18 July 2019

The UK Government has announced that from 5 August 2019 the discount rate in England and Wales will be increased to -0.25% from the current rate of -0.75%.

The decision to change the discount rate in England and Wales is taken by the Lord Chancellor, on the advice of the Government Actuary Department. Following the Lord Chancellor’s announcement of 15 July, the UK Government published a Statement of Reasons, setting out the reasoning behind the decision, an Impact Assessment, and a Summary of Responses to the Call for Evidence. The Government Actuary Department have also published the Government Actuary’s advice to the Lord Chancellor.

The following preliminary points should be noted:

• The Civil Liability Act 2018 states that the rate is to be arrived at assuming damages are invested in a low risk, but not very low risk portfolio.
• On advice of the Government Actuary it has been assumed that a representative claimant invests over a period of 43 years, rather than 30 years that had been assumed previously. This was based on evidence from the Summary of Responses to the Call for Evidence.
• It is estimated that a claimant could expect to achieve a rate of return of around 2% per annum before deductions.
• On the advice of the Government Actuary, 0.75% is then to be deducted for tax and expenses.
• It is assumed, on the advice of the Government Actuary, that claimants’ costs are expected to rise over time owing to inflationary pressures. 1% is to be deducted for inflation.

The Lord Chancellor arrives at a discount rate of 0.25%.  He argues that this rate results in a 50/50 chance of a claimant being under or overcompensated. The Lord Chancellor states that there is too high a risk of under-compensation at this rate. The Government Actuary in his advice sets out the percentage risk of under/over compensation using different rates. The Lord Chancellor concludes that, having considered the various possible rates, -0.25% ‘leaves a reasonable additional margin of prudence which reflects the sensitivities of the rate to the baseline assumptions’.

What might the implications be for Scotland?

There are some important differences in the 2019 Act which might have a bearing on the rate arrived at. The 2019 Act prescribes a period of investment of 30 years, rather than 43 years used by the Lord Chancellor. The 2019 Act sets out a notional investment portfolio (Table 1). By contrast, the Lord Chancellor has been guided solely by the projections of the Government Actuary as to what a notional portfolio might look like. These are not identical. We can compare what a notional representative investment portfolio looks like in Scotland vs England and Wales below:

Table 1 - Scottish Notional Investment Portfolio (As prescribed by Damages (Investment Returns and Periodical Payments) (Scotland) Act 2019)

Table 2 -Notional Investment Portfolio as assessed by the Government Actuary

Finally, the 2019 Act states that the rate assessor must have regard to inflation and must make the standard adjustments which are 0.75% for taxation and expenses and 0.5% for a margin for error.

The UK Government actuaries will now report to the Scottish Ministers with a recommendation for the Discount Rate in Scotland. The rate in Scotland will be finalised by 1 October 2019 at the latest.

It remains to be seen whether the Scottish Ministers will use 2% as the assumed rate of return as a starting point, or whether the shorter investment period of 30 years and slightly different approach to the notional investment portfolio will lead them to use a different figure.

If 2% is used as a starting point, and a figure of 1% is assumed for inflation, we will likely see the rate of -0.25% being replicated in Scotland.

Contacts:

Catherine Currie, Partner ccr@bto.co.uk T: 0141 221 8012