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Reforming the Personal Injury Discount Rate in Scotland - Nicola Edgar, Morton Fraser LLP

21/08/18. The Damages (Investment Returns and Periodical Payments) (Scotland) Bill was introduced to the Scottish Parliament in June 2018 and provides a new method of fixing the Discount Rate with the aim of ensuring fairness and certainty.

The Personal Injury Discount Rate

The Discount Rate is applied to personal injury settlements to accurately compensate the injured party for their loss by taking account of the likely rate of return which the pursuer can expect to receive from investing their award over their lifetime. It is applied to any award for future pecuniary losses such as future loss of earnings or provision for future care or medical costs.

In March 2017 in Scotland, following a similar change in England and Wales, the discount rate was changed for the first time since 2002 when it was reduced by the Scottish Ministers from 2.5% to minus 0.75%. This substantial reduction was due to the fact that the market had changed dramatically over this period and the new rate took account of the reduced returns available from investments. The rate change significantly impacted on the compensation payable, resulting in a marked increase in damages payments and additional financial pressure on defenders, such as insurers and the public sector.

The Bill

The Bill is set out in two parts - the first part focusses on proposals to alter the method of calculating the discount rate, whilst the second part proposes providing Scottish courts with the power to impose Periodical Payment Orders (PPOs) as a method of compensating a pursuer for future financial loss.

Calculation of Discount Rate

The current method of setting the discount rate, in line with the decision by the House of Lords in Wells v Wells (1999) 1 AC 345, assumes that a pursuer is risk adverse, investing in only 'risk free' investments, with minimal potential returns. However, the new method is based upon what the Advocate General for Scotland argues to be the reality, that a pursuer will have a 'cautious' as opposed to a 'risk free' portfolio. Therefore, the new method is based on the assumption that the pursuer will potentially receive greater returns and, in turn, the level of settlement payable by defenders will ultimately be lower to take account of this.

Who will review the rate and how often

The Bill proposes moving the responsibility for fixing the discount rate from the Scottish Ministers to the London based Government Actuary's Department (GAD). The recent rate change adversely impacted defenders as little notice was provided and a large financial obligation was created overnight. The Bill has proposed that the rate be reviewed at least every 3 years to prevent this happening again and ensure that the rate will be expected, transparent, incremental and a reflection of current market conditions.

Periodical Payment Orders (PPOs)

The second part of the Bill sets out proposals for providing courts with the power to impose PPOs for future loss, as an alternative to settling a case on a lump sum basis.

A PPO allows for future losses to be paid annually, in line with inflation, either for a set number of years or until the pursuer's death. This type of settlement is often recommended in catastrophic injury cases, particularly where the pursuer is young and future losses are uncertain due to the nature of the injuries and potential care needs. Currently parties can agree a PPO, however, the Bill provides that courts will have the power to impose a PPO, even if one or both parties object.

From a pursuer's perspective, the advantage of a PPO is that they will not be exposed to the risk of investing their lump sum, or the risk of their compensation running out if they live beyond their life expectancy. For a defender, the cost of the claim can be spread over time and there is no risk of overcompensation if a pursuer doesn't live as long as expected, resulting in a windfall payment to their beneficiaries.

It will be interesting to see the extent courts utilise their power to impose PPOs, particularly where one or both parties wish to avoid it. If the courts were to begin to impose PPOs against the wishes of parties, this may influence negotiations and encourage parties to agree early settlement.

Summary

Whilst the Bill is not proposing a further change to the discount rate, it is putting in place a new regime for this to be done in the future. It is expected the rate would be reviewed once the Act is brought into force, which is expected to be in 2019.

The overall policy aim for the new statutory regime is ensure the method and process of fixing the rate is clear, fair, transparent and credible. The intention is that it will ensure a balance between the potential for a pursuer to run out of compensation with the potential to overcompensate, ensuring that the pursuer receives as close to 100% compensation for their loss as possible.

Nicola Edgar
Associate
Morton Fraser LLP

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