In 2017/18, the administrations north and south of the England/Scotland border consulted on options for reforming how the personal injury discount rate (PIDR) is to be set. That process led to new statutory discount rates in both jurisdictions in the second half of 2019.
Three years on and governments on either side of the Ireland / Northern Ireland border are consulting on this same issue, with both consultation periods due to close in mid-August. These processes could lead to new discount rates in both jurisdictions, perhaps in around a year or more in either case.
We have already blogged about the launch of both consultation papers (here in Ireland and here for Northern Ireland), each of which refers in some detail to the recent legislative experience in England & Wales. For that reason, what follows is more of a look forward to the possible reform processes rather than a detailed look at content of the papers.
England & Scotland have broken the link to ultra-low investment risk
PIDRs in Ireland and Northern Ireland are, notionally at very least, currently linked to the returns in UK Index-linked Government Stock (ILGS) following the House of Lords decision in Wells v Wells (1998) that claimants investing damages must be assumed to be very low risk investors. The NI rate remains at 2.5% and was set in 2001 by the Lord Chancellor when ILGS yields were around that level. It was not reviewed in 2017/18 - unlike in England - due to the absence of a functioning administration. The Irish rate of 1% or 1.5% (depending on head of loss) was judicially set in 2014 in Russell v HSE and is based on ILGS yields at that time, adapted to Irish economic conditions.
The ultra-cautious Wells / ILGS link to the PIDR continues to bind English and Scottish Ministers in 2017 and meant a rate of -0.75% was set in March that year. New legislation broke this link and is based (in England) on a more realistic and evidence-based investment approach. That delivered a realistic median real return of +0.25% which the Lord Chancellor reduced by 0.5% to arrive at a new statutory PIDR of -0.25% in July 2019. His controversial extra half per cent reduction was to shift the balance of over vs under compensation away from that median and towards over compensation in order, it was said, to provide protection to claimants. In Scotland, the rate was reset at the same -0.75% figure in September 2019 but using a notional investment portfolio specified in the new legislation.
In these different ways, both jurisdictions broke the Wells/ILGS link in the second half of last year. It is worth noting that advice at the time from the UK Government Actuary was that the Wells approach would have resulted in a PIDR of around -2%.
Northern Ireland looks set to follow
The NI consultation paper offers either the English or Scottish models as the way forward in proposed new legislation. It notes that “Northern Ireland, therefore, remains the only UK jurisdiction in which the discount rate still has to be set under an unamended Damages Act and in accordance with the principles in Wells v Wells” and concludes that “the discount rate in this jurisdiction should also now be set to reflect more closely how they [ie plaintiffs receiving large awards for future losses] 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 hidden sting here is that even if new legislation can be framed in that way, in the short to medium term the unamended Wells approach requires NI Ministers to re-set the 2001 PIDR down to something that might be as low as the -2% noted above.
Options for Ireland
Here we start from a different premise, with the PIDR set at common law rather than by statute. Irish Minsters have relevant powers in the Civil Liability and Courts Act 2004 but they have never been exercised.
The Russell case is Court of Appeal authority (the Supreme Court having refused to hear a further appeal), meaning it would need a decision at at least that level to depart from it. So, if Russell offers hard and fast PIDRs of 1% and 1.5% these figures should apply either until a new ruling on appeal or until new legislation intervenes. However, if what Russell does is not so much provide numbers as to set out an approach by which current UK ILGS yields can be translated into an Irish PIDR then the possibility of an Irish Court being invited to look at very low figures (ie -2% noted above) is a good deal more concerning.
This delicate balance is not expressly drawn out in the consultation paper. It does however point out that if Ministers were to use existing powers “to prescribe a rate materially different from this judgment [ie Russell], the courts may still use their discretion [or inherent jurisdiction] to pay what they consider the appropriate rate.”
The crucial question in the paper is whether setting the PIDR should be left either to the courts or should the 2004 legislation be amended to provide principles by which Minsters would set it and review it at regular intervals? If the latter is favoured, options for these principles are said to include the ultra-low risk Russell basis or the new English evidence-based approach. Other approaches might also be developed.
If it is assumed that refreshing Wells/ILGS Russell today would point to around -