Damages (Personal Injury) Order 2001

– in the House of Lords at 7:50 pm on 29th November 2001.

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Photo of Lord Kingsland Lord Kingsland Conservative 7:50 pm, 29th November 2001

rose to move to resolve, That this House calls on Her Majesty's Government to revoke the Damages (Personal Injury) Order 2001 (S.I. 2001/2301), laid before the House on 27th June 2001.

Photo of Lord Kingsland Lord Kingsland Conservative

My Lords, when assessing damages in court cases involving personal injury or fatal accident, a long-established principle is that full compensation be paid to the claimant. The courts order payment of such compensation in the form of a lump sum. The sum represents an amount that, when invested, will generate a future flow of annual income sufficient to meet the expected costs of care and medical attention throughout the remaining years of the victim's life. Clearly, to cover any future flow of anticipated expenditure, the lower the expected rate of return from investing the lump sum, the higher the lump-sum award will have to be.

In the case of Wells v Wells, the Judicial Committee of your Lordships' House decided that the so-called Ogden tables, prepared by the Government Actuary, should be used to determine the capital sum that best represents continuing loss of earnings, cost of medical expenses and cost of care in personal injury awards. The tables are especially useful in relation to children who are brain damaged or individuals who are paralysed for life.

In effect, the tables are multiplication tables. The judge determines the annual cost or loss and uses the tables to establish the lump-sum compensation. When using the tables, it is necessary to identify the rate of return on certain specified investments. In order to avoid problems that arise from day-to-day changes in the rate of return, Section 1(1) of the Damages Act 1996 gives the noble and learned Lord the Lord Chancellor power to set it. Section 1(4) of that Act enables such an order to be annulled by either House of Parliament.

This Motion to withdraw is substituted for the customary Prayer because, owing to the need to recall Parliament in September and October this year, the 40-day limitation period had elapsed, through no fault of the Government or the Opposition, before your Lordships reassembled on 15th October.

Despite the urgings of the Judicial Committee of your Lordships' House in the case of Wells v Wells, it was not until June 2001 that the noble and learned Lord, relying on calculations made by the Treasury's debt management office, finally set a rate of 2.5 per cent. However, the calculations were manifestly inaccurate. The noble and learned Lord tried again. New calculations were produced; but in the end he reaffirmed his earlier decision.

In giving the reasons for his decision the noble and learned Lord contended that he applied the appropriate legal principle laid down in Wells v Wells. In particular, he stated that it was,

Xunrealistic to require severely injured claimants to take even moderate risks when they invest their damages awards".

However, it is plain that the substance of the decision of the noble and learned Lord does not reflect that approach. Our view is that a proper application of the principle in Wells v Wells would produce a rate of return of 2 per cent. The difference between 2.5 per cent and 2 per cent is crucial because of the implication for the scale of the lump sum payments.

In Wells v Wells the noble and learned Lord, Lord Lloyd of Berwick, said:

XWhat the prudent plaintiff needs is an investment which will bring him the income he requires without the risks inherent in the equity market, which brings us back to the index linked government stocks".

The problem that the noble and learned Lord, Lord Lloyd, rightly identified is that for most personal injury claimants the costs to be met in the future are care costs that arise on a regular daily, weekly or monthly basis and which are unavoidable. Yet, because of the volatility of equity prices, a claimant who invests his or her award in equities would be exposed to the risk of having to realise capital to meet needs at times when the market value of his or her investments are depressed, thus exhausting the award sooner than anticipated.

The noble and learned Lord, Lord Lloyd, was firmly of the view that the only appropriate investment upon which to base the rate of return would be index-linked government stocks of over five years duration. However, it is clear that in setting the rate the noble and learned Lord the Lord Chancellor was influenced by the opportunities for equity investment. He said:

Xthere are sensible, low-risk investment strategies available to claimants which would enable them comfortably to achieve a real rate of return at 2.5 per cent or above without them being unduly exposed to risk in the equity markets".

