September 30, 2019

Scotland: Discount rate to remain -0.75%

The Government Actuary has confirmed that the discount rate in Scotland will remain unchanged at -0.75% following the completion of his review. The rate will take effect from 1 October 2019.

A detailed report has been prepared in accordance with the Damages (Investment Returns and Periodical Payments) (Scotland) Act 2019 ("the Act") and follows from the September 2018 report for Scottish Government on the personal injury discount rate analysis.

The report sets out the breakdown of the rate as below:

  %per annum

Gross return above RPI inflation from notional portfolio before standard adjustments

RPI +0.50%

Standard adjustment for tax and costs of investment advice and management

-0.75%

Standard adjustment for further margin involved in relation to the rate of return

-0.50%

PI discount rate

RPI -0.75%

The methodology for the calculation of the discount rate in Scotland differs to that of England and Wales. The Act prescribes a notional investment portfolio more risk averse than the comparative provision in England and Wales.  The Act also sets a notional investment period of 30 years, compared to the 43 year period for England and Wales. Together with the two standard adjustments, these differences have resulted in the lower rate.   

The decision is hugely disappointing for compensators such as insurers and public bodies, who will now face higher compensation settlements in Scotland, in comparison to those in England and Wales.

Whilst a negative discount rate had been forecast at an expected figure of -0.25%, the outcome greatly favours pursuers and will be viewed as highly unsatisfactory by compensators. The decision is likely to adversely affect policyholders as higher insurance premiums for those in Scotland when compared to the rest of the UK will likely result.

An additional update setting out the implications of this decision will follow on further detailed review of the report.