Meeting of the Parliament 18 December 2018
I thank those who provided submissions on the bill and the witnesses who attended the three Economy, Energy and Fair Work Committee sessions that were dedicated to the bill. As the minister said, the bill is technical, but it is important. It provides for a new statutory regime to calculate the personal injury discount rate that applies to compensation awards in personal injury cases.
Under Scots law, the role of compensation is to restore the injured party—to the extent that a financial award can—as closely as possible to the position that they were in before they were injured. When assessing the amount of a lump-sum award, courts take into account the net rate of investment return that a claimant might expect to receive from a reasonably prudent investment of the lump sum. That is referred to as the discount rate.
As the committee’s convener and the minister said, the committee heard evidence that pursuers and defenders want a more stable, transparent and fair method for setting the discount rate. The bill takes into account a number of factors in how the discount rate should be calculated.
First, the bill defines a hypothetical investor. It says that the discount rate should be calculated by reference to the assumption that the hypothetical investor will invest over 30 years and that they will invest in a notional portfolio that is made up of investments in a fixed class of assets. In addition, the bill proposes making a series of standard adjustments to the discount rate—an adjustment to reflect the impact of inflation; a deduction of 0.5 of a percentage point to represent the costs of tax and investment advice; and a further deduction of 0.5 of a percentage point, which is referred to as the further margin—to reduce the risk of undercompensation of the party that suffered loss. The bill also provides for regular reviews of how the discount rate is set and gives courts additional powers to impose periodical payment orders.
There was consensus among defender groups and pursuer groups on a number of areas, including the need to update the system; the need to increase the availability of periodical payment orders and give courts further powers on them; and the need for regular reviews of the discount rate. We are grateful that the Scottish Government is to follow the committee’s recommendation that the review cycle for the discount rate should be over five years instead of three years.
The committee heard differing views on particular aspects of the bill. I will raise three areas where there was a lack of consensus in the evidence.
There is concern among defender groups that the notional portfolio is overcautious and is too highly invested in fixed assets, which offer a lower return than higher-returning investments in equities. The proposed portfolio assumes that only 20 per cent of the investment would be in equities, which is lower than the percentage in a typical balanced investment portfolio. That is important because the interest rates on Government bonds have historically been much lower than the higher returns on equity investments.