Apart from the fact that that observation contradicts the earlier statement of the noble and learned Lord that he applied the appropriate principles in Wells v Wells, recent activities in the equity markets have severely undermined the strength of the case of the noble and learned Lord. Since United Kingdom equities peaked at about the end of 1999, the FTSE all share index has fallen by over 20 per cent. Indeed, the approach of the noble and learned Lord mirrors that taken by the Court of Appeal in Wells v Wells which was rejected in terms by the Judicial Committee of your Lordships' House.

However, inconsistency with the Judicial Committee's judgment does not end there. The Judicial Committee also made it clear that the selected gross interest rate should be reduced to allow for the effect of tax on the investment proceeds in the form of income and capital gains tax. In a letter to David Kemp, QC, dated 21st September 2001, the Lord Chancellor's Department said that the base figure used by that department of 2.4 per cent,

Xdoes not take tax into account".

The letter goes on to say:

Xa figure of 15 per cent has been used as indicated by Lord Lloyd in Wells v Wells", as an appropriate rate for tax deduction. Deducting 15 per cent gives a figure of 2.09 per cent. So on the figures of the noble and learned Lord the Lord Chancellor, it is clear that 2 per cent is a more appropriate rate. For a 25 year-old woman with a proven loss of #40,000 per annum, such a difference in interest rates results in a loss of #150,000 in a lump-sum award.

There are other less obvious but, nevertheless, important inconsistencies in the way in which the gross amount has been reached. The noble and learned Lord the Lord Chancellor decided to base his conclusions on an average over all index-linked government stocks, saying, without giving a reason, that he was not obliged to accept that part of the Judicial Committee's decision. Yet the inclusion of government stock with redemption rates under five years increases the gross rate to the detriment of long-term victims for whom the tables are primarily designed.

Perhaps the most undermining evidence of all is that provided by the Government Actuary. Section 1(4) of the Damages Act requires the noble and learned Lord to consult the Government Actuary as well as the Treasury. The Government Actuary is the Government's principal adviser on pensions, which are what most of the awards in these cases are intended, after all, to provide.

With the greatest possible respect, the Government Actuary is far better qualified to advise on these matters than the debt management officer of the Treasury, which may, on occasions and subconsciously, be susceptible to the financial concerns of government departments, such as the Department of Health or the Ministry of Defence.

The Government Actuary was a member of Sir Michael Ogden's working party which met to respond to the noble and learned Lord's consultation and which recommended a rate of 2 per cent in May 2000. Moreover, in his report to the noble and learned Lord the Lord Chancellor, pursuant to Section 1(4) of the Damages Act 1998, the Government Actuary stated:

XMy recommendation is that the rate of discount should be prescribed as the rate shown, at the date of the trial, as the gross redemption yield on the FTSE Actuaries Government Securities UK index for index linked gilts with over 5 years to redemption".

He added:

XThis rate should be adjusted to allow for tax".

Moved to resolve, That this House calls on Her Majesty's Government to revoke the Damages (Personal Injury) Order 2001 (S.I. 2001/2301), laid before the House on 27th June 2001.—(Lord Kingsland.)

Photo of Lord Thomas of Gresford Lord Thomas of Gresford Liberal Democrat 8:00 pm, 29th November 2001

My Lords, I support the Motion in the name of the noble Lord, Lord Kingsland. Perhaps I can add a little flesh to the bones from practical experience. Those of us who practised in the personal injury field will know that the purpose of civil damages is to put the plaintiff in the same situation as if he had never been injured. The purpose is to award a lump sum which, together with interest over a period of time, will meet all the expenses which can reasonably be foreseen. In my earlier years there was a protection to the plaintiff for these capital sums by investing in a mixed bag of equity and government stock. To a degree, that was a protection against inflation. However, it was a slightly risky investment.

In 1981 the index-linked government stock was produced. That was a way in which a person could be fully protected against inflation because the stock was linked to the retail prices index. As the noble Lord, Lord Kingsland, pointed out, in 1998 Wells set a 3 per cent figure pending the Lord Chancellor's determination under the Act. The Judicial Committee of the House of Lords said the sooner he performed that duty the better; we would know where we were. At the time a figure of 3 per cent was set. That was not a unanimous decision of their Lordships. The yield on index-linked government stocks averaged over a three-year period was 2.85 per cent. It was slightly above the three-year average, even at that time, but the 3 per cent figure was then maintained.

