NI Personal Injury Discount Rate: Outcome of the Public Consultation, 23rd October 2020.
Looking back to our last client bulletin (17th June 2020) on the subject of the Personal Injury Discount Rate (PIDR) in Northern Ireland, we had charted a way forward that acknowledged the failings of the current methodology for setting the rate under Wells v Wells and made the case for reform to better align Northern Ireland with the rest of the UK jurisdictions.
A call was made to postpone or set to one side the Statutory Consultation which had been announced by the Minister on 27th February 2020 around a proposal to reset the PIDR at -1.75% under the current Wells v Wells formula. The rate in Northern Ireland since 2001 has remained at 2.5%. The reality of actual settlements reached is that settlements are being concluded on the basis of discount rates closer to 0%.
It is therefore with much relief that yesterday afternoon the Department of Justice Officials came before the Justice Committee in Parliament Buildings (22nd October 2020) to announce the setting aside of the Statutory Consultation so that there would be no temporary rate at -1.75% and the proposed fast tracking of a reformed methodology to strike the PIDR as set out in the summary of the Consultation Responses, section 3 of the Response Document (October 2020)
In a letter dated today, 23rd October 2020, addressed to stakeholders the Department’s Deputy Director of Civil Policy, Laurene McAlpine confirmed its decision to adopt a new legal framework for setting the PIDR in Northern Ireland. The new framework which will require primary legislation will:
- assume plaintiffs invest their lump sums in a mixed portfolio of low risk investments.
- be set by the Government Actuary with reference to a notional portfolio (subject to review) as prescribed in the Scottish model.
- be subject to Statutory Reviews every 5 years with the Minister having power to order a review sooner ‘in response to an unexpected change to economic or financial circumstances’.
Why the Scottish Model?
The Department, in its Public Consultation Paper, had taken the position that either of the frameworks in England/Wales or Scotland, would be a suitable model for Northern Ireland as each fulfilled the principles underlying the concept of 100% compensation. It acknowledged that the majority of views expressed preferred the English model and cited ‘…its flexibility and greater amount of discretion for a Minister’ as highlight features. Nonetheless, there were two models under consideration. Why then did the Department recommend the Scottish model over that of England/Wales?
At paragraph 3.8 (Page 30 of the Response Document) the Department emphasised the need for clarity ‘…as to the basis of the actuarial calculations’ and input in setting the rate .The notional portfolio under the new framework would be drawn up on expert advice and would reflect a low risk strategy ‘…that realistically reflects how a claimant might invest his/her lump sum’. This would provide, in the Department’s words, ‘up-front information to everybody about how the discount rate is calculated’. The Department took the view that ‘transparency and clarity’ were important features of any new framework and that the Scottish model set out in the Damages (Investment Returns and Periodical Payments) (Scotland) Act 2019 provided the necessary degree of prescription for the notional investment portfolio. In contrast, the English model was described before the Justice Committee, by the Department’s Laurene McAlpine as more opaque.
Options for Scotland-lite?
Paragraph 3. 9 of the Response Document makes it clear that further work is yet to be done and that the Department will be consulting with the Government Actuary’s Department ‘…on the detail of the Scottish notional portfolio’. A number of possible changes are in prospect that may produce a more bespoke Northern Ireland solution:
- the assumed investment period of 30 years prescribed in the Scottish model may not reflect either the average or typical investment period for a lump sum award of damages. The investment period in the English model is longer – at 43 years.
- possible refinement of the prescribed investments within the notional portfolio. The Scottish legislation was presumably based on analyses carried out 18 – 24 months ago. The Department recognised this and indicated it would seek GAD’s advice on ‘…changes to the investment market since the Scottish legislation was made…’
Will a change or tweak to the Scottish model produce a different PIDR for Northern Ireland? That is a distinct possibility. What seems equally possible is that even if the Scottish notional portfolio was transcribed without change into NI law, it might produce a rate other than -0.75% prevailing in Scotland, given the performance and volatility of the markets since that rate was struck. The real rate of return over and above RPI (when the Scottish rate was struck), was in fact a positive rate at 0.5% and was based on two market condition snapshots in Dec’18 and June’19. By the date the Government Actuary revisits market conditions in relation to setting a rate under the new model in Northern Ireland, it is likely to be at least 2 years or more in time removed. If the standard adjustments used in Scotland are carried over to Northern Ireland, then whatever that real rate of return turns out to be, it will be lowered by a combined factor of –1.25% which comprises a standard adjustment of –0.75% for the costs of investment advice and taxation and a further margin of -0.5%“ in relation to the rate of return” (a somewhat obscure reference on first reading ). It was the combined statutory adjustments which lowered the real rate of return from positive 0.5% to negative 0.75% However, the clear and unequivocal explanation for this further margin, over and above the costs of tax and advice is set out in the Scottish Government’s Policy Memorandum which accompanied the draft Damages (Investment Returns and Periodical Payments) (Scotland) Bill in June’18. We set it out in full:
“71. In the case of a pursuer, investment is likely to be a necessity as opposed to a preference or choice. Damages have the purpose of placing the pursuer back in the position they would have been in save for the personal injury and with the sorts of damages that attract the discount rate this is most likely to be to meet future pecuniary losses and care costs. Damages are not surplus funds which can be speculatively invested. Any losses are likely to be material to a pursuer‘s ability to meet their needs. For all of these reasons, the Scottish Government considers that a further adjustment is needed to reduce the likelihood of under-compensation. The corollary is that there will inevitably be a probability of over-compensation but it will be less than if the rate were set by reference to ILGS. A further adjustment is, therefore, set out in the legislation which will be deducted from the rate of return. The further adjustment is in recognition of the fact that any investment, however carefully advised and invested may fail to meet their needs. The Scottish Ministers will have power to change that adjustment by regulations.”
