Meeting of the Parliament 18 December 2018
I am very pleased to be here to open the debate on the general principles of the Damages (Investment Returns and Periodical Payments) (Scotland) Bill. I thank the convener and members of the Economy, Energy and Fair Work Committee for their insightful scrutiny at stage 1 of what is quite a technical, detailed and, in places, complex bill. I welcome the committee’s positive support for the general principles of the bill, as set out in its report.
I also put on the record my thanks to the Finance and Constitution Committee and the Delegated Powers and Law Reform Committee for their additional scrutiny and consideration. Like the Economy, Energy and Fair Work Committee, I am grateful to all those who provided evidence on the bill. Finally, I thank the Government Actuary’s Department, whose analysis and expertise have been invaluable in informing the bill.
For some time, the personal injury discount rate has been the subject of criticism. Prior to 2017, pursuers’ representatives expressed concern that the rate was, in effect, undercompensating pursuers, and a judicial review was sought. Since the most recent change, there has been criticism from defenders’ representatives and insurers, on the basis that setting the rate by reference to returns on index-linked gilts intrinsically overcompensates many pursuers. There have also been concerns that the duration between reviews has contributed to the scale of the impact of changes, as well as concerns about a general lack of transparency in the process.
When we consulted on the issue in 2017 and asked whether the law on how the discount rate is set should be changed, 78 per cent of respondents agreed that a change is necessary. During the various consultations, common concerns emerged to do with the fairness, clarity, certainty, regularity and credibility of the method and process for setting the rate.
The bill attempts to address those points. It will put in place a new statutory regime for calculating the discount rate that should be applied to future pecuniary losses in personal injury cases. In providing new methodology, the bill requires the Government Actuary’s Department to assume that the damages that are awarded for future loss will be invested in a notional investment portfolio, comprising set classes of investment asset. The portfolio has been designed to meet the objectives and match the characteristics of the “hypothetical investor”, as identified in the bill.
It is encouraging that, in its stage 1 report, the Economy, Energy and Fair Work Committee said:
“the Committee welcomes the additional clarity and transparency provided by having the method for calculating the discount rate set out in legislation.”
The committee noted that that view was shared by most of the respondents to its call for evidence.
As the bill stands, the rate will be reviewed every three years. Currently, there is no statutory requirement for the discount rate to be reviewed regularly. It is clear that the lack of a regular review is detrimental to all parties. Most consultees agreed that the rate should be reviewed on occasions specified in legislation.
The Scottish Government took account of respondents’ views and decided that a review should be carried out every three years, with the possibility of a review being instigated sooner than that, if circumstances require it. Such an approach will provide a significant degree of certainty, tempered with a proportionate degree of flexibility.
Stakeholders suggested that a three-year review period might mean that settlement of cases would be delayed if one of the parties anticipated that a more favourable rate would come into force, and argued that a five-year review period would go some way towards addressing that issue.
The Scottish Government’s view is that it is imperative that reviews are regular. In its stage 1 report, the committee said:
“the Committee believes—in the interests of finding that balance between flexibility and certainty—that five years would be preferable to three.”
As I said in my response to the report, we listened carefully to the people who gave evidence and we considered the committee’s conclusion. I agree with that conclusion. We will lodge an amendment at stage 2 to alter the frequency of review from every three years to every five years. The facility to call for an out-of-cycle review will, of course, remain.