I well recall sitting as a deputy judge in the High Court some two years ago faced with claims for personal injury, each attracting lump sum damages of over #1 million, and being faced with this problem. There were strong submissions that the 3 per cent rate should be lowered because, as the noble Lord said, the Government Actuary, upon whose figures the Lord Chancellor was supposed to act, in his working party had advised a rate of 2 per cent. That was the submission made to me as a deputy judge. Naturally, after reserving judgment and making inquiries of the Lord Chancellor's Department as to when the rate would be set, I followed precedent. We thought—it was certainly strongly put to me—that the rate would be coming down from 3 per cent. Nevertheless, I followed precedent. I regret to say that the plaintiffs in those three cases, who were severely injured, lost out in the sort of figures to which the noble Lord, Lord Kingsland, referred in his illustration. I have practical experience of seeing how injured people have not had the money to which the system says they are entitled.

There was a long wait. It was not until June of this year that the Lord Chancellor finally made his pronouncement. It is something like two to three years since the decision in Wells. I should like to know why. We see so many statutory instruments going through this House and through another place. This is perhaps one of the shortest I have ever seen in my life. All it states, effectively, is that the rate should be 2.5 per cent. Why on earth did it take three years for that to happen? Why is not the rate more flexible? Why can it not be altered in accordance with changing rates? As the noble Lord, Lord Kingsland stated, over three years to June, taking into account 2.5 per cent inflation, the average yield at the current rate over a three-year period was 2.1 per cent. If tax is taken into account, it was less than 2 per cent. Yet, at that very moment, the Lord Chancellor announced a 2.5 per cent rate.

For another three, four, five or six years, however long it may take, that is the figure that will be used. If interest rates fall further and if stock levels fall, so the injured plaintiff will suffer. That is insupportable. I want to see the Lord Chancellor produce a flexible rate that changes as the FTSE index changes. The figures are available on a monthly basis. There is no reason why that should not be done, certainly at more regular intervals than three years, so that plaintiffs can be properly compensated for their serious injuries. We have been talking in terms of indices and financial jargon of one sort or another. However, this is a human problem. It is the injured person who is suffering.

Photo of Lord Hunt of Wirral Lord Hunt of Wirral Conservative

My Lords, as has already been pointed out in the debate on 25th June 2001, when the noble and learned Lord the Lord Chancellor set the discount rate at 2.5 per cent, he ended three years of uncertainty. However, I believe that the last thing that is needed by anybody, including claimants, is for the whole debate to be re-opened.

Noble Lords will know that I am senior partner at Beachcroft Wansbroughs. For many years I have specialised in financial services, especially personal injury damages. I declare that interest. Although I well understand my noble friend's argument put forward in the debate, I believe we have to reflect on the fact that in practice, claimants do not invest in index-linked government securities. Speaking as chairman of the Association of Independent Financial Advisers, I should be surprised if any independent financial adviser would recommend investment solely or even primarily in index-linked government securities.

At the time of our Appellate Committee's decision in Wells v Wells, there were 12 index-linked government securities available. That ruling was based on the assumption that the Government would continue to issue ILGS.

The fact is that no new ILGS have been issued, although there have been further tranches for existing redemption dates. There are now 11 index-linked government securities in issue, four of which have redemption dates within the next five years. There are no ILGS with a redemption date beyond 2030. Therefore, it is not possible for a claimant with a life expectancy of more than 29 years to protect himself or herself beyond that period. In five years' time there will be only seven ILGS unless new ones are issued, and we are informed that none is contemplated.

There is, however, a great demand for ILGS, particularly from pension funds. The Government's failure to issue new index-linked government securities has distorted the market in those stocks. Thus, any argument which now seeks to rely on the return from ILGS is, I believe, completely out of date. Therefore, the Lord Chancellor was right to depart from the view of the Appellate Committee that the best way to protect the interests of injured claimants was to tie the discount rate exclusively to the return from ILGS.

