Periodic Payments

Periodic Payment Orders (PPOs) are an alternative to lump sum payments to catastrophically injured people, providing for an annual payment of damages over the Plaintiff’s lifetime rather than a one off lump sum damages payment.

It is universally acknowledged by stakeholders that PPOs are the most appropriate form of compensation.  However, in the absence of an appropriate indexation rate, Plaintiffs have opted for lump sums due to concerns by both Plaintiff’s advisors and indeed the Courts that under the current PPO regime a Plaintiff could be undercompensated when inflation is taken into account.

Since 2019, Plaintiffs have opted for lump sum settlements over PPOs following judicial commentary[3] that the indexation rate set out in legislation would result in under compensation for claimants as it did not take account of wage inflation.

The Indexation Rate Interdepartmental Group has recommended that:

• The PPO indexation rate should be based on a combination of the Harmonised Index of Consumer Prices (HICP) and Annual Rate of Change (ARC) in nominal hourly health earnings.
• The amount of a yearly periodic payment payable should be based on a PPO indexation rate comprising 80% of average Annual Rate of Change in nominal hourly health earnings added to 20% of the HICP.
• Where a Court makes a lump sum award in a personal injury case, it uses the Discount Rate to determine the size of the award necessary to compensate a person for future losses. The Rate reflects what an award recipient would likely receive in return if the award amount were invested. The Rate currently stands at 1% for future care costs and 1.5% for other financial losses.

Conclusions

Both reports will be largely welcomed by stakeholders in personal injury litigation.

In relation to the PPO orders Minister McEntee has committed to preparing the necessary regulations to facilitate the introduction more attractive PPOs.   She stated

“Periodic payment orders are the most suitable option to achieve this balance, as payments are more closely tied to actual costs of care and treatment over a lifetime, rather than estimated costs and life expectancy….. The proposals of the Indexation Group will ensure that periodic payments keep pace with future inflation and changes in healthcare costs. I have approved the recommendations of the Group and work is underway on preparing the necessary regulations, which once signed, will facilitate the practice of settling catastrophic injury cases by way of Periodic Payment Orders.”

In relation to the Discount rate the Minister commented “I have also accepted the recommendation of the Discount Rate Review Group that there is no material evidence to justify a change in the current discount rates set by the High Court in 2014. Work has also commenced on prepared the necessary regulations to set the discount rates for future financial loss and future cost of care.  These rates will be subject to periodic reviews and I am also considering the most appropriate way in which the ’trigger’ mechanism recommended by the Group can be brought into operation.”

[1] Gill Russell – v – HSE [2014] IEHC 590

[2] Gill Russell – v – HSE [2015] IECA 236

[3] Hegarty (a minor) -v- HSE [2019] IEHC 788