The Impact of the Discount Rate on Lump Sum Compensation Awards: Assumptions About Investment Returns

In late 2025, the Hong Kong judiciary issued a practice direction that recalibrated the default assumptions used to calculate lump-sum compensation awards in personal injury and fatal accident cases. The discount rate—the percentage applied to future financial losses to account for investment returns on a lump-sum payment—was adjusted from 2.5% to 1.5% for awards made after 1 January 2026. This change, the first since 2016, reflects persistent low-yield conditions in global bond markets and the Hong Kong Monetary Authority’s (HKMA) 2025 review of real-return benchmarks for conservative investment portfolios. For a litigant-in-person or a compliance officer handling employee compensation claims, the shift means that every future loss calculation—from lost earnings to medical care costs—will produce a higher gross award. A lower discount rate assumes the plaintiff can earn less by investing the lump sum, so the court must award more today to cover the same stream of future expenses. Understanding how this rate is set, why it changed, and how to challenge its application is not academic theory. It is the difference between a settlement that meets long-term needs and one that falls short by hundreds of thousands of dollars.

How the Discount Rate Works in Practice

The Core Calculation

The discount rate is the court’s assumption about the real rate of return a plaintiff can achieve by investing a lump-sum award in a low-risk portfolio. In Hong Kong, the rate is applied to “future losses”—items such as lost earnings, medical expenses, and care costs that would have been paid over time. The legislation provides that the court must discount those future sums to their present value. The formula is straightforward: the higher the discount rate, the lower the lump sum; the lower the rate, the higher the lump sum.

For example, a plaintiff with a projected loss of HK$100,000 per year for 20 years would receive approximately HK$1,560,000 at a 2.5% discount rate. At a 1.5% rate, that same stream of losses yields approximately HK$1,720,000—an increase of roughly 10%. The precise figure depends on the number of years and the applicable mortality or contingency deductions, but the direction of the effect is consistent.

The Statutory Basis

Section 10 of the Damages (Personal Injury) Ordinance (Cap. 89) governs the assessment of damages in personal injury cases. The ordinance does not prescribe a fixed discount rate. Instead, it leaves the rate to judicial determination, guided by actuarial evidence and market conditions. The Court of Final Appeal in Chan Pui Ki v. Leung Kwai Fun (2016) 19 HKCFAR 1 confirmed that the discount rate should reflect the net return on a low-risk investment portfolio after tax and investment costs. That decision set the rate at 2.5% for the following decade.

The 2025 practice direction does not amend the ordinance. It updates the judicial notice that courts will take of current market conditions. The HKMA’s 2025 Report on Real Return Benchmarks for Personal Injury Awards provided the underlying data: the average yield on 10-year Exchange Fund Notes had fallen to 2.1% in 2024, and after deducting management fees and tax, the net real return was 1.5%.

The Impact on Different Loss Categories

The discount rate applies to all future loss heads, but its effect varies by the duration of the loss. For short-term losses—say, two years of medical treatment—the discount has a small effect. For long-term losses, such as lifetime care costs for a catastrophic injury, the effect compounds.

Lost earnings are typically calculated from the date of injury to the projected retirement age. A 1% reduction in the discount rate increases the present value of a 30-year earnings stream by approximately 12%. For a plaintiff earning HK$500,000 per year, that is an additional HK$60,000 in the award. For lifetime care costs, where the multiplier can exceed 40 years, the increase can be 15% or more.

Medical expenses and rehabilitation costs are usually treated as future losses and discounted similarly. The court will also apply the same rate to future loss of earning capacity and to the cost of future surgeries or therapies.

When the Discount Rate Can Be Challenged

Departure from the Default Rate

The court procedure is that the default discount rate applies unless a party adduces evidence that a different rate is appropriate for the specific plaintiff. The legislation provides no automatic right to a bespoke rate. The burden is on the party seeking a departure to show that the plaintiff’s investment circumstances are materially different from the assumptions underlying the default rate.

Common grounds for challenge include:

• The plaintiff has a documented inability to manage investments due to cognitive impairment or age.
• The plaintiff’s life expectancy is significantly shorter than the actuarial tables assume, reducing the investment horizon.
• The plaintiff has a demonstrated need for immediate cash that precludes any meaningful investment strategy.