I believe that the Lord Chancellor was entitled to that considered opinion as the Damages Act places the responsibility for setting the rate on him, the only limitation on his power being the obligation to consult the Government Actuary and the Treasury. My noble friend quite correctly quoted the Lord Chancellor when he said that ILGS were not the only indicator of the real rate of return on low risk investment.

If this debate had taken place before the order had been made I would have argued very strongly that the discount rate should remain at 3 per cent. I tabled a Question for Written Answer about the impact of the reduction from 3 per cent to 2.5 per cent. The noble and learned Lord the Lord Chancellor responded that a full assessment of the impact of the new discount rate was being prepared and would be published in due course. I do not know whether the noble Baroness will be able to give the House an update on when that assessment will be ready. I shall be very interested to hear what the impact is.

One must recognise that any reduction, particularly against the artificial market which exists at the moment in ILGS, imposes a huge additional burden, for example on the National Health Service. The report of the National Health Service Litigation Authority states that the additional burden caused by the reduction from 3 per cent to 2.5 per cent amounted to #500 million. The decision to set the rate at 3 per cent was that of the Appellate Committee in Wells v Wells. In arguing that it is no longer appropriate to fix the rate to ILGS, I recognise that in today's market an investor should easily be able to achieve a return of 3 per cent without running any undue risk. If one accepts that to fix the rate by reference to the return from ILGS is no longer fair to both sides, 3 per cent is likely to be too low. Having said that, I recognise that this order was made after full consultation and consideration of the interests of claimants and defendants alike and, I believe, strikes a fair balance between them. I have no wish to see a return to the atmosphere of uncertainty which existed before the order was made.

In conclusion, having discussed this matter with my noble friend, I recognise the strong view that he expresses from the Front Bench. I hope that in the longer term those responsible for this policy will give greater consideration to providing the court with power to order structured settlements. That entirely equitable and humane alternative would avoid all those distasteful arguments about life expectancy and give the injured persons, particularly the parents of an injured child, the security that they need.

Photo of Baroness Crawley Baroness Crawley Labour 8:15 pm, 29th November 2001

My Lords, listening carefully to the noble Lord, Lord Kingsland, I cannot agree with the argument that he put forward in his bid to revoke the Damages (Personal Injury) Order 2001. I try not to disagree with the noble Lord as a former colleague in the European Parliament. However, tonight I must do so. The crux of the noble Lord's problem with the order is that the discount rate for the lump sum damages in personal injury cases has been set too high and should be rounded down to 2 per cent. Yet, as the noble Lord is aware, the Lord Chancellor did not pluck the rate of 2.5 per cent out of thin air. He did not pass me in the corridor one day and ask me what I thought the discount rate should be. The Lord Chancellor did all, and more, that he was required to do by the 1996 Act in terms of consultation. He also commissioned the highest quality advice from independent financial experts.

Having considered all the relevant evidence, the Lord Chancellor came to the conclusion that it was right and appropriate to set the discount rate at 2.5 per cent. In so doing he made it known that his intention was to set a rate that, as far as possible, ensured that injured parties in personal injury cases received the full compensation awarded by the court, no more and no less.

As the noble Lord, Lord Kingsland, is aware and the noble Lord, Lord Hunt of Wirral, has just observed, inadequate compensation is unfair to claimants and over-compensation is unfair to defendants. I believe that in this case the Lord Chancellor has struck the right balance in the rate that he set. I also believe that the noble and learned Lord has struck a balance in recognising that the most significant risk that claimants face is not that their investments will fail to yield a 2.5 per cent return per annum but that they will live longer than assumed when the compensation was awarded. To raise the value of lump sums with an artificially low discount rate will hinder the development of structured awards which can reduce the risk of claimants who live longer facing poverty in old age.

The noble Lord, Lord Kingsland, may accept that it would seriously impede the timely settlement and disposal of personal injury cases if frequent changes were made to the rate to take account of limited and, most probably, temporary changes in market conditions. For these reasons, among others, I cannot agree with the challenge to the order.

