December 4, 2018

Stage 1 Report on Damages (Investment Returns and Periodical Payments) (Scotland) Bill published

Summary

The Economy, Energy and Fair Work Committee has published their Stage 1 Report on the Damages (Investment Returns and Periodical Payments) (Scotland) Bill, following their call for evidence over the summer. The Committee received 24 responses to its call for evidence, as well as hearing oral evidence from stakeholders.  

The Committee welcomes the introduction of the Bill, particularly the transparency provided by having the method for calculating the discount rate set out in legislation. Whilst acknowledging differences of opinion on some of the detail, the Committee concludes the Bill has been framed in the interests of achieving fairness, regularity and credibility across a range of cases and for both sides.

The Committee supports the general principles of the Bill and recommends to the Scottish Parliament that they be agreed to, whilst also requiring further information and clarification on a couple of issues.

Disappointingly for defenders, many of the areas of potential unfairness in the draft Bill have not been addressed and amended, which is likely to result in over compensation for some pursuers if carried forward into the Act. It is to be hoped the issues of concern for insurers will have an opportunity to be raised during the Bill's passage through parliament, with meaningful amendments made to those areas to ensure the 100% compensation principle is upheld.

How the Discount Rate should be calculated

The Scottish Government accepts that it is appropriate to move away from the index-linked gilts approach that was taken in Wells v Wells and towards a very cautious but low-risk portfolio, which is to be welcomed.

It was noted that Wells v Wells did not force pursuers to invest in a particular way, and nor does the new legislation. What pursuers actually do is considered to be irrelevant. The method is intended to provide a standardised approach that will apply across a broad range of cases. The Committee acknowledges that the process is not an exact science; the approach being that of the hypothetical investor with a notional portfolio investing over a period of 30 years.

Whilst standardisation and improved transparency is to be welcomed, failure to base the methodology on what happens in practice, produces unnecessary artificiality and a departure from the 100% compensation principle, potentially leading to over-compensation.   

The Committee notes the 30-year assumed period of investment has been arrived at as a workable average to cover the damage profile for a broad range of cases. The Scottish Government has said it will keep the figure under review, with regular analysis and advice from the UK Government Actuary's Department. Where analysis showed a significant divergence in outcomes over 15, 30 and 50-year periods, consideration would be given to having more than one rate.

The Committee has requested more detail from the Scottish Government on that commitment, including the degree of divergence required to introduce more than one rate. Insurers will need to keep this issue under close review and seek to argue for multiple rates where this would improve fairness in the compensation process.

Risk-free approach

The Committee heard evidence that pursuers already take on a number of risks, for example, in relation to living longer than provided for in their award. An investment risk, it was argued, added to the likelihood of under-compensation. Accordingly, a risk-free approach to the discount rate was seen as the only way to achieve the 100% compensation principle.

Any investment comes with a degree of risk and the Scottish Government accepts that there is always a possibility of under or over-compensation. It considers that a 50% chance of under-compensation, as UK Government Actuary's Department analysis suggested is currently the case, is not acceptable. The Committee supports the Government's view that the adjustments to cover inflation, the costs of tax and investment advice, and a “further margin” adjustment to reduce the risk of under-performance, will reduce that probability.

The justification for implementing these adjustments, particularly the 'further reduction' is far from clear. If the cautious portfolio is the appropriate way to meet the needs of the hypothetical pursuer, then this 0.5% reduction must go beyond their needs and therefore beyond the 100% compensation principle. The notional portfolio is already too cautious and the "further margin" is likely to erode the 100% compensation principle still further.

Furthermore the need for the "further margin" is undermined by the availability of PPOs. The 0.5% margin is said to be included to avoid the risk of under-compensation. This is simply unnecessary given the investment portfolio approach is overly cautious and pursuers with the lowest risk appetite can utilise a PPO.

Political Accountability

The intention behind the UK Government Actuary being responsible for setting the rate is that it becomes a technical rather than political exercise, with some political accountability being retained by setting the framework in primary legislation.  A contrasting approach is being taken in England and Wales. It is arguable that this ought to remain a decision for which there is political accountability, given the financial implications for public bodies such as the NHS.

The Scottish Government will be able to alter the adjustments and make-up of the notional portfolio via secondary legislation and therefore does have an ongoing input to the process. It is to be hoped this right is exercised and the notional portfolio amended as required to ensure it most accurately reflects how pursuers invest. 

The Scottish Government wishes to strike a balance with the regularity of the review period between the requirements of flexibility and certainty. The Committee believes that there is merit in this suggestion and invites the Scottish Government to set out how this might be achieved and whether it can be done through the Bill or otherwise. The Committee believes, in the interests of finding balance between flexibility and certainty, that five years would be preferable to three.

These changes mirror those in the Civil Liability Bill in England and Wales. As large loss cases typically take up to five years to resolve, there is likely to be the possibility that either party might seek to use a pending review to manipulate a settlement negotiation. A longer, five year review period might prevent such 'gaming' of the system and it is hoped such an amendment is implemented.

Periodical Payment Orders (PPOs)

The Committee welcomes the provision to impose periodical payment orders. PPOs are currently available, but only in cases where both parties agree. The Committee has invited the Scottish Government to bring forward amendments to give more weight to the pursuer's views when a court decides on a PPO, potentially including a statutory presumption in favour of the pursuer on this point.

In England and Wales, PPOs are already available to the courts and tend to be favoured by public bodies, which is also likely to be replicated in Scotland. However, in the interests of wider application and pursuer choice, the Committee has asked the Scottish Government to outline how it will promote the use of PPOs beyond the public sector.

Next steps

It is understood the Bill will begin to be debated at Stage 1 on 18 December 2018. It is expected that areas where the Committee has requested further information or recommended a change will be addressed as the Bill proceeds through parliament. Similarly, it is hoped that parliament listens to defenders' concerns about some elements of the Bill and brings forward appropriate amendments to fully adhere to the 100% compensation principle.