The first part focusses on proposals to alter the method of calculating the personal injury discount rate, and provides that the rate be reviewed by the Government Actuary's Department every three years. The second part of the Bill proposes providing Scottish courts with the power to impose Periodical Payment Orders as a method of compensating a pursuer for future financial loss. The full version of the Bill can be accessed here.
The Personal Injury Discount Rate
In an effort to ensure that personal injury settlements accurately compensate the injured party for their loss, any award for future pecuniary losses designed to put the pursuer in the position they would have been in had they not been injured - such as future loss of earnings or provision for future care or medical costs - is adjusted in line with a discount rate. This discount rate takes account of the likely rate of return which the pursuer can expect to receive from investing their award over their lifetime.
In March 2017, 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 rate had not been reviewed for 15 years and in this time the market had changed dramatically, particularly since 2008. Accordingly, the new rate was to take account of the reduced return a pursuer could gain from their investment. The rate change had a significant impact upon the amount of compensation payable in cases where future losses were being claimed, resulting in a marked increase in damages payments. In turn defenders, such as insurers and the public sector, have been put under additional financial pressure.
Calculation of Discount Rate - the Current Method
Currently, the approach followed by the Scottish Ministers in setting the discount rate is in line with the decision by the House of Lords in Wells v Wells (1999) 1 AC 345. In this case, it was held that a pursuer should be deemed risk adverse, investing in only 'risk free' investments. Accordingly, any potential return should be based on Index Linked Government Stock (ILGS) or Gilts. However, the Advocate General for Scotland, Lord Keen of Elie, recently stated that whilst the law provides for an injured party to be 100% compensated for their loss, the current discount rate means that they are in fact being compensated on average by between 120-125%, even after management costs and tax are taken into account. This is on the basis that in reality, pursuers invest in other products and receive higher returns on their investments than those provided by ILGS.
The New Method
The new method for calculating the discount rate is based on a hypothetical investor who has received a lump sum award for damages to meet future losses resulting from their injury. It is assumed the investor will have a 'cautious' as opposed to a 'risk free' portfolio, allowing for greater returns whilst also taking into account investment costs and tax. Accordingly, the new method assumes the investor will receive a greater income from their investment. In turn, the level of settlement payable by defenders will be lower to take account of this.
The intention is that the new method will ensure a balance between the potential for a pursuer to run out of compensation with the potential to overcompensate the pursuer, ensuring that the pursuer receives as close to 100% compensation for their loss as possible.
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 Government Actuary's Department (GAD), based in London. Given the GAD is involved in setting the discount rate in England and Wales, it is likely Scottish rates will be the same or similar in future.
The rate change in 2017 adversely impacted defenders given that there was little notice provided and there was a large financial implication created overnight. The Scottish Government has recognised that the significant rate change was attributable to the rate not being reviewed for such a long period. At Consultation, there was support for the rate being reviewed annually, however, it was felt this was impractical and potentially costly. Therefore, the Bill has proposed it be reviewed every 3 years, or earlier if the Scottish Ministers consider it appropriate, perhaps in the event of a market crash.
With more frequent reviews, it is hoped that the rate will be expected, transparent and incremental, as well as reflecting 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. On the other hand, there is a small risk that the body responsible for making their payment, likely an insurance company, will default on the payment.
For a defender, the advantage of a PPO is that there is no risk of the overcompensation which would result if a pursuer didn’t live as long as expected, resulting in a windfall payment to their beneficiaries. In addition, it means they do not need to make a lump sum payment and the cost of the claim can be spread over several years. There is no need for a discount rate to be applied to the future losses in this scenario as the PPO guarantees these will be paid and inflation will be taken into account, therefore, as costs are managed over a longer period of time there is no risk of a further change in the discount rate having an impact upon the award of compensation.
The current low discount rate means it may not be in a pursuer's interest to opt for a PPO, however, the higher the rate goes, the lower their award of damages would be and the more incentive there may be for a pursuer to agree to a PPO.
Once the legislation is in place, it will be interesting to see the extent the courts utilise their power to impose PPOs, and particularly the extent they will impose a PPO 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 of the case.
The overall policy aim for the new statutory regime in setting the personal injury discount rate is to allow for a method and process which is clear, certain, fair, regular, transparent and credible. Legal Affairs Minister, Annabelle Ewing, has stated that this reform is necessary to "ensure the system keeps pace with modern Scotland and the needs of its people".
It should be noted that the Bill is not proposing a further change to the discount rate, but it is putting in place a new regime for this to be done in the future. The GAD will be required to start a review of the rate on the date the Act is brought into force, with a review expected to take up to 90 days. The Bill will likely become law in 2019 and we will keep a close eye on its progress through Parliament.