Kate Donachie

There has been some speculation that the Scottish government will step in line with the Lord Chancellor’s decision and fix a matching rate. However, the Scottish legislation does not allow for this. Under the legislation, the UK government actuary is tasked with carrying out a separate assessment and then setting the Scottish discount rate. The Scottish government must accept the actuary’s decision. Accordingly, although there may be uncertainty surrounding the actual figure that will be fixed for the Scottish discount rate, there is no question of the Scottish government exercising a political decision. The level of the Scottish discount rate remains squarely in the hands of the UK government actuary, who has to submit his decision to the Scottish government by 28 September 2019.

Background

In England and Wales, the Civil Liability Act 2018 provides the framework for review and setting of the discount rate. In Scotland the framework is found in the Damages (Investment Returns and Periodical Payments) (Scotland) Act 2019, which came into force on 1 July 2019.

Although both pieces of legislation were passed relatively close to each other and considered the same subject matter, in the same wider context; the Acts do not provide for the same process of calculating the discount rate, and there are some significant differences.

The decision maker

In Scotland the rate assessor is the UK government actuary. Without secondary legislation the Scottish government cannot do anything but abide by the UK government actuary’s decision in relation to the appropriate discount rate for Scotland. In England and Wales the decision is made by the Lord Chancellor and, while he must consult the UK government actuary, he is not bound by that advice.

The assumed investments

In Scotland the UK government actuary has to assume that damages will be invested in a “notional portfolio” which is specified in the legislation and can only be changed by regulation.

In England and Wales the legislation states that the Lord Chancellor should carry out the analysis on the basis that a claimant will invest in a diversified portfolio and will be willing to take more than a very low risk, but less than that taken by a prudent investor who is properly advised.

On this occasion the UK government actuary has recommended that, in England and Wales, the assumed investment should be the midpoint of the portfolios argued for by respondents to the consultation on the Civil Liability Act 2018.

It seems that the assumed investments used by the UK government actuary in formulating his advice to the Lord Chancellor are slightly higher risk than those prescribed by the Scottish legislation. This may well result in a lower predicted return in Scotland.

Period of investment

In Scotland the period over which the damages are to be invested is specified at 30 years, while in England and Wales there is no prescribed period.

This time round, the UK government actuary has recommended that a period of 43 years be assumed in England and Wales.

It is generally the case that a longer period of investment will provide a higher return – and so, it is likely that a lower return will be predicted for Scotland than would have been the case, had the period of investment matched the 43 year period chosen in England and Wales.

Inflation

In Scotland, the UK government actuary is obliged by statute to use the Retail Price Index (RPI) as the appropriate measure of inflation. In England and Wales, the legislation provides that the Lord Chancellor is to allow for inflation “as he thinks appropriate”.

The UK government actuary has recommended that the Consumer Price Index + 1 per cent is used in England and Wales, which results in a rate close to the RPI one. Accordingly, the specification of RPI in the Scottish legislation is unlikely to result in a materially lower Scottish discount rate.

Standard adjustments

At the time the Scottish legislation was passed by the Scottish Parliament, there was much focus on the “standard adjustments”. Those require the UK government actuary to make two reductions to the discount rate which he would otherwise fix; 0.75 per cent to take account of taxation and investment costs and 0.5 per cent as a margin to reduce the risk of under compensation.

It was anticipated that those reductions would necessarily lead to a lower rate in Scotland than in England and Wales.

However, the Lord Chancellor has also decided that in England and Wales, there should be a 0.75 per cent reduction to reflect taxation and expenses and a 0.5 per cent reduction to allow a margin against under compensation. Accordingly the reductions (1.25 per cent) will be equivalent.

What does this mean for the discount rate in Scotland?

There are some similarities between the approach taken by the Lord Chancellor for England and Wales and the approach prescribed by the Scottish legislation, but differences do exist. It remains to be seen what effect the Scottish notional portfolio will have on the UK government actuary’s calculations. The notional portfolio set out in the Scottish legislation may be more cautious than the one used by the UK government actuary in his advice to the Lord Chancellor. In addition, the shorter investment period in Scotland seems likely to result in a lower investment return than that calculated for England and Wales.

Accordingly, we may still see a discount rate in Scotland that is lower than the -0.25 per cent now fixed in England and Wales, but it is possible that the two rates will be closer than had previously been predicted. That will largely be a result of the Lord Chancellor’s decision not to increase the rate in England and Wales by as much as commentators had expected.

Kate Donachie is a managing associate at Brodies LLP