UK: Scotland: Discount Rate Bill Passes Stage 1

Last Updated: 3 January 2019
Article by Vikki Melville

Most Read Contributor in UK, March 2019

The Damages (Investment Returns and Periodical Payments (Scotland) Bill has passed its Stage 1 reading in the Scottish Parliament.

The debate followed hot on the heels of the Government's reply to the Economy, Energy and Fair Work Committee (the Committee)'s Report on the Bill, which provided some welcome news for insurers. However, there remain several significant points of contention in the Bill, which it is hoped will be addressed during the parliamentary process.

Review period

Scottish Ministers accepted recommendations from both the ABI and the Committee that the Discount Rate should be reviewed every five years, rather than three as proposed in the Bill. As large loss cases typically take up to five years to resolve, a longer review period should help to avoid parties trying to 'game' the system by delaying their claims in the hope of receiving a more favourable discount rate at review. Ministers are expected to bring forward an amendment at Stage 2.

Investment period and notional portfolio

The Bill currently assumes a hypothetical investor will invest over a 30 year period using the 'notional portfolio' as defined in the Bill. However, the Committee heard evidence that the average investment period for pursuers following a serious personal injury claim (in excess of £250,000) is 46 years, calling into question the validity of the proposals, which would be likely to result in overcompensation for pursuers.

Indeed, the Minister presenting the Bill to the Committee stated that "there is no authority on which to base that [30 year] figure; it was chosen merely as useful duration that was neither too short nor too long". The Government has therefore agreed to keep under review how the 30 year period will work. It is hoped the investment period is extended as the Bill proceeds through parliament.

It was suggested that the notional portfolio for a hypothetical investor should be stress tested before stage 2. The Government argued that the mix in the notional portfolio closely represents pursuer behaviour in the real world. However as previously noted, the Government Actuary's Department (GAD) found the national portfolio was not representative of the way in which pursuers should invest their damages, are advised to do so, or actually invest their damages. Indeed the notional portfolio appears overly cautious and should contain a higher proportion of equity investments to ensure the 100% compensation principle is upheld.

The Government has also not ruled out applying a split discount rate in circumstances where there is a 'significant divergence' in returns in the notional portfolio over different time periods, most likely 10/15 years and 50 years. No indication has been given as to what a 'significant divergence' might be, and as the Government recognises, interpretation will require the use of judgment rather than the strict application of a formula. In light of this admission, it is arguable that this function ought to remain a decision for which there is political accountability, as is the position in England & Wales, particularly given the financial implications for public bodies such as the NHS.

Periodical Payment Orders (PPOs)

The Bill for the first time gives courts the power to impose PPOs without needing the parties' consent. The Committee recommended an amendment, requiring courts to attach more weight to a pursuers view when deciding whether a PPO is appropriate.

Scottish Ministers are reflecting on this issue; however in their response to the Committee they were wary of undermining the court's ability to make a decision on a particular case. It is to be hoped Minsters stick to their guns on this issue in the interest of fairness to both parties.

Advice reductions

It was suggested on several occasions during the debate that the additional 0.5% reduction for tax and investment advice may not be sufficient. It was highlighted that the Committee had heard evidence that investment costs would be higher at the beginning and then decrease over time. In its evidence to the Committee, pursuer representatives suggested that investment charges and tax costs could be anything from 0.5% to 2%.

Whilst this may be the case for fees in relation to some investment funds, returns under such funds are likely to be significantly higher than those possible under the national portfolio. Accordingly, this issue needs to be considered further within the context of the proposals as a whole. 

Next steps

Amendments to the Bill can now be lodged and these will be considered by the Scottish Parliament's Economy, Energy and Fair Work Committee at Stage 2 on 22 January 2019.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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