Responding to the discount rate change – Scotland to consider a new methodology
On 14 June 2018, the Cabinet Secretary, Michael Matheson introduced the Damages (Investment Returns and Periodical Payments) (Scotland) Bill, with significant implications for anyone dealing with serious injury claims in this jurisdiction. It will result in a different discount rate being applied in Scotland, as well as granting courts the power to impose Periodical Payment Orders (PPOs).
The financial memorandum to the Bill anticipates that a higher discount rate than the current -0.75%, estimated to be 0.0%, will mean a corresponding reduction in lump sum payments. The memorandum goes on to say that insurers “should be able to pass on savings in the form of reduced insurance premiums to the benefit of wider society”.
Following a review of the rate by the Lord Chancellor, Scottish Ministers lowered the rate from 2.5% to -0.75% in March 2017, reflecting the same changes in England and Wales. The Lord Chancellor applied the guidance set by the House of Lords in Wells v Wells , accepting the importance and exclusivity of investment in (low risk) Index Linked Government Stock (ILGS). Consequently the current rate reflects the fact that investments in ILGS presently result in a net loss relative to inflation. However, the reality of investment has meant that damages awarded for future loss have dramatically increased and resulted in over-compensation.
The Bill will introduce a new methodology based on how claimants actually invest their damages. Doing so is intended to provide fairness to all parties and is to be welcomed.
The core measures in the Bill will:
- Amend Section 1 of the Damages Act 1996 to put the process of setting the rate on a clearer statutory footing, with a requirement for the Government Actuary to set the rate and publish their reasoning.
- Preserve the 100% compensation principle. The compensation sum should represent the full loss, neither more nor less, and should be exhausted at the end of the period for which the award is made.
- Require the Actuary to have regard to the actual returns available to claimants and the availability of a PPO in respect of some or all of the loss.
- Establish a timeframe for the review of the discount rate. A review should be carried out within three years of the previous review. Scottish Ministers will have the ability to call for an earlier review if needed.
- Give courts the power to impose PPOs for future pecuniary losses.
The Bill sets out a framework for setting the rate based on a “notional investment portfolio” for an investor who takes advice and invests in a “cautious” portfolio over a 30 year period. Standard adjustment figures are to be fixed at 0.5% for taxation, and advice costs, and to account for fluctuations in the rate of return.
Scottish Ministers estimate that if this formula was currently applied it would set a discount rate in Scotland of 0.0% and the current intention is to apply one universal rate.
The rate would be assessed by the Government Actuary, rather than an independent panel, who can choose to seek views from a range of experts before making their recommendation to Scottish Ministers.
The Bill proposes a review as soon as the Act is in force, and thereafter every three years, with the option to review earlier if circumstances such as market volatility point to such a need.
Periodical Payment Orders
Scottish Courts can order a PPO in Scotland, but only if parties consent. As a result, they have until now been extremely rare. This Bill requires the court to consider whether a PPO is appropriate, even if the parties do not consent to one.
The court must be satisfied that continuity of payment will be “reasonably secure” and can require a compensator to take certain prescribed steps to ensure that security. PPOs will be deemed to be index linked, and the court will have the power to vary or suspend any PPO in the future, where there has been a change in physical or mental condition, and to prevent under or over compensation.
The Bill is currently at Stage 1 of the legislative process. Over the coming months parliament will consider the general principles of the bill, and ask interested parties for their input. Parliament will then debate and reach a decision on those principles in the Chamber.
Stage 1 is likely to last for several months. Scottish Parliament will be in recess between 30 June 2018 and 2 September. It is therefore likely that Stage 1 will conclude in autumn. We may see the Bill progress through Stage 2 before the end of the year, but the start of 2019 is more likely to conclude all remaining elements. If the Bill is to be enacted, then it is likely to pass into law by the end of spring 2019.
|Stage 1||Varies but it often lasts several months||Considering the general principles|
|Stage 2||Varies. There is usually two whole weeks from the end of Stage 1 before the start of Stage 2. It can be dealt with at one committee meeting, or may require more and be spread over a number of weeks.||Amending the bill|
|Stage 3||The date for Stage 3 is proposed in a business motion usually two weeks before the proceedings are due to take place.||Final consideration|
|Legislatively Competent||Four week period||Challenge by Law Officers on parliaments power to make law|
|Royal Assent||Varies||If no challenge, the Presiding Officer submit the Bill to the Queen|
There is a clear intention to take the discount rate review away from politicians. A certain degree of control will be maintained, including the ability to appoint a different assessor to the Government Actuary, to order an early review, and to apply multiple rates.
The bottom line is an estimate by the Scottish Government that application of the principles would lead today to a 0.0% rate being applied. Whilst the courts would retain the specific power to apply a different rate if persuaded by a party, it is anticipated that the rate fixed will be almost universally applied. The Scottish Government has made it clear that it wishes to see insurers pass the savings onto customers.
We predicted some time ago that the Scottish Government might take a different direction on the discount rate than the rest of the UK, and it seems likely that Scotland’s discount rate will become more favourable to compensators. Current estimates suggest Westminster will review in October 2019 with a likely discount rate of 1.0%, unless they decide to adopt the Scottish model.
On PPOs, the Bill brings Scotland more in line with the rest of the UK and, in a jurisdiction which has seen very few to date, their popularity will remain to be seen. When one considers the provisions of the Civil Litigation (Expenses and Group Proceedings) (Scotland) Act 2018 in relation to ring fencing future losses, it is clear that the Scottish Government is keen to push PPOs as part of a clear policy towards providing 100% compensation. We rather suspect that, at least initially, the Scottish courts will be just as keen to embrace PPOs and compensators need to be prepared.
- Personal injury litigation in Scotland: an evolving landscape
- Progress at last: Civil Liability Bill brings promise of certainty on discount rate and whiplash reform