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The “New” Future for Compensation - The Scottish “Discount” Rate

The “New” Future for Compensation - The Scottish “Discount” Rate

In the personal injury world, it has long been agreed that it is necessary to vary compensation for future losses to reflect the fact that recipients would invest their money and receive a return on that investment. The question has always been:

What is a fair discount rate and how do we determine that?

Scotland’s answer was introduced earlier this year in the Damages (Investment Returns and Periodical Payments) (Scotland) Act 2019, which created a new mechanism for determining the discount rate in Scotland.

After months of number crunching and applying the new mechanism, The Government Actuary Department has determined that the “new” Scottish discount rate will be -0.75%.

What does the “new” discount rate really mean?

The eagle eyed amongst you will have noticed that the 2019 review has not resulted in a change. The discount rate has been - 0.75% in Scotland since March 2017. In comparison, the similar (but different) review carried out in England and Wales earlier in the year resulted in the discount rate south of the border being fixed at -0.25%. When the discount rate is a negative number, it results in an uplift (rather than a discount) being applied to future losses to reflect anticipated losses when settlement sums are invested when taking into account tax and other associated investment costs/advice. This can result in a significant increase in the value of high value claims where losses are claimed for future wage loss, care or prosthetics for example.

It is fair to say that this announcement came as a surprise to most as it was generally expected that the outcome of the review would be similar to the -0.25% discount rate now applicable in England and Wales. This difference in the discount rate north and south of the border may sound small but when talking about lump sum payments for future losses, a 0.5% difference can be substantial.

As the Assistant Director of the ABI commented yesterday “This is a bad outcome for Scottish insurance customers and taxpayers that does not reflect the real world environment on how investment decisions are made”.

Scotland can already be seen as a more welcoming jurisdiction compared with England and Wales for fatal claims and where damages are payable for pleural plaques, for example. With claimants now benefiting from larger uplifts in future damages, combined with the impending changes to the rules on claimant costs in Scotland the likely result is an increased number of claimants forum shopping by crossing Hadrian’s Wall to do battle in the personal injury courts of Scotland. If this does happen the likely result is higher insurance costs and higher premiums for Scottish businesses.

All of which poses the question – when are we going to stop calling it the “discount” rate?

Fiona Davidson

Senior Associate

Burness admin