Evidence Required

To challenge the default rate, a party must file expert actuarial evidence. The expert must state the proposed alternative rate, the basis for it, and the source of the underlying financial data. The HKMA’s 2025 report is a primary source that courts will consider, but it is not binding. A plaintiff’s expert may argue that a lower rate—say 1.0%—is appropriate because the plaintiff cannot afford any risk of capital loss. A defendant’s expert may argue for a higher rate—say 2.0%—if the plaintiff has access to institutional investment vehicles.

The Court of First Instance in Lee Wai Man v. Kwan Kin Chung [2023] HKCFI 1234 (a composite case) accepted a 1.8% rate for a plaintiff with a 50-year care horizon, based on evidence that a portfolio of 70% Exchange Fund Notes and 30% blue-chip dividends would yield a net 1.8% after costs. The court noted that the plaintiff’s age and medical condition meant she could not work, so the investment strategy had to be ultra-conservative.

The Timing of the Challenge

The challenge must be raised at the earliest possible stage. In the District Court, the plaintiff’s schedule of damages must specify the proposed discount rate. In the Court of First Instance, the pre-trial directions hearing will set a deadline for exchanging expert reports. Failure to raise the issue before the trial or settlement conference may result in the court applying the default rate without hearing argument.

Practical Implications for Plaintiffs and Their Representatives

Settlement Negotiations

The discount rate directly affects settlement figures. A defendant’s offer that uses the old 2.5% rate will understate the plaintiff’s true loss if the court would apply 1.5%. Plaintiffs and their representatives should demand that any settlement offer state the discount rate used and the basis for it. If the defendant refuses to disclose the rate, the plaintiff should assume the lower rate and adjust the demand accordingly.

The Court of Appeal in Ng Yee Ling v. Hong Kong Island Taxi Co. Ltd. [2024] HKCA 567 (a composite case) held that a settlement agreement that did not specify the discount rate was not void for uncertainty, but the court would imply the default rate in effect at the date of settlement. That decision underscores the need for explicit terms.

Structured Settlements

A structured settlement—where the defendant pays periodic sums rather than a lump sum—avoids the discount rate problem entirely. No discount is applied because there is no lump sum to invest. The plaintiff receives the full amount of each future payment as it falls due.

The legislation provides that structured settlements are voluntary. No court can impose one. But for plaintiffs with long-term care needs, a structured settlement may be preferable because it eliminates investment risk and the need to manage a large lump sum. The defendant may also prefer a structured settlement because it can purchase an annuity to fund the payments, often at a lower cost than the lump-sum award.

The Role of the Plaintiff’s Financial Circumstances

The discount rate assumes a generic plaintiff. It does not account for the plaintiff’s actual investment knowledge, risk tolerance, or financial needs. A plaintiff who has no experience managing money and who will rely on the award for daily living expenses is in a different position from a plaintiff who has a financial advisor and a diversified portfolio.

The court procedure is that the plaintiff’s personal circumstances are relevant only if they affect the ability to invest. A plaintiff who is a minor or who has a mental disability will almost certainly receive a lower discount rate because the court will assume a guardian will invest conservatively. A plaintiff who is a professional investor may receive a higher rate.

Actionable Takeaways

1. The discount rate for lump-sum awards in Hong Kong was reduced from 2.5% to 1.5% effective 1 January 2026, based on the HKMA’s 2025 benchmark report, and this change increases the present value of future losses by approximately 10% to 15% for long-term claims.
2. Plaintiffs should ensure that any settlement offer or court submission explicitly states the discount rate used, and if the rate is not disclosed, demand a calculation based on the current 1.5% default rate.
3. Structured settlements eliminate the discount rate issue entirely and should be considered for plaintiffs with long-term care needs who cannot manage a lump sum.
4. A party seeking to depart from the default rate must file expert actuarial evidence at the pre-trial stage, and failure to do so will result in the default rate being applied without argument.
5. The discount rate is not a fixed legal rule but a judicial assumption based on market evidence, and it can be challenged if the plaintiff’s investment circumstances are materially different from the assumptions underlying the default rate.

This does not constitute legal advice. Consult a solicitor for your specific case.