The Government Actuary's Department (GAD) has now published its "Personal Injury Discount Rate regulation features advice" in both Northern Ireland and Scotland in response to the same five questions put to it, which have influenced the regulations subsequently laid before the legislative assemblies in both jurisdictions.
Northern Ireland
The notional investment portfolio
The GAD's conclusion is that, in the absence of any clear evidence pointing to the need for change, the notional portfolio remains suitable for investing in by a hypothetical claimant investor. The portfolio is made up as follows:
|
Cash or equivalents |
10% |
|
Nominal gilts |
15% |
|
Index-linked gilts |
10% |
|
Investment-grade credit |
30% |
|
High-yield bonds |
5% |
|
UK equities |
7.5% |
|
Overseas equities |
12.5% |
|
Property |
5% |
|
Other types |
5% |
Investment period
The GAD view is that the prescribed investment period of 43 years remains appropriate. This time period was originally based on evidence which suggested that the typical life expectancy of a claimant is around 40-45 years. This and other evidence led to the assumption of 43 years in the 2019 report to the Lord Chancellor as part of the review in England and Wales which was then adopted in NI. The GAD in its response acknowledged that there is no approach to setting the investment period which would be fair to every future claimant.
Damages inflation
The basis on which the Retail Prices Index (RPI) is calculated will change and be aligned with the Consumer Prices Index including owner-occupiers’ housing costs (CPIH) from 2030. As CPIH is projected to be lower than RPI, the GAD says that this means that claimants would receive lower compensation and that, therefore, the RPI is no longer appropriate for the purpose of taking inflation into account when setting the discount rate.
Because GAD states the NI legislation requires that a single, unadjusted and published rate should be used, using an unofficial hybrid rate such as CPI + 1% to get around the problem was not possible and a specific index needed to be used.
The GAD gave consideration to an earnings-based measure, and noted that either the Annual Weekly Earnings (AWE) or Annual Survey of Hours and Earnings (ASHE) would be more appropriate than RPI. Historically AWE is recalculated back to 2000 whenever the methodology changes, to give a continuous measure over the whole period, and the GAD considered it more appropriate than ASHE when projecting future rates of change. The regulations as laid confirm that AWE is to be used.
Taxation and investment advice and management
At present, the PIDR in NI includes "standard adjustment" of 0.75% to allow for the impact of taxation and the costs of investment advice.
The GAD has concluded that this is no longer enough. Changes in investment yields and tax rates have meant that the tax burden has increased by 0.5% and, according to the GAD, there are indications that investment costs have also risen. Overall, the GAD considers that it would be appropriate to provide for a total deduction of 1.25%, representing an increase of 0.5%. This is to reflect the estimated increase in the tax burden of the average claimant of around 0.5% since the original analysis. This recommendation is adopted in the regulations that have been laid.
Further margin
This is intended as a "margin for prudence", to reduce the likelihood of claimants being under-compensated. As the GAD considers that the present rate of 0.5% remains appropriate, no change to the further margin is proposed or adopted in the regulations.
More than one rate of return?
Having regard to the concerns of stakeholders about added complexity and the need for further evidence and analysis, GAD’s advice is that a single rate remains appropriate. The GAD goes on to say that a dual rate system may be appropriate, but further evidence and analysis is required and this may not be possible to achieve in the current timeframes.
Next steps:
The Minister will lay draft regulations before the assembly that will:
- prescribe AWE as the inflation index, and
- modify the standard adjustment for taxation and the costs of investment advice and management from a deduction of 0.75% to 1.25%.
Subject to the assembly approving the proposed regulations, they will be made on, or before 1 July 2024 for the PIDR review to commence.
The proposed regulations were discussed by the Committee for Justice on 25 April 2024, who have asked for further clarification on the implications of the changes and the potential impact on insurance premiums.
Scotland
The notional investment portfolio
The notional portfolio used in Scotland is identical to that in NI. The GAD's view of the portfolio in Scotland is the same as in NI, i.e. there has been no significant evidence which undermines the previous analysis and so the portfolio remains as it is.
Investment period
This has been 30 years in Scotland. Although the GAD response suggested that this remained appropriate and may "reflect relatively short-term" pursuers, the regulations which have been laid before the Scottish Parliament specify an investment period of 43 years, bringing Scotland into line with the rest of the UK.
Damages inflation
As with NI, those drafting the response consider that the RPI is no longer suitable as a measure of damages inflation. On the basis that this is the case, the GAD again compares ASHE with AWE and comes to the conclusion that AWE may be more appropriate for the same reason as given in the NI response. The regulations confirm AWE is the index to be used.
Taxation and investment advice and management
At present, the discount rate in Scotland includes a deduction of 0.75% for taxation and investment costs. The GAD considers this no longer to be appropriate, for the same reasons set out above in respect of NI. The revised figure included in the regulations is 1.25%, within the potential range identified in the GAD response.
Further margin
The GAD considers that the present rate of 0.5% remains appropriate and, as such, no change to the further margin is proposed.
More than one rate of return?
The GAD has the same concerns with regard to this issue in Scotland as it has in NI. A dual rate may be appropriate but the extent of further analysis and evidence required militates against it being brought in the "current timeframes". Concerns about added complexity and the need for a transition period are also mentioned. Pursuers' lawyers are generally opposed to a dual rate. Maybe one for the review in 2029?
Next steps:
Regulations have been laid and will be affirmed by the Scottish Parliament before July 2024. These include:
- using AWE instead of RPI as the inflation index, and
- increasing the deduction for the impact of taxation and the cost of investment advice to 1.25%.
Final thoughts
The findings of the GAD in Scotland and Northern Ireland that they have to use a single index for measuring inflation creates a significant issue. RPI worked at the time the respective PIDR legislation was introduced as it sat at close to a mid-point between CPI and earnings inflation. As RPI is no longer considered an appropriate index for damages inflation, the choice is a starker one between CPI, which the GAD considered would be likely to underestimate the effect of inflation, and AWE which it considered would be likely to overestimate it.