In the debate to come, it is important to remember this fundamental imbalance and consider if this remains true to the exposed desire of the Minister to set the PIDR “ in such a way that balances the risks of both over and under-compensation and is fair to both claimants and defendants.” [Foreword to the Public Consultation Document June ’20]
To excuse what is an intentional act on the part of the framers of the legislation in Scotland, by saying the rate thereafter set would be less than if the current methodology under Wells v Wells remained, is no rationale or justification. In choosing the Scottish model for Northern Ireland, with its transparency and formulaic approach which appears attractive because it makes the final exercise of striking the rate more an actuarial one, it must be remembered that arguably the political input comes front loaded- in the selection of investment types and proportions of each and in the duration of the hypothetical investment period chosen. The Scottish prescribed choices for the notional investment portfolio contain a smaller proportion of equities and bonds and the 30 year notional investment period (as opposed to the longer 43 year period in the England/Wales model) arguably produces lower yields.
Valid concerns on the part of defence practitioners in Northern Ireland remain:
In allowing an accelerated passage of the bill, the Justice Committee would be giving up its scrutiny function as the Committee stage would be by-passed, in theory allowing a bill to pass all stages in as little as 10 days. The need for removing the “not fit for purpose” current methodology under Wells v Wells is long overdue in NI. There is therefore a legitimate expectation that the reformed model be in place without delay. It does not require 20/20 hindsight to suggest that time might have been better used in the early Spring of 2020 in bringing forward the public consultation rather than an illogical statutory consultation. That however is no justification for an accelerated procedure which potentially prevents and/or restricts the oversight and scrutiny which such a crucial bill requires.
In the Department’s stakeholder letter of 23rd October 2020, it indicated a desire to ‘…legislate for a new legal framework as soon as possible’. Subject to the Assembly, it hoped to have legislation in place by the autumn of 2021. In evidence given yesterday afternoon by Laurene McAlpine, the Deputy Director of the Civil Justice Policy Division indicated that the Minister would be asking the Assembly for an ‘accelerated passage’ of the proposed Bill which would mean the Justice Committee giving up its scrutiny role in order to speed up the passage of the primary legislation. With use of the accelerated procedure it was hoped to introduce the proposed Bill into the Assembly in January/February 2021 with a view to Royal Assent in September 2021. It was further indicated that if the Bill proceeded in a normal fashion, it might take until early 2022 for it to come on the statute books.
It seems clear from the initial exchanges before the Justice Committee that they and likely the Assembly, will require further persuasion before agreeing to an accelerated passage and that in the not too distant future the Minister, Naomi Long MLA, will come before the Committee to set out the position. In an interesting development at the start of the live broadcast of the committee business yesterday afternoon, the Department indicated that the Minister had to recuse herself due to a conflict of interest. The permanent secretary had therefore taken over her role in leading and taking key policy decisions which is a first for the Northern Ireland Assembly in the context of a sitting Assembly and a Minister in post.
The Chair of the Justice Committee, Mr Paul Girvan, indicated to the Departmental Officials that notwithstanding the Committee’s concerns and doubts over whether the Bill would be given an accelerated passage, the Committee would facilitate and work with the Department and the Minister. Although the current mandate ends in April/May 2021 (with new local elections at that time), it was a little surprising to hear yesterday the Department outline its projected timeline for an accelerated passage of the Bill – before the Assembly in January/February 2021 and given Royal Assent in September 2021.The distinct possibility remains that the Justice Committee and Assembly may well decide that with that period of time in play, the new reforms proposed for the PIDR merit their full attention and scrutiny and therefore refuse accelerated passage.
It is expected that the Minister will come before the Justice Committee in the near future. It is likely the Minister will outline in clear terms what is at stake, namely the need to replace an obsolete device, the Wells v Wells formula which carries with it a significant likelihood of over compensation in lump sum awards, with a reformed methodology utilising a mixed portfolio of low risk investments which strikes a fair balance between over and under compensation.
The Department’s decision therefore not to proceed any further with the statutory consultation announced on 27thFebruary 2020 is a welcome acknowledgement that any rate set under Wells v Wells would be flawed, whether that be -1.75% or otherwise. In bringing back into the general conversation around the PIDR, the acceptance that the 100% rule requires fairness and even handedness, for both plaintiff and defendant interests, the Minister and the D0J are to be commended.
The devil as always, however, is in the detail. While an evaluation of the public consultation responses is not a numbers game, nonetheless the Department’s preference for the Scottish model against the overwhelming majority of responses which selected the English model, requires more analysis and scrutiny. It seems likely that the Justice Committee will deliver both.
We will monitor developments and provide a further bulletin in the coming weeks.
23rd October 2020