Client update 17th June 2020 Northern Ireland Discount Rate
Today the Department of Justice launched a Public Consultation seeking views on whether the current legal framework for setting the discount rate in Northern Ireland should be changed. The consultation documents can be accessed on the DoJ’s website, here:
Significantly, the consultation will close in 8 weeks on Friday 14th August 2020. The Statutory Consultation launched by the Minister in February 2020 is still ongoing. The Department have today indicated the Minister has not yet made a final decision in relation to the proposed new rate of -1.75%.
Where now for the discount rate in Northern Ireland?
The likelihood is that even if the Minister makes a decision on changing the discount rate under the current legal framework (Wells -v- Wells principles), it is unlikely that the necessary secondary legislation will be in place before the autumn of 2020. By that date the outcome of the Public Consultation, just announced today, will then be known and there will likely be in place draft primary legislation setting out the proposed new methodology.
The Minister therefore currently has the opportunity to consider putting the current Statutory Consultation to one side and moving forward by prioritising primary legislative changes. To do otherwise, namely if the minister does in the coming weeks decide upon a new rate (-1.75%) the rate is unlikely to be formally in place in Northern Ireland until the autumn. With likely primary legislative changes then following within a short period of perhaps six to nine months, Northern Ireland will then face the prospect of two changes within a relatively short space of time. This will do nothing for certainty or stability and will paralyse the process of settlement and negotiation of civil claims.
The Department’s consultation document specifically notes that, ‘…when setting the discount rate, the Department currently has to apply legal principles set in the decision of the House of Lords’. This is a reference to the case of Wells -v- Wells. Please refer back to our client’s bulletin update in relation to the discount rate of 12th June 2020 and whether in fact the Minister is constrained in the manner outlined by the Department.
It is arguable that the Minister currently has the power under the Damages Act 1996 to make changes to the current discount rate. This can be done by moving away from a model based upon 100% ILGS to a mixed investment portfolio. It can be argued that primary legislation to bring about these changes is not required. Certainly looking back in the early period following the commencement of the U.K. wide consultation in 2012, there was no express reference to the need for primary legislation and it was only towards the close of the consultation response in 2017 that the need for primary legislation became centre stage. It seems clear however that the Minister has been advised to follow the route taken by the rest of the U.K. and has endorsed the need for primary legislation as the vehicle to affect the change to the discount rate (as occurred in England and Wales with Part 2 of the Civil Liability Act 2018 and in Scotland, the Damages (Investment Returns and Periodic Payments) (Scotland) Act 2019).
The case for change.
The Department’s Consultation Paper: ‘the personal injury discount rate: how should it be set?’ June 2020 relies heavily on research and advice work carried out following the launch of the discount rate consultation in 2012 by the 3 U.K. jurisdictions and, in particular on the delayed response by the Ministry of Justice (in London) on 30th March 2017. The MoJ’s response was a review of the law relating to the rate in England and Wales. The MoJ concluded that the present law on setting the rate did not properly reflect investment practice and led to over-compensation of claimants and additional cost to taxpayers and consumers. It also accepted that there ought to be time limits within which reviews of the rate must be held.
Northern Ireland, therefore, remains the only UK jurisdiction in which the discount rate still has to be set under an un-amended Damages Act and in accordance with the principles in Wells v Wells. The Department saw no reason to believe that the investment decisions of plaintiffs in Northern Ireland were likely to be significantly different from those made by plaintiffs in other jurisdictions. The Department therefore considered that, while plaintiffs in Northern Ireland should continue to be assumed to be more risk averse than ordinary investors, the discount rate in this jurisdiction should also now be set to reflect more closely how they invest in reality, so as to better protect against the risk of over-compensation, and any potential unfair financial burden on public bodies, businesses and consumers. The Department also considered there should be regular review of the rate, to ensure that the rate remained realistic and was adjusted as market conditions changed. Accordingly, the Department of Justice is proposing that the legal framework for setting the rate in Northern Ireland should be changed.
