Tuesday 12 February 2013 by John Hyde

Justice minister Helen Grant today said initial evidence may support a rise in the discount rate used to calculate deductions from compensation awards.

The government has opened a second part to a consultation with the legal and insurance professions that began last year. It will run to 7 May.

In the paper accompanying the second consultation, the Ministry of Justice said there was evidence that recipients of lump sums 'do not invest in the cautious way that is envisaged by the guidelines'.

The current rate of 2.5% was set in 2001 and was based on yields of Index-Linked Government Gilts (ILGs).

The government emphasised in its introduction to the consultation that it had 'no provisional preference' about how to set the rate.

The paper said: 'The initial evidence indicates [successful claimants] seem to invest in mixed portfolios, including higher risk investments.

'This may be the result of a number of factors, but it might suggest that the current legal parameters for setting the rate may produce a rate that is too low.

'This would result in over-compensation for claimants and extra cost for defendants and those who fund them. These unnecessary costs could unfairly increase the burden on taxpayers and consumers as ultimately they have to fund the payments by state bodies and private insurers.

'Conversely, if the rate is too high, it is the victims of wrongful personal injury who will suffer.'

Claimant groups have argued the rate is out of date and leaves some injured people under-compensated by hundreds of thousands of pounds. The Association of Personal Injury Lawyers had threatened a judicial review over the issue until the MoJ offered a consultation.

The Association of British Insurers has argued that a smaller discount to compensation payments would have an immediate cost to insurers that would likely be passed onto consumers through higher premiums.

National defendant firm Kennedys told the consultation that the use of ILGS ignored the reality of what claimants do with their damages and could over-compensate them.

The first government consultation with the legal professions in England and Wales, Scotland and Northern Ireland, ran for six weeks, ending on 23 October 2012.