APIL vice president, Gordon Dalyell, examines how the Scottish Government has taken a very different approach from the Lord Chancellor in setting the discount rate in Scotland.

Last Tuesday saw Stage 3 and the passing of the Damages (Investment Returns and Periodical Payments) (Scotland) Bill.

Following the change to the discount rate in February 2017, there was increasing pressure on Government to change the methodology in setting the rate. Traditionally, the Lord Chancellor has set the rate for England and Wales and, whilst in Scotland the decision is one for the Scottish ministers, they have tended to follow the decision taken by the Lord Chancellor.

However, on this occasion the Scottish Government decided to go their own way.  Hence publication of the Damages Bill in June 2018. In addition to formulating a method to calculate the discount rate, they also decided to introduce proposals to allow the court to grant periodical payment orders without the need for both parties to consent.

The discount rate proposals form the basis of the first part of the Damages Bill. Rather than have the Lord Chancellor set the rate after consultation, the Scottish Government decided that an independent person should set the rate, and interestingly they decided on the Government Actuary - yes the Westminster Government Actuary. He will have regard to a notional portfolio of investments, which a hypothetical investor would have taken out, assuming a careful and prudent approach. This portfolio will produce a rate of return, which will then be adjusted by two separate factors, the first to reflect taxation and investment charges, the second to reflect other contingencies.

The suggested figure in the original Bill was 0.5 per cent for each factor.

Strong evidence was presented to the Parliament that any movement away from the existing method of calculating the discount rate is a departure from the 100 per cent compensation principle. The Scottish Government accepted privately that on the current approach the discount rate would be in the region of -1.75%. The political reality is that, as in Westminster, the Government is not prepared to stick with that current model.

During the passage of the Bill through the Scottish Parliament, the focus of potential amendments was on the two adjustment factors, especially the one relating t o investment charges. The Government Actuary’s Department had estimated that the range of charges could be between 0.5 per cent and 2 per cent but it was likely that they would be at the lower end, and consequently the figure of 0.5 per cent was chosen.

Jackie Baillie, a Labour MSP, put forward a proposed amendment increasing this factor to 1.5 per cent, while the Scottish Conservatives sought to reduce one of the factors from 0.5 per cent to 0.25 per cent.

APIL were able to point to evidence from independent financial advisers, and others, indicating that the likely level of charges was between 1.5 per cent and 2 per cent. Evidence obtained during the course of the Ministry of Justice consultation was extremely useful, as was evidence provided by FOCIS.

Discussions with the Government minister and civil servants resulted in the Government amending the original rate of 0.5 per cent to 0.75 per cent in respect of the first factor.

While this did not go as far as we would have liked, it is a step in the right direction.

The rate will be reviewed every five years, in line with the period in England and Wales, though the original suggestion, as with Westminster, was three years. There is scope for an earlier review. The Scottish Government does have the power to amend both the makeup of the notional portfolio, as well as each of the adjustment factors, prior to any review, and must consult prior to considering whether any amendment is required.

In the memoranda accompanying the original Bill documentation, the Scottish Government indicated that they were aiming for a discount rate of 0 per cent. It remains to be seen what figure is ultimately achieved.

In terms of timescale, the Bill is likely to receive Royal Assent within the next four to eight weeks, with the first review taking place as soon as the Act comes into force, and a decision to be made within 90 days. Consequently, we are likely to see a new rate in August or September of this year.

We will be keeping a close watch on developments, and will continue to gather as much relevant evidence as possible so that at the appropriate point, this can be presented to the Government as part of the assessment of whether the rate is delivering on ensuring that injured people are receiving fair compensation.