Discount Rate New proposals for setting the rate in Scotland
We now have the Scottish Government's proposals for taking forward reform of the discount rate in Scotland, in the form of a new Bill, as well as supporting material including a Policy Memorandum which is its response to the recent joint consultation on the issue with the Ministry of Justice. It is now clear from these proposals that although the processes will be similar there are some key differences between how the rate will be set in Scotland as opposed to England and Wales. Depending on the progress of the relevant legislation in each Parliament, the rates might come into effect on different dates.
The Scottish Government has given an early indication that, on current evidence, it expects a discount rate of 0.0% to be set in Scotland having taken account of two adjustments which it proposes to make to a notional portfolio of investments. The MoJ previously indicated that it expected the rate for England & Wales to be between 0% and 1%. The fact that the rate setter in Scotland will be the UK Government Actuary who will also be involved in advising the Lord Chancellor on setting the rate in England and Wales suggests there is likely to be a degree of consistency in the methodology applied across those jurisdictions though the actual rules for setting the rates will be different. The actual terminology used to describe the risk level from investments in Scotland by use of the notional portfolio is "cautious" and in England and Wales is expected to be "low risk". While the terminology is not identical, we would expect the eventual result of both proposed processes will be to produce a similar discount rate.
Scotland - The Damages (Investment Returns and Periodical Payments) (Scotland) Bill sets out a new framework for setting a discount rate in Scotland, which will be inserted into the Damages Act 1996.
England & Wales - The Civil Liability Bill will be the legislation that prescribes how the discount rate will be set in England and Wales.
Scotland - The discount rate is currently set by Scottish Ministers. Going forward it will be set by the Government Actuary who is the head of the Government Actuary’s Department which is a non-ministerial department of the UK Government. The Scottish Government by its proposal seeks to remove the issue from the political arena and to pass it to a UK rather than a Scottish civil servant.
England & Wales - In stark contrast to Scotland, and while the UK Government has expressed more than one view on the subject, its current plan as taken from the recent Report Stage of the Civil Liability Bill is that the Lord Chancellor will set the rate in consultation with an expert panel consisting of the Government Actuary who will chair it and four others. However, after much debate, the first review and rate will be set by the Lord Chancellor alone.
The dual involvement of the Government Actuary in both jurisdictions albeit carrying out different roles is interesting and might suggest that some similarity of outcome could be expected. While that may prove to be so, it is also necessary to bear in mind that the rules against which the rate is set are different thus leaving room for alternative outcomes.
Scotland - The Financial Memorandum indicates the rate will be set by reference to a "notional investment portfolio" the detail of which is set out in a Schedule to the Bill. The Policy Memorandum accompanying the Bill and responding to the joint consultation accepts this was not an approach consulted upon and this proposed solution may come as a surprise.
At the time of the consultation, there were three options consulted upon. These were very risk averse/risk free; low risk/mixed balanced portfolio or ordinary prudent investor. The Scottish Government's proposal is to use neither of the more popular alternatives identified in the responses (the first two), nor indeed the third, but to bring forward an alternative investment approach involving the use of portfolios which it says would be described as "cautious".
The Scottish Government propose this approach as an answer to the need to identify a suitable rate of return which can be used in the process of setting the discount rate in Scotland. They say that the appropriate rate of return is one which can reasonably be expected to be achieved by a person who invests in this portfolio for a period of 30 years. They prefer this approach to one based on trying to look back at how pursuers have been investing over recent years as that data is either not generally available or might be thought unreliable. The portfolio will contain a mix of assets: cash 10%, nominal gilts 15%, index-linked gilts 10%, UK equities 7.5% overseas equities 12.5%, high-yield bonds 5%, investment grade credit 30%, property 5% and other types 5%. The use of the portfolio is intended to meet the needs of an individual in the position of the hypothetical investor who is described in the legislation.
England & Wales - In the House of Lords this week there was no real challenge to the new proposed risk assumptions, which would see the rate set by reference to "low risk" rather than "very low risk" investments as at present. This was the most popular option identified during the consultation.
Adjustments to the rate
Scotland - The proposal once the rate has been identified is to make two adjustments to it, each resulting in a reduction of 0.5%, and so effectively reducing whatever rate is selected by 1.0%.
The first reduction of 0.5% is for the impact of taxation, as well as to take account of the need for investment advice and cover the management costs over the funds.
The second reduction of 0.5% is described as providing a margin in case the investments fail to meet the pursuer's needs even if carefully invested, presumably because of fund underperformance.
England & Wales – The Government Actuary Department's July 2017 analysis, which now forms part of the Government's impact assessment for the Civil Liability Bill acknowledges that the appropriate allowance for expenses and tax is likely to depend on a number of factors and that further work is likely to be needed to determine a reasonable allowance. But, based on an initial high level assessment, they believe that a deduction of around 0.5% is likely to be reasonable. No second reduction would be made. If it were made as proposed by the Scottish Government, then it can easily be said that overcompensation would arise. The risk in question was one though recently identified by the House of Commons Justice Committee when looking at the issue.
The likely actual rate
Scotland – The Scottish Government say, though they do not give detail in support, that use of the portfolio and adjustments in the Bill would currently produce a discount rate of 0.0%. We can deduce that their conclusion is that the use of the portfolio apparently produced the result of a 1% return before the two adjustments were made.
England & Wales – When publishing their consultation response, the government indicated that if its proposed way forwards was adopted then it would lead to a discount rate of 0 to 1%. There is therefore likely to be at least a degree of similarity of outcomes between the jurisdictions.
Periodical payment orders
Scotland – PPOs have been used in Scotland but currently require the consent of the parties to agree one. The Bill will now enable the courts to impose PPOs where appropriate. With the discount rate now at minus 0.75% the benefit of PPOs is diluted but should the rate increase then PPOs will become more attractive. Indeed when the Civil Litigation (Expenses and Group Proceedings) (Scotland) Act 2018 comes into force PPOs will be the only way for the pursuer to prevent his or her solicitor taking a percentage of future losses under a DBA.
England & Wales – already in place and the Scottish proposals largely replicate the current system there.
Timescale – new discount rate
Scotland – The Government Actuary will be required to conclude and send a report to Scottish Ministers within 90 days of the commencement of the review. For the first review the 90-day period will start on the date the Act comes into force. The rate is to be reviewed by the Government Actuary every three years.
England & Wales – The timescales will be slightly different as the Lord Chancellor will have 90 days after the Act comes into force to commence the first review and will then have to report within 140 days thereafter. It looks as though the rate will be reviewed every 3 years although following the recent Report Stage of the Civil Liability Bill it appears the UK Government may be open to considering other proposals before the Bill's third reading.
Timescale - Implementation
Scotland - It is understood that the Scottish Parliament’s Economy, Jobs and Fair Work Committee will be the Committee assigned to scrutinise the Bill. Once this is confirmed there will likely be a call for evidence before the end of June with oral evidence in September. The Damages Bill is unlikely to pass onto the statue book before April next year.
England & Wales - The Civil Liability Bill is completing its House of Lords passage and will hopefully pass to the Commons before summer recess at the end of July. Previous estimates of when we might see a change in the discount rate had been pointing towards the latter part of 2019. If further progress can be made both to the commencement of the Act and the start of the first review, we might reasonably hope for the rate change to be brought forward to the summer of 2019.
The practical effects of the breadth of rates are shown in the example below:
Value of claim at -0.75%
Value of claim at 0.00%
Value of claim at 2.5%
A 19-year-old male following a severe road traffic accident where future pecuniary losses have been calculated at £20,000 a year for life.
We will continue to monitor the position across the UK and report on any significant news.
This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.