Photo of Lord Brennan Lord Brennan Labour

My Lords, in my professional life it has been my duty to represent a considerable number of injured plaintiffs and many defendant organisations which meet such claims. Experience has taught me one vital fact about those who are severely injured, which is what this debate is about: that they, and particularly their families if they are children, want the assurance, in so far as they can obtain it, that the money they need to look after themselves or their loved ones will not run out.

Contrary to some superficial reports that large awards are squandered, reputable research indicates that many such families save money against a rainy day which they should be spending on the care for which the money was awarded in the first place. They save because they are afraid that the money will run out. In one's professional career one has faced many campaigns to change the rate of interest, which is at the heart of calculating the future loss. The objective is to avoid the risk of the money running out.

The time has come I fear to give up the campaign for the moment. Only three or four years ago the rate was 4.5 per cent. That was wholly unjust. Because of the decision in Wells v Wells it became 3 per cent. That was acceptable at the time. It has now been set at 2.5 per cent. That is the reality. The Motion will not change it.

In giving his reasons, my noble and learned friend the Lord Chancellor tried to reflect a number of considerations. Whether practitioners, trade unionists or whoever agree or disagree, that is the reality. I think that it is time to put the argument aside, with three very important provisos. The first one is that although the Lord Chancellor rightly said that it would not be right to tinker frequently with this rate, equally it would be wrong to be indifferent to a market where rates of interest have gone to the present level and could sink yet more. To bear that in mind and to review the rate earlier than three years if the circumstances required would surely be a prudent approach.

The second proviso is, I hope, important to practitioners. In the Damages Act 1996, Section 1(2) follows Section 1(1) which gives the Lord Chancellor the right to prescribe the rate. But subsection (2) is very important because it allows a judge to award a different rate. If the Lord Chancellor can find it in his heart to forgive me, I have to correct his reasons in one material particular. At the end he said that under that subsection a judge may adopt a different rate in a particular case if there are Xexceptional circumstances" so to require. The phrase Xexceptional circumstances" is not a statutory phrase. The subsection says that a judge can award a different rate, if in the circumstances of the particular case, it is Xappropriate"; in other words, if justice requires it, not if there are exceptional circumstances. Practitioners should remember that.

My last proviso is not really a proviso; it is a strong and urgent request to the Government to put this history of uncertainty about claims and damages right out of the legal arena in personal injuries claims. That can be done under the law by judges awarding the annual cost of the loss— whether it be care, transport or whatever—which will run for the lifetime of the injured person. So when they go to court the decision is: how much do you need from time to time for that requirement? The heartache, the legal costs and the waste of time spent in trying to calculate a lifetime sum could be completely avoided. Justice would be done. Worry would be put aside. Everyone interested in this, from the claimants to the insurers and the lawyers, would find it much more satisfactory.

I hope that the Lord Chancellor's present consultation on this issue will lead to a conclusion as robust as the one that I have suggested. The debate marks a review of yesterday. I close by inviting a different approach tomorrow.

Photo of Baroness Hooper Baroness Hooper Conservative

My Lords, I support my noble friend's Motion. In so doing, I support the argument put forward by the noble Lord, Lord Brennan, to end the uncertainty in this matter.

I intervene in the debate as a former independent board member of the Medical Defence Union. I shall not repeat the detailed arguments which have already been made. I recognise the needs of claimants in these sometimes very tragic circumstances. But I make the point that lowering the discount rate from June of this year immediately increased compensation payments for medical and negligence claims. It dramatically increased the National Health Service's clinical and negligence liability. That was a point made by my noble friend Lord Hunt. It increased the payments made by medical defence organisations on behalf of their members. These payments have increased exorbitantly in recent years. Therefore, it follows that any further decreases in the discount rate will not be in the public's long-term interest as increases in awards will ultimately be made from the public purse.

I also ask the Minister why discount rates cannot be based on a prudent combination of index-linked government stocks and equities and not just on index-linked government stocks. That blend would be extremely helpful.

The final point that I make is in relation to the retrospective effect of these changes. Medical negligence claims have such long time-scales that any increases in awards have an immediate adverse effect on NHS funds.

