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Discount Rate and Scotland

March, 28, 2019

Last week, The Lord Chancellor announced that a review of the personal injury discount rate in England and Wales would commence.  Later that same day, the Damages (Investment Returns and Periodical Payments) (Scotland) Bill was unanimously approved by the Scottish Parliament.

Legislative reform commenced on both sides of the border after the discount rate was amended from 2.5% to minus 0.75% in 2017.  It was estimated that this change would cost the public purse and insurers just under £10billion over the next five years.  All stakeholders remained committed to the principle of 100% compensation for those who have suffered significant injuries.  The issue which arose was whether in moving to redress the shortfall in compensation many claimants were receiving following the financial crash in 2007-2008, the pendulum had swung too far in the other direction, placing significant pressure on policyholders and public services in particular.

Reviews took place of the methodology to be applied when calculating the discount rate, in an attempt to strike a balance between protecting claimants from the risk of inflation outpacing investment returns, whilst more reasonably reflecting the realistic practices of investors, rather than assuming that they will all adopt a “very low risk” approach.

Although the Scottish method of considering a notional investment portfolio will differ from the independent panel which will provide advice to the Lord Chancellor in England and Wales, initial indications were that the same rate may well apply in both jurisdictions.  The Lord Chancellor announced in September 2017 that if the new approach proposed in the Civil Liability Bill (as it was then) were to be applied at that time, the discount rate would be in the region of 0% to 1%.  In a report to the Scottish Government dated 5 September 2018, the Government Actuary Department estimated a rate of return of 0.9%, which would result in the discount rate being set at 1%.

As markets have continued to move and analysis of the proposed models has taken place, it was anticipated that a more realistic possible outcome was that a discount rate of 0% may apply throughout the UK.  That was until an amendment to the Scottish bill was passed at Stage 3, increasing the standard adjustment for investment and taxation.  The upshot of that amendment is that the current projection for the Scottish discount rate is minus 0.25%.

The Scottish Bill will now proceed through the final stages and will become an Act over the next couple of months.  Allowing for the relevant timescales that will follow, a new discount rate may be in force in Scotland in around September 2019.  The Lord Chancellor’s announcement triggering the review process in England and Wales means that a new discount rate should be identified by 5 August 2019.

We await with interest to see whether this will result in there being another key distinguishing feature in high value cases involving complex injuries between claims in Scotland as opposed to those made in England and Wales, and shall update you further upon the conclusion of the reviews.

 

 

 

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