The new discount rate in Scotland unlikely to be positive
The Scottish Government has announced that the Damages (Investment Returns and Periodical Payments) (Scotland) Act 2019 (the Act) will come into force on 1 July 2019, triggering the UK Government Actuary's Department (GAD) to start work assessing a new Scottish rate. With expectations that the rate may remain below 0% and still an over-compensation to pursuers, it is unlikely to have the positive impact we had hoped.
On 14 June 2018, the Cabinet Secretary, Michael Matheson introduced the Act, which will result in a different discount rate being applied in Scotland, as well as granting courts the power to impose Periodical Payment Orders (PPOs).
As the Act progressed through the Scottish Parliament, it went through several amendments. Changes included the amendment to extend the review cycle for the discount rate in Scotland from three years to five in line with England and Wales, to require Scottish Ministers to consult on the make-up of the notional investment portfolio when the discount rate is reviewed and to the continuity of PPOs.
On 19 March 2019, the Act was passed by the Scottish Parliament and received Royal Assent on 24 April 2019. On 7 June 2019, the Scottish Government announced that the Act will be in force from 1 July 2019. At that time, the Scottish Government will instruct the GAD to calculate the discount rate for Scotland and will have 90 days to report back to the Scottish Government.
The GAD must report to Scottish Ministers with its recommendation for the new rate by 28 September 2019. Once the recommendation is submitted, Scottish Ministers must lay the report before Scottish Parliament as soon as practicable, and in Scotland this is a swift process. The new rate will come into force the day after the report is laid and so we anticipate that Scotland will have a new discount rate by early October 2019.
We estimate that the rate will be -0.25%, due to the deduction from the investment rate of return of 1.25%.
It was suggested, during the debates, that the 0.5% reduction for tax and investment advice may not be sufficient, although questions were also raised concerning the justification for such a reduction given the notional portfolio appears overly cautious and any further reduction is likely to erode the 100% compensation principle still further.
The Economy, Energy and Fair Work Committee heard evidence that investment costs would be higher at the beginning and then decrease over time. In its evidence to the Committee, pursuer representatives suggested that investment charges and tax costs could be anything from 0.5% to 2%.
Part of the Act allows Scottish Ministers to provide regulations whereby more than one rate of return can be set if they so wish. Should Ministers decide that a dual rate is required, as the State of Jersey has, the relevant regulations must specify the circumstances to which each rate of return is to relate and require the GAD to cover each rate of return separately.
We previously predicted that the Scottish Government would take a different direction on the discount rate than the rest of the UK, and that certainly appears to be the case. With England and Wales likely to arrive at 1% in August 2019, and a prevailing 2.5% in Northern Ireland, forum shopping in such a small country will be all too easy, and is a significant concern.
For Scotland, it is disappointing to see that we seem to be on course to a discount rate that does not reflect the targeted 100% compensation, and which is to the detriment of all compensators. A long-lasting difference between the jurisdictions is likely to affect insurers’ approach to writing business in Scotland, with some perhaps withdrawing altogether.