Photo of Baroness Scotland of Asthal Baroness Scotland of Asthal Parliamentary Secretary, Lord Chancellor's Department, Parliamentary Secretary (Lord Chancellor's Department)

My Lords, I first thank all those who have contributed to the debate. I am very grateful to noble Lords who have raised a number of issues. Noble Lords will know that my noble and learned friend the Lord Chancellor gave a long and detailed consideration to this order. In so doing, he acted entirely properly throughout and reached an entirely reasonable decision.

I have listened with great care to what the noble Lord, Lord Kingsland, has said, but perhaps I may gently suggest that some of the quotations were a little selective. One really must read the decision and the reasons given to it in the round. In preparing for the debate, I refreshed my memory by reading those reasons in full. Indeed, I was tempted, so comprehensive and complete were they, simply to read them into this debate as my speech. But I know that that would never do.

Last year the Lord Chancellor issued a consultation paper seeking views on his powers in setting the discount rate. Respondents were overwhelmingly in favour of the Lord Chancellor prescribing a discount rate, but it is right to say that there was a wide range of contrasting opinions about what the rate should be. The noble Lord, Lord Thomas, asked why it took so long. Part of the reason is because the Lord Chancellor was determined to get this matter right and to make as broad a consultation as was necessary. The Lord Chancellor gave careful consideration to the many difficult and detailed points raised and commissioned further advice from expert financial analysts.

I was refreshed to hear the comments made by the noble Lord, Lord Hunt of Wirral. I agree with him in terms of what the reality of the situation demands.

In the course of the process, the Lord Chancellor, as he is required by statute, consulted the Government Actuary and the Treasury. He also approached the Debt Management Office, which is the Treasury executive agency responsible for managing the Government's debt. As such, it records daily market prices on all government stocks available in the market and is an authoritative source on the real yields implied by those prices. His decision takes account of their advice about the details of different methodologies. I stress the word Xconsultation". The Lord Chancellor, although he is obliged to consult and to take that into consideration, is not restricted to simply applying what those consultees say. He must engage in an analytical process of defining what the consequences of those diverse consultations actually mean.

On 27th June, the Lord Chancellor laid the order setting the discount rate at 2.5 per cent. His reasons were placed in the Libraries of both Houses. Those reasons referred to a three-year average gross yield of index-linked government stock of 2.61 per cent, on which the decision was largely based. Questions were raised as to the correctness of the figure, and the Debt Management Office, which supplied that figure, subsequently discovered that there were certain minor inaccuracies in the underlying data.

It was regrettable that that error arose. As a result, the Lord Chancellor considered his decision completely afresh. He applied the legal principles laid down authoritatively by the courts, most recently by an Appellate Committee of your Lordships' House in Wells v Wells, as has already been said.

It was held that,

Xthe object of the award of damages for future expenditure is to place the injured party as nearly as possible in the same financial position he or she would have been in but for the accident. The aim is to award such a sum of money as will amount to no more, and at the same time no less, than the net loss".

That point has been emphasised by several noble Lords, not least by my noble friend Lady Crawley. The Lord Chancellor also acknowledged that claimants who had suffered severe injuries in an accident will not be in the same position as ordinary investors and will need to ensure that they have dependable sources of income to meet their future needs and care costs. For those reasons, it is unrealistic to expect them to take even moderate risks when investing their damage awards.

The Lord Chancellor thought it important that both claimant and defendant should have a reasonably clear idea about the impact of the discount rate on their case. He decided that this objective would be achieved by setting a single rate to cover all cases; that it should be set to the nearest 0.5 per cent; and that there should not be frequent changes to the rate. Noble Lords will know that the noble and learned Lord, Lord Lloyd of Berwick, made just that point in Wells v Wells, when he said that it was undesirable that the guidelines should be changed too often.

The discount rate has to cover a wide variety of different cases and claimants with widely differing personal and financial characteristics. The consultation exercise also demonstrated that estimating the real rate of return on possible future investments, including index-linked government stock, involves making some assumptions for the future about the wide variety of factors that affect the economy as a whole—for example, the likely rate of inflation. So any approach to setting the discount rate must be fairly broad brush. There can be no single right answer as to what rate should be set.

