Government explains why it set the discount rate at -0.25%

Government explains why it set the discount rate at -0.25%

The Lord Chancellor and Justice Secretary, David Gauke MP, went against the advice of government actuary Martin Clarke in setting the new Ogden discount rate, government documents reveal.

On 15 July, Gauke announced that the rate would rise from -0.75% to -0.25% on 5 August.

In a 77-page report dated 25 June 2019, the Government Actuary’s Department had recommended that the rate be set at 0.25%.

Responding to the government actuary as part of yesterday’s announcement, Gauke referred to the department’s analysis as “a starting point for my determination rather than an end point”.

Disagreement

In a letter to Gauke, Clarke calculated that a rate of 0.25% would have a 50:50 likelihood of overcompensating and under-compensating the average claimant.

The Lord Chancellor regarded this 50:50 split as an unacceptable compromise. As an example, he highlighted that it would give claimants only a 65% chance of receiving 90% compensation.

Gauke noted: “I consider this to give rise to too great a risk that the representative claimant will be under-compensated, or under-compensated by more than 10%”.

It was decided that claimant outcomes should be more heavily weighted towards over-compensation, consequently pushing the Ogden rate below the recommended 0.25%.

Gauke did concede that the decision “involves making a series of assumptions and judgements in considering the evidence and economic variables that apply” but insisted he should “build in further prudence” in “order to recognise that in any individual case one or more of those baseline assumptions may not apply”.

 

Credit to Insurance Age for the original article

2019-07-17T08:09:51+00:00