Scottish Discount Rate announcement
The Scottish Government is expected to confirm today that there will be no change to the Discount Rate in Scotland and it will remain at -0.75%.
This announcement follows the review carried out by the Government Actuary in terms of the Damages (Investment Returns and Periodical Payments) (Scotland) Act, passed earlier this year, and, for the first time, establishes a different rate to the one that applies to injury claims in England and Wales (-0.25%).
The fact that different rates will apply to equivalent injury claims on either side of the border is likely to be problematic for a number of reasons. Indemnity spend for compensators will be materially higher for Scottish claims where the Discount Rate is used and there is a real risk of forum shopping. There will also be significant frustration felt by compensators that this was another missed opportunity to introduce a Discount Rate that reflects more closely the reality of how injured parties choose to invest their damages.
It is worth noting that the methodology that governs the calculation of the Scottish Discount Rate is different to that used south of the border. As such, it was anticipated at the outset of the review process that the Scottish Discount Rate might be lower than the rate in England & Wales (albeit the effective retention of the status quo was not on the horizon). There are several reasons for this.
The new Scottish Discount Rate is based on a 30-year investment period rather than the 43-year period used in England & Wales.
The notional Scottish investment portfolio in which the injured party hypothetically invests their damages is more risk-averse than the portfolio used south of the border.
Most significantly, there are two prescribed “standard adjustments” that must be taken into account when calculating the Scottish rate, namely a 0.75% deduction to reflect the impact of taxation and the cost of investment advice/management and a 0.5% deduction as a “further margin” that, according to the Scottish Government, reduces the risk of under-compensation. Neither of these adjustments feature in the Civil Liability Act 2018 and reflect the position adopted by the Scottish Government during the passage of the Damages Act that it would much rather over-compensate than under-compensate any injured party.
Interestingly, the Government Actuary commented that if the rate had been calculated using the old system involving Index-Linked Gilts, it would have been in the range -2.0% to -1.5%. As such, the selected rate of -0.75% might be viewed as an improvement on that scenario. However, there will be little solace to be found for compensators in that regard.
What happens next?
- The “new” rate becomes effective on 1 October 2019
- Compensators should check that all reserves for Scottish claims involving Discount Rate calculations remain at -0.75% and ensure that such reserves have not been revised in the light of the earlier rate change in England & Wales.
- The rate must be reviewed at least every 5 years
- There remains scope for more than one rate to be set following future reviews but any such change is likely to be at least 5-10 years away.
- The negative rate is unlikely to provide much encouragement to injured parties to opt for a Periodical Payment Order notwithstanding their long-awaited introduction in Scotland (currently anticipated to happen 2020)
- The negative rate also maintains the difficulties around the most appropriate method to be used to calculate accommodation claims. Roberts v Johnstone remains the most persuasive (English) authority in this regard but it is worth noting that the English Court of Appeal case of Swift v Carpenter is to be heard in March 2020 and will be significant. Weightmans are acting for the defendant in that case and further updates will be issued on this in due course.
If the content of this update raises any issues for you, or you would like to discuss any provision you make following the Scottish Discount Rate announcement, please liaise with your usual contact in the Weightmans Casualty team or contact to Doug Keir.