Their Lordships in Wells v Wells decided that it was appropriate to set the discount rate by reference to the average yield on index-linked government stock. In deciding what the rate should be, the Lord Chancellor considered advice on various forms of investment in addition to index-linked government stock, including banks, building societies, bonds and equities. I must tell the noble Baroness, Lady Hooper, that that was very much in his mind.

He considered that claimants with a large award as compensation could reasonably be expected to seek expert financial advice. I was not surprised to hear the noble Lord, Lord Hunt of Wirral, say that that was in accordance with good practice. The advice that my noble and learned friend received demonstrated that a mixed portfolio, which would be recommended as offering a low-risk form of investment, could be expected to produce real rates of return well in excess of 2.5 per cent. Nevertheless, the Lord Chancellor followed their Lordships in Wells v Wells and decided that he should use the average yield on index-linked government stock as the benchmark for setting the rate.

There is no single correct method by which the average yield on index-linked government stock can be calculated. Among other factors, the calculation will depend on which stocks are to be included in the average, the length of the period under consideration, the inflation assumption made and the form of average taken. There is room for reasonable people to reach different conclusions as to the preferable approach to each of those points of detail. Indeed, there were some differences of this nature between the judgments of their Lordships in Wells v Wells itself.

The Lord Chancellor chose a methodology for calculating the average yield on index-linked government stock that is robust and straightforward. It is a simple average of the real yields over the past three years of all stocks available in the market. His calculation is based on an assumed inflation rate of 3 per cent, which is now the standard industry assumption.

That calculation produces an average gross yield figure of 2.46 per cent and a yield net of tax of 2.09 per cent. Accordingly, my noble and learned friend concluded that the net average yield on index-linked government stock, as adjusted to take account of tax, lies in the range between 2 per cent and 2.5 per cent. In his opinion, following Wells v Wells, the discount rate should be set with that range in mind. The Lord Chancellor did not consider that the choice of whether a rate of 2 per cent or one of 2.5 per cent was appropriate was a simple arithmetical matter, nor that Wells v Wells required him to prefer one rate or the other.

It was in the context of that final stage of the reasoning process—whether to round up or down—that the Lord Chancellor again considered the advice received through consultation. That included advice that the present rate of return in respect of index-linked government stock does not represent a pure and undistorted measure of the real rate of return that markets would afford. It also appeared that there are sensible low-risk investment strategies available to claimants that will enable them comfortably to achieve a real rate of return of 2.5 per cent or above, without their being unduly exposed to risk in the equity market—a point reinforced this evening by the noble Lord, Lord Hunt of Wirral.

Having considered all the evidence and advice available to him, my noble and learned friend concluded that the discount rate should be 2.5 per cent. In doing so, he had borne in mind that it will, of course, remain open to the courts, under Section 1(2) of the Damages Act 1996—I am happy to confirm to my noble friend Lord Brennan that his correction was right—to adopt a different rate in any particular case if there are exceptional circumstances to justify them in so doing.

So there is a degree of flexibility. The Lord Chancellor's decision to set the rate at 2.5 per cent, which achieves the objective of providing full compensation—no more; no less—strikes a fair balance between the interests of claimants and defendants. There is a major point here. The Lord Chancellor has set the discount rate in exercise of his statutory powers to do so, has directed himself correctly in accordance with the law and acted throughout on the highest quality legal and financial advice.

Your Lordships may think it significant that having set the discount rate at that level, he has been criticised both by those who want a lower discount rate and by those who want a higher rate. That in itself is unsurprising. But—perhaps this is the point—no one has initiated legal proceedings to challenge his decision in the courts. Any such challenge would now be time-barred. The courts are the correct place to challenge the ministerial exercise of discretionary powers conferred by Parliament. One almost feels that if no one is entirely happy, my noble and learned friend has probably got it exactly right. I invite your Lordships to so infer.

I turn to some of the specific points that have been raised. The noble Lord, Lord Kingsland, said that the Lord Chancellor's decision mirrored that of the Court of Appeal in Wells v Wells, which was overturned by their Lordships on appeal. Your Lordships will know that that is not correct. The Court of Appeal in Wells v Wells favoured a figure of 4.5 per cent based directly on a mixed portfolio. The noble and learned Lord the Lord Chancellor used the benchmark on government stock and adjusted that figure only at the margins to take account of the mixed portfolio and other factors which I have already outlined.

