New rules for the Discount Rate and Periodical Payment Orders in Scotland

The Scottish Parliament has approved The Damages (Investment Returns and Periodical Payments) (Scotland) Bill this month.

Overview

The Damages (Investment Returns and Periodical Payments) (Scotland) Bill ("the Bill") was introduced in the Scottish Parliament on 14 June 2018. Its aim is to provide a new method to calculate the personal injury Discount Rate in Scotland and to give courts the power to impose periodical payment orders (“PPOs”) for future pecuniary losses for the first time.

For more information on the background to the Bill and its progress through Holyrood, please read our previous updates from July and from December.

Following a debate on 19 March, the Scottish Parliament approved the Bill. Royal Assent is expected to be granted by May.

The details – what you need to know

1. The Discount Rate

  • The rate in Scotland will now be assessed by the ‘Rate Assessor’ rather than the Lord Chancellor. This person will be appointed by the Scottish Government, failing which the position will be filled by the UK Government Actuary.
  • The rate review must be concluded within 90 days of the Bill receiving Royal Assent. Thereafter, the Scottish Government must present the Rate Assessor’s report to Holyrood ‘as soon as practicable’ with the recommended rate taking effect the following day.
  • The rate must then be reviewed at least every 5 years.
  • The rate will be calculated with reference to a ‘notional portfolio’ of investments in which the injured party will hypothetically invest his/her damages adopting a cautious approach.
  • The rate will reflect the return based on a 30-year investment period and certain specified ‘standard adjustments’ must be taken into account, namely deductions of 0.75% for the impact of taxation and cost of investment advice/management and 0.5% as a “further margin” involved in relation to the rate of return.
  • When the Bill was first published, the Scottish Government stated that the new methodology would produce a rate of 0%. Factoring in the revised standard adjustments contained in the amended Bill (1.25% instead of the original 1%), a lower rate of around -0.25% now looks to be the likely outcome.
  • There is scope for more than one rate to be set. The Scottish Government has advised that it will keep the 30-year period under review and where analysis shows a significant divergence in outcomes over 15, 30 and 50 year periods, it will give consideration to having more than one rate.

2. Periodical Payment Orders (PPOs)

  • Scottish courts will now be able to impose a PPO on parties in a similar manner to England & Wales. Previously PPOs have only been available in Scotland where both parties agree.
  • PPOs will be open to variation in certain specified circumstances: where the original agreement had made provision for variation and identified the particular change which would need to occur; that change had actually occurred and there would be ‘significant’ over- or under-compensation as a result.
  • There is also the ability for the court to suspend a PPO where there is evidence that the injured party will be significantly over-compensated if the payments are not stopped.

Comment

The new methodology underpinning the calculation of the Discount Rate means that the rate in Scotland will be lower than the rate in England & Wales, most likely a rate of around -0.25%. We anticipate that the new rate will be in operation by the autumn. While this new rate is undoubtedly an improvement for insurers from the current rate of -0.75%, it will still represent a material difference to the anticipated rate to be used south of the border.

The scope for having different Discount Rates is interesting because it follows the approach recently adopted in Jersey.

As for the new rate in England & Wales, the review remains ongoing, but with the Jersey and Scottish methodology falling into broad alignment, this provides an indication of what might happen at the conclusion of the review. If we were to end up with a Discount Rate of -0.25% south of the border, that would be a disappointing outcome. When the draft legislation was originally published in September 2017, the then Lord Chancellor referred to the potential range for the new rate as 0% - 1%. Given the position in Jersey and Scotland, it is perfectly possible that the new rate in England & Wales will end up towards the lower end of that range. However, the likelihood is that indemnity spend will be significantly higher for any Scottish claim where the Discount Rate is used and there is a real risk of forum shopping.

In relation to PPOs, Scotland has now been brought into line with the rest of the UK although it remains to be seen how popular they become. It is worth highlighting that the Scottish Government has made it clear throughout the legislative process that it views the use of PPOs as a key part of its policy to achieve 100% compensation. We therefore anticipate that the Scottish courts will embrace their new powers and insurers should expect to see PPOs become a much more common feature in higher value Scottish claims.

Can we help?

Should you wish to discuss this in more detail, or would like assistance with any other matter, please do not hesitate to get in touch.

  • Rob Williams (Partner, Political Affairs, 0345 070 3852)
  • Bavita Rai (Partner, Innovation & Client Affairs, 0121 200 3499)
  • Doug Keir (Partner, Scottish Affairs, 0141 375 0869)
  • Kurt Rowe (Associate, Market Affairs, 0207 822 7132)

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