-1.75% Discount Rate Proposed by Department of Justice for Northern Ireland

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-1.75% Discount Rate Proposed by Department of Justice for Northern Ireland

Published 28 febrero 2020

Department of Justice proposes changing the existing discount rate of 2.5% to -1.75%

The Department of Justice, Civil Justice Policy Division, has today issued a letter to stakeholders confirming the Minister of Justice has asked officials to undertake a statutory consultation with GAD (the Government Actuary’s Department) and the Department of Finance, on a proposed change to the discount rate currently applicable in Northern Ireland.  Under that proposal, the existing rate of 2.5% would be varied to a revised rate of -1.75%. 

Any such variation would come at a considerable expense for compensators dealing with catastrophic injury claims in Northern Ireland. It would also serve to introduce a far more punitive rate than those which currently apply in the jurisdictions of England & Wales (-0.25%) and Scotland (-0.75%).  

Northern Ireland has no equivalent of the Damages (Investment Returns and Periodical Payments) (Scotland) Act 2019 or the Civil Liability Act 2018, which changed the mechanism in the Damages Act 1996 for setting the discount rate. The applicable legislation in Northern Ireland is still the old version of the Damages Act, with the function devolved to Executive by The Northern Ireland Act 1998 (Devolution of Policing and Justice Functions) Order 2010.

The last review of the discount rate under what is regarded as ‘the old methodology’ in England & Wales, but which still applies in Northern Ireland, was in 2017. The then Lord Chancellor in England & Wales – at that time the Rt Hon Elizabeth Truss MP – concluded that she was bound to adhere to the approach advocated by Wells v Wells.  She approached the setting of the discount rate (at -0.75%) on the basis that the governing principle is as identified by Lord Hope in that case: “[The discount rate] is the rate of interest to be expected where the investment is without risk, there being no question about the availability of the money when the investor requires repayment of the capital and there being no question of loss due to inflation.”

The Lord Chancellor referenced a portfolio that contains 100% index-linked gilts (ILGS) as the best mechanism for meeting that criterion, adopting the same approach as had previously been taken in 2001. That approach was widely criticised, due to the change in use (and therefore performance) of ILGS in more recent years. It is very difficult to see how an investment in 100% ILGS, which would guarantee that claimants made a loss, could now be seen as without risk.

Today’s announcement by the Department of Justice runs the risk of giving rise to the very same criticisms.

No timescale is indicated in relation to how long the statutory consultation will take but if the proposed new discount rate of -1.75% is implemented, it will likely come into effect relatively quickly.

The Department of Justice has said that “in due course” the Minister will then give consideration to reviewing how the rate in Northern Ireland is set but quite when that will be is uncertain. Any changes to the mechanism for calculating the discount rate would require primary legislation to change.  Accordingly, compensators in Northern Ireland, including the NHS, may find themselves having to live with a -1.75% rate for a considerable period of time.   

Concerns in that regard will no doubt be compounded by the political situation in Norther Ireland. The devolved Executive and Assembly collapsed in January 2017 and was restored in January 2020. Should the Assembly collapse again, any review of how the discount rate ought to be calculate and subsequent implementation of in improved mechanism would presumably then become stalled.     

There are alternative avenues open to the Department of Justice. The  Minister could opt to depart from the approach previously taken by the Rt Hon Elizabeth Truss MP and implement change in the process of calculation ahead of any review of the current discount rate.  That would see Primary Legislation through the Assembly and were it to happen there would be a consultation. The Department of Justice should be encouraged to adopt that course, rather than proceed with the immediate review of the rate under the old, outdated methodology.  Ms Truss was widely criticised for recognising that the ILGS approach was outdated and needed changing, but then reviewing the rate ahead of running the consultation that ultimately led to the necessary changes.

Authors

Sean McGahan

Sean McGahan

Belfast

+44 (0) 289 041 2820

David Johnson

David Johnson

London - Walbrook

+44 (0)20 7894 6856

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