In reply to the noble Lord, Lord Thomas, who asked about setting the rate and suggested that the delay was unreasonable, it can be seen from what I have described that it took a great deal of time and care to reach that conclusion. I invite the noble Lord to accept that it was undertaken as speedily and efficaciously as was necessary and appropriate.

The noble Lord also asked about a flexible rate. What people most need in this area is certainty. A number of noble Lords commented on the distress, concern and disadvantage which was caused by instability and lack of certainty. We do not believe it would inure to anyone's benefit to return to that position.

The noble Lord, Lord Hunt, asked about a lump sum. Calculating a lump sum is not an exact science and claimants will invariably end up with too much or too little. That is why the noble and learned Lord the Lord Chancellor is currently taking forward work on structured orders and expects to publish a consultation paper on detailed proposals in the new year. My noble friend Lord Brennan mentioned some of that work.

There is an issue in relation to lump sum awards. Some have argued that it will encourage families to save money instead of spending it on care; that families will be concerned that they will be squandering it. Others say that they will be depriving themselves of the care needed. The consultation paper must encompass all such issues in order for us to gain a better understanding before reaching an informed decision.

The noble Lord, Lord Hunt, also asked when information will be published. The published information will be available early in the new year. We need to gather data from all the major interest groups affected, including the local authorities. The latter has been taking a little time and we must await the outcome of that exercise. However, the matter is being examined with a deal of energy.

I hope that I have covered the issues which were raised by noble Lords. In responding to the Motion, I should make clear that I am not, on behalf of my noble and learned friend the Lord Chancellor, making a fresh decision but seeking better to explain and amplify why he reached the decision he reached in July. That is the only decision that he has made in relation to the matter.

I invite your Lordships to say that we have had a good debate but that time has moved on. Many cases have been settled as a result of the 2.5 per cent recommendation and they have finally been disposed of on the basis of that rate by the Lord Chancellor. I invite your Lordships to say that it would not be appropriate for us now to seek to re-open a situation which has properly and fairly been closed.

Photo of Lord Kingsland Lord Kingsland Conservative

My Lords, I thank the Minister and all noble and noble and learned Lords who have spoken in the debate. Perhaps the noble Baroness will allow me one or two reflections on what she said. First, I do not believe—and in doing so perhaps I am alone in your Lordships' House—that the fact that my proposal will increase the expenditure of the National Health Service is relevant in this decision. If people are under-compensated and suffer as a result, that is a far more serious matter than the Government having to raise a little more money in taxation. I am delighted to see the noble Baroness confirming that that was not a consideration in the mind of the noble and learned Lord the Lord Chancellor when he made his decision.

While the noble Baroness was making her speech, I tried to test what she said against the judgment of the noble and learned Lord, Lord Lloyd, in Wells v Wells. With the greatest possible respect to the noble Baroness, I must say that I found her conclusions about what the noble and learned Lord the Lord Chancellor determined not to match the criteria laid down by the noble and learned Lord, Lord Lloyd. It is clear from what the noble Baroness said that a return on equity shares was taken into account in the decision of the noble and learned Lord the Lord Chancellor. It is also clear that, when the calculation for tax was made, the figure which resulted was much closer to 2.0 than 2.5 per cent.

In those circumstances, I believe that the noble and learned Lord the Lord Chancellor ought to have drawn the logical arithmetical conclusions and not insert some additional factor which had no place in the judgment of the noble and learned Lord, Lord Lloyd. In those circumstances, I should like to test the opinion of the House.

On Question, Whether the said Motion shall be agreed to?

Their Lordships divided: Contents, 43; Not-Contents, 106.

Division number 2 Private Parking: Ports and Trading Estates — Damages (Personal Injury) Order 2001

Aye: 41 Members of the House of Lords

No: 104 Members of the House of Lords

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

Resolved in the negative, and Motion disagreed to accordingly.