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Scotland: Discount Rate reforms will come into force on 1 July 2019

  • Legal Development 10 June 2019 10 June 2019
  • Insurance

Scotland: Discount Rate reforms will come into force on 1 July 2019

The Scottish Government has announced that the Damages (Investments Returns and Periodical Payments) (Scotland) Act 2019 will come into force on 1 July 2019.

The Government Actuary's Department (GAD) will therefore start assessing a new Scottish Discount Rate on 1 July. The deadline for GAD to report to Scottish Ministers with its recommendation for the new rate is 90 days (as per Part 3 of the Act), meaning the deadline is 28 September 2019, although the recommendation could be submitted before this date. Following changes to the Bill proposed at Stage 2 a negative Discount Rate is expected. The changes increased investment charges from 0.5% to 0.75% which resulted in a change from the forecasted Discount Rate of 0% to -0.25%.

It had been suggested during the Stage 1 debates that the 0.5% reduction for tax and investment advice may not be sufficient, although questions were also raised concerning the justification for such a reduction given the notional portfolio appears overly cautious and any further reduction is likely to erode the 100% compensation principle still further. It was highlighted that the Economy, Energy and Fair Work Committee had heard evidence that investment costs would be higher at the beginning and then decrease over time. In its evidence to the Committee, pursuer representatives suggested that investment charges and tax costs could be anything from 0.5% to 2%. As stated above, a 0.75% figure was determined as appropriate.

The GAD's report must include a rate determination made in the review and a summary of the calculation of the rate of return. Once the recommendation is submitted to Scottish Ministers they must lay the report before Scottish Parliament as soon as practicable. The new rate will come into force the day after the report is laid. As such, there is the possibility that the new Discount Rate for Scotland could be in force by 1 October 2019 or earlier, depending on when the report is submitted to Ministers, although the Scottish Parliament is in summer recess during July and August.

Schedule B1 of the Act allows Scottish Ministers to provide regulations whereby more than one rate of return can be set, however without any such regulations "a rate of return is to be set so as to have effect for all cases." Should Ministers decide that a dual rate is required as per Jersey, the relevant regulations must specify the circumstances to which each rate of return is to relate and require GAD to cover each rate of return separately.

PPOs

Part 2 of the Act which relates to periodical payments orders (PPOs) will not come in to force until new Rules of Court are approved by the Scottish Civil Justice Council. There is currently no anticipated date for this.

Once this comes into force the judiciary will have the power to impose PPOs without needing the parties' consent although as per S3 of the Act the court must "have special regard to the pursuer's needs and preferences when doing so". This follows on from a recommendation made by Economy, Energy and Fair Work Committee in its report on the Bill whereby it suggested that the court should attach more weight to a pursuer's view when deciding whether a PPO is appropriate.

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