NI Discount Rate.
The current discount in Northern Ireland remains at 2.5%. Setting the rate in Northern Ireland (as in Scotland) is a devolved matter. The NI Assembly is now back up and running as from 11th January 2020. The Assembly collapsed 3 years ago in January 2017. In that intervening 3 year period there were changes to the discount rate in the rest of the UK. England/Wales changing to firstly -0.75% in March 2017, and then more recently -0.25% from 5th August 2019. Scotland recently decided to keep the rate at -0.75% (October 2019). To justify doing so, Scotland adopted a different methodology.
The effective discount rate in Northern Ireland?
Prior to the first changes in England/ Wales (March 2017), settlements in NI were being achieved between 0 and 1%, adopting the approach of English based defence practitioners (notwithstanding the NI official rate remained at 2.5%).
Following the more recent changes in England/Wales in August 2019, NI settlements were tending to reflect -0.25%. Whether insurers will be able to argue for a rate closer to 0% (or higher) is open to question. The picture has been further complicated by the Scottish decision to go their own way and keep the rate at -0.75%. Looking forward, we expected to see Plaintiff solicitors arguing for a minus discount rate and probably initially setting their stall out at -0.75%.
In the meantime, officially our discount rate remains at 2.5%. No settlements however are reflecting that rate and have not done so for several years. The NI Assembly is now up and running. It remains to be seen how quickly the Department for Justice in NI will act to review and amend our discount rate. As matters presently stand, the Minister of Justice in NI has 2 alternative rates to consider across the water: England/Wales at -0.25% and Scotland at -0.75%. Viewed objectively the Minister of Justice will have to underpin any decision for change with thought and analysis in deciding which way to go.
In a timely stakeholder alert released by the DoJ today, it was announced that the Minister of Justice has directed her officials to undertake a statutory consultation with the Government Actuary and the Department of Finance, as required under the Damages Act 1996, in relation to the discount rate. Significantly the statutory consultation is on a proposal to change the rate to -1.75%. The Minister cited the significant decline in investment returns since our rate was last set in 2001. Further the proposal was based on a 1 year average of yields on ILGs (excluding those with < 20 years to maturity).
Details of the statutory consultation are awaited with interest. However, as primary legislation will likely be required to set out the proposed methodology for arriving at the rate (as in Scotland) there is likely to be a delay of many months on that front alone.
What happens in the meantime? Prior to the initial recent change to the discount rate in England/Wales (March 2017 onward), NI settlements were tending to following the practice in England/Wales – i.e. using a rate between 0% and 1%. The subsequent changes to the rate in England/Wales (Aug ‘19) and then in Scotland (from Oct ’19) have created a very confused playing field with different discount rates within GB. The prospect of forum shopping has raised its head.
In considering the discount rate in England/Wales, the overriding assumption made by the Lord Chancellor was towards ‘low risk’ investment. The position adopted by Scotland under the Damages (Investment Returns and Periodical Payments) (Scotland) Act 2019 was to construct a notional investment portfolio which was more risk averse than the methodology used in England/Wales. There were of course other factors at play, for example adjustments for investment advice and a further margin in relation to the rate of return. Todays’ announcement by NI’s Minister of Justice will introduce further uncertainty. The Minister’s stakeholder alert concluded with an observation that pending the statutory consultation (and enabling primary legislation), ‘…the rate must be set in accordance with the legal principles established by the House of Lords in Wells v Wells which makes clear that claimants must be assumed to be very risk averse investors’. The questions now before us are:
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