The Discount Rate and Periodical Payment Orders in Scotland - the latest developments

A report's key findings and recommendations on reform of the Scottish Discount Rate have been published in Holyrood

Overview

The Damages (Investment Returns and Periodical Payments) (Scotland) Bill ("the Bill") was introduced in the Scottish Parliament on 14 June 2018.

The overall aim of the Bill is to reform the law on the setting of the personal injury Discount Rate and to give courts the powers to impose periodical payment orders (“PPOs”) for future pecuniary losses. For more information on the background to and detail of the Bill, read Weightmans' update from July 2018.

The Economy, Energy and Fair Work Committee (“the Committee”) at Holyrood has now published its Stage 1 Report on the Bill and this update sets out some of the Committee’s key findings and recommendations.

In detail

The Committee, which took formal evidence on the Bill from various stakeholders in October and November, supports the Bill’s general principles. We would highlight the following conclusions/recommendations:

1. The Discount Rate

Calculation

The Committee notes the division of opinion between the claimant and defendant community regarding the preferred approach to be adopted; the former highlighted risks such as the costs of care and modifying accommodation which could add to the investment risk while the latter argued that any rate which does not reflect the returns of ordinary and prudent investment is unfair, leading to over-compensation.

The Bill focuses on a ‘hypothetical investor’, investing a compensation award for future losses, and requires the Discount Rate to be calculated on the basis of that hypothetical investor investing over a 30 year period in a ‘notional portfolio’ of investments in various classes of assets.

Noting that there appears to be little or no information on actual investor behaviour, the Committee states that the point of the proposals is to provide a standardised approach that can work in the interests of fairness, regularity and certainty across a range of cases. The Scottish Government has confirmed 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 would consider having more than one rate. The Committee asks the Government for more detail on that commitment.

A risk-free approach?

In contrast to the position in England and Wales, the Bill sets out a series of defined adjustments to be made to the Discount Rate. These are, firstly, the impact of inflation (by reference to the Retail Prices Index); secondly, a deduction of 0.5% to represent the costs of tax and investment advice; thirdly, a further deduction of 0.5% as a ‘further margin’ to reduce the risk of under-performance.

Notwithstanding the opposition to these adjustments, particularly the arbitrary imposition of the 0.5% ‘further margin’, the Committee states that it is prepared to support the Bill as it is currently drafted. The Scottish Government had previously stated that there is always a risk of either under- or over-compensation and it believes that this risk, assessed at 50%, is not acceptable.

The Committee concludes that it is satisfied with that the proposed adjustments achieve the aim of reducing the probability of under-compensation.

The UK Government Actuary and the review period

The Bill requires the UK Government Actuary to review the Discount Rate every three years, plus provision for additional, out-of-cycle reviews if requested by Scottish Ministers. The intention here is that the exercise becomes technical rather than political and the Committee is content with this approach.

The Scottish Government had argued that this proposed three year period balances the requirements of flexibility and certainty but it also made it clear that it was open to suggestions, perhaps recognising the Westminster legislation amendment to extend the review period for England and Wales to five years. The Committee’s conclusion is that five year reviews would be preferable to three.

2. Periodical Payment Orders (PPOs)

Use of PPOs

PPOs are currently only available in Scotland where both parties agree. The Bill would change the law, enabling the courts to impose a PPO. The Committee welcomes this proposal but has invited the Scottish Government to bring forward amendments to give more weight to the claimant’s views when a court is asked to decide on a PPO, perhaps providing for a statutory presumption in favour of the claimant on this point. The Committee also asks the Government to outline how it will promote the use of PPOs beyond the public sector (where they tend to be favoured in England and Wales).

Variation of PPOs

The Bill also allows for variation of a PPO 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. The Committee also supports this proposal.

Finally, the Committee noted the absence of the Motor Insurers’ Bureau (“MIB”) from the list of reasonably secure bodies and asks Scottish Ministers to report back in 12 months on its considerations about adding the MIB to the list of bodies approved to enter into PPOs, once uncertainties about its position created by Brexit were resolved.

What happens next?

We anticipate that the Scottish Government will respond to the Committee’s report in the next two weeks, ahead of the Stage 1 debate and vote at Holyrood which is expected on 18 December.

Comment

The proposal to alter the review period for the Discount Rate from three years to five years is welcome. This would mirror the position now adopted in England & Wales. However, the Committee’s support for the proposed adjustments to the Discount Rate make it more likely that a lower rate will be produced under the new rules than will be set south of the Border. The most likely outcome remains a Discount Rate of 0% in Scotland, predicted to come into effect towards the end of 2019.

In relation to the MIB, its omission from the list of reasonably secure compensators mirrors the existing legislative position in England and Wales. However, we would expect the Scottish courts to accept MIB’s “security” in due course, relying on the raft of court approvals from south of the border as sufficient evidence of this.

We also consider that the issue of Brexit will not change the picture. The MIB pre-dates the EU Directives so, even with a hard Brexit, the MIB’s role as guarantee fund should continue. In terms of the legislation, the PPO funder only needs to be reasonably secure and this test is met even with Brexit.

Can we help?

We will report again as the Bill continues its passage through Holyrood. In the meantime, 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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