Who benefits from changes to personal injury discount rates?

When someone claims damages for personal injury, they can claim for losses which haven’t happened yet – future losses. For example, earnings they will no longer receive because they are unable to do their old job, or costs for nursing care, or just extra help around the home.

In Scotland, damages are almost always paid in a lump sum at the point of settlement, not increments over the rest of the injured person's lifetime. This creates a problem; damages should ensure just the right amount of compensation, not too much, and not too little. So how do courts predict what the lump sum will be worth in the future, when the loss would have happened? There is no perfect answer, but there is general consensus that the lump sum should be adjusted to reflect that the claimant is getting the full amount now.

Until 2018, that adjustment decreased the lump sum, on the assumption that the money would be invested and would increase in value, above inflation. In 2017, after much disquiet about the inability to secure returns which outstripped inflation, the adjustment changed, and it increased the lump sum.

The adjustment is referred to as the Personal Injury Discount Rate. If the rate is positive, as it was between 2001 and 2017, it decreases the lump sum. If it is negative as it was from 2017, the lump sum increases.

Following several reviews, in 2018 and 2019, separate pieces of legislation were passed north and south of the border, prescribing different ways of arriving at the discount rate. In 2019 those different legislative frameworks resulted in different rates; the rate in England and Wales was still negative but increased from -0.75 to -0.25 per cent whereas in Scotland the rate stayed at -0.75 per cent.

The different rates meant that damages for the same losses were higher in Scotland than in England and Wales. For example, a 45-year-old who has lost earnings of £30,000 per year to retirement at 68, would have received £721,800 in Scotland and £681,340 in England and Wales.

The Scottish legislation obliged the Scottish Government to carry out a review five years after the initial rate was set. On 25 September the Scottish Government announced the Scottish rate would become positive, changing to +0.5 per cent. The new rate means the 45-year-old losing £30,000 per year would now receive £626,100 in Scotland, nearly £100,000 or 14 per cent less than under the old rate.

The Scottish discount rate is effectively set by the Government Actuary, who is bound by the Scottish legislation to use a number of pre-determined assumptions. In her report setting out the new rate, she advised the change in rate was brought about by an improvement in investment returns.

The impact of the increased PIDR is to decrease the value of settlements, and therefore the cost of claims for insurers, and other compensators such as the NHS and local authorities. It also means claimants will receive less, but if the rate is calculated correctly, the amount they can expect to receive from investing their damages has increased to offset the lower damages.

The next mandatory review is due to take place in 2029 but, as the GA points out, it is possible the investment market will shift significantly before then. If so, the Scottish Government can carry out an early, additional review. However, for now at least, this is good news for those meeting the cost of claims.

First appearing in The Scotsman.