The Damages (Investment Returns and Periodical Payments) (Scotland) Bill has now passed, and changes to how the Discount Rate will be calculated and applied in Scotland will come into effect.
Following its publication last June, the Bill was considered at Stages 1 and 2 by the Economy, Energy and Fair Work Committee, and has now been approved by the Scottish Parliament following the Stage 3 vote.
Disappointingly for insurers, following changes to the Bill proposed at Stage 2, and based on the Scottish Government’s initial calculation of the discount rate under the model proposed in this Act, the forecasted Discount Rate has been adjusted to -0.25% rather 0% as initially believed.
These changes increased investment charges adjustment from 0.5% to 0.75%, resulting in the above change to the expected rate.
It had been suggested during the Stage 1 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. It was highlighted that the Committee had 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%. As stated above, a 0.75% figure was determined as appropriate.
The Act also passed with additional amendments including:
- Extending the review cycle for the Discount Rate in Scotland from three years to five in line with England and Wales, per the Civil Liability Act;
- Requiring Ministers in Scotland to consult on the composition of the notional investment portfolio during any future review of the Discount Rate;
- QOCS will now apply to proceedings to vary a PPO, although the parties could choose to make different provision in an agreement.
- The Act will move forward to the reconsideration stage which will take four weeks. The Act will then proceed for Royal Assent and we expect that it could be on the statute book by May.
- The Scottish Government will then instruct the Government Actuary’s Department to calculate the updated Discount Rate for Scotland and will have 90 days to report back to the Scottish Government. The Actuary’s Department recommendation will then require Parliamentary approval.
- The Scottish Parliament will be in summer recess during July and August and therefore, we expect the new Scottish Discount Rate to come into force in Q3.
- Although the increase in the current rate will be welcomed by insurers, questions remain that the proposals do not go far enough to prevent continued overcompensation for pursuers.
- It remains unclear at this stage whether or not a dual Discount Rate will be considered during the first review in Scotland, as has recently been applied in Jersey. During the Stage 1 discussions, the Government did not rule out applying a split discount rate whether there is a 'significant divergence' in returns for the notional portfolio over different periods, for example 10 years and 50 years.