The personal injury discount rate in Scotland: expect a single rate

This article was authored by Adam Dalgleish, Trainee Solicitor.

The way in which the Personal Injury Discount Rate (PIDR) in Scotland is calculated is set to change following a new Scottish statutory instrument passed by the Scottish Parliament. However, whether the result will be lower or higher than the current -0.75% rate remains unknown.

The Damages (Review of Rate of Return) (Scotland) Regulations 2024 will come into force on 1 July 2024, the date on which the formal review of the PIDR must begin. This follows the report published by the Department Actuary’s Department (GAD) on 27 March 2024 which recommended changes to the current features of the rate setting methodology.

Key Changes

Inflation index update

Previous measure: Retail Price Index (RPI).
New measure: Average Weekly Earnings (AWE) index.
Reason from the GAD: RPI is outdated and AWE is a better reflection of inflation related to earnings and care costs, which are pertinent to personal injury compensation.

Adjustment for tax and investment costs

Previous adjustment: -0.75%
New adjustment: -1.25%
Reason from the GAD: Changes in investment yields and tax rates have increased the financial burden on pursuers by an average of 0.5% per annum.

Investment period

Previous period: 30 years
New period: 43 years
Reason from the GAD: An alignment with existing practices in England, Wales, and Northern Ireland.

Analysis of the Changes

RPI is no longer viewed as an adequate inflation index measure and this is consistent with the advice and consultation responses of the GAD. The view is that RPI is no longer appropriate for the purpose of taking inflation into account when setting the PIDR. The GAD gave consideration to AWE as a more appropriate index as this better reflects inflation in relation to loss of earnings and care costs, and is more appropriate for projecting future rates of change when compared with an adjusted prices index such as the consumer price index (CPI).

The deduction at -0.75% is considered no longer appropriate by the GAD for taxation and investment costs. The average tax burden sustained by claimants is said to be around 0.5% with further indications that investment management costs have also risen. The recommended adjustment range of between 1.0% and 1.75% ensures that claimants are neither overcompensated nor undercompensated.

An extension of the investment period from 30 years to 43 years brings Scotland into line with the other parts of the UK. Evidence provided on life expectancy and investment strategies in response to the call for evidence in England and Wales shows that an extended period would allow for better growth of compensation funds and ensures that claimants have sufficient resources over their expected lifetime.

Single or Multiple PIDR?

Last year a consultation was carried out to assess whether a dual model may be more appropriate than the current single discount rate model. It is the opinion of the GAD that further evidence and analysis is required before such a change could be implemented. The introduction of a dual rate system could add a degree of complexity and would likely require a transition period for stakeholders. In maintaining clarity and consistency in the PIDR, the decision was made to remain with a single rate.

Comment

Based on the GAD’s report, it is not yet known whether the next review of the PIDR will result in a higher or lower rate. It is, however, likely that a single rate will be announced, as opposed to dual or multiple rates.

The use of CPI as a measure may result in undercompensating claimants, whereas there is a risk that AWE could overcompensate claimants. There is evidently no ‘one size fits all’ approach and the effect of these changes remains to be seen.