The Department considered that the two obvious precedents for a new legal framework for setting the rate in Northern Ireland were the frameworks for England/Wales and Scotland. The consultation document reproduces the legal framework under the CLA 2018 at appendix 1 (page 26 onward) and under the Damages (IRPP) (Scotland) Act 2019 appendix 2 (at page 33 onward). The Department considered that, in setting the rate for Northern Ireland, it must be assumed that the recipient of damages will invest a lump sum for the purpose of meeting all losses and costs for the entire period for which they have been awarded; that the lump sum will be exhausted at the end of this period; and that it should be set with reference to low-risk rather than very low-risk investments. The Department considered that either of the legislative frameworks in England/Wales or Scotland would meet those objectives and is not inclined to think that a third model is required, although views on that are invited.
The key differences between the two models are that the assumed portfolio of investments – and the adjustments to be made for taxation and management costs – are prescribed in Scotland, but are left to judgment in England and Wales.
Who sets the rate?
In England and Wales, the Lord Chancellor prescribes the rate in secondary legislation. He/she consults an expert panel and the Treasury. In Scotland, the Government Actuary sets the rate. The rate is not brought into operation by secondary legislation, but by the Government Actuary’s report being laid by Scottish Ministers before the Scottish Parliament.
In Northern Ireland, following the model for England and Wales would mean that the Department of Justice would set the rate, having consulted the Government Actuary, or an expert panel including the Government Actuary, and the Department of Finance. Following the model for Scotland would mean that the Government Actuary would set the rate, and the Department of Justice would lay his report before the Northern Ireland Assembly.
The choice ultimately for the Minister and the Northern Ireland Assembly is whether they want to retain a degree of political accountability for the decisions made around the discount rate. In which case the English model might be preferred as it allows for greater ministerial discretion. If however, the Minister/Assembly want to remove or distance themselves from what will be awkward and difficult decisions (particularly if the markets remain volatile and unstable), then adopting the Scottish model might be the answer. It could be argued that assessing the rate is an actuarial exercise and should therefore be left to the experts. As the consultation document notes, the Scottish model exhibits a greater degree of prescription and consequently lends itself more to an actuarial decision.
The Department has also taken a view that a review of the discount rate should carried out in the future and as in England/Wales and Scotland it should be every 5 years.
The Departments’ Impact Assessment document provides an illustration of the significant effects of discount rate changes on an award covering annual care costs of £100,000 for the rest of the claimant’s life in two scenarios:
Discount rate 40 year old male with normal life expectancy 10 year old female with normal life expectancy
2.5% £2,652,000 £3,475,000
1% £3,611,000 £5,557,000
-0.25% £4,876,000 £9,128,000
-0.75% £5,566,000 £11,470,000
-2% £8,005,000 £21,931,000
The effect of the rate differs, depending on the size of the award and the period of time to which it relates: the larger the award and the longer the period of time, the greater effect the discount rate has. The Department acknowledged that if awards increase in value, insurance premiums will rise to cover the additional cost of those awards.
The current Statutory Consultation launched February 2020 has not yet concluded. The Minister has now today launched a Public Consultation with a clear intention of prioritising primary legislation to change how the discount rate is calculated in Northern Ireland. If both proceed, then Northern Ireland may face an uncertain period of at least 6 to 9 months, and possible 12 to 18 months, of instability until the primary changes have been put on the statute book. Will this have a positive or negative effect on settlement strategies? The prospect of large value/catastrophic injury claims being held up or delayed is clearly a significant risk.
The Minister’s timely decision to launch the Public Consultation is to be welcomed. The current framework, which looks back to the House of Lords decision in Wells -v- Wells, has long been out of date and unfit for purpose. Government consultation papers and analyses have for the last decade flagged up that a hypothetical risk portfolio constructed on 100% ILGS is not a risk-free approach, if ever it was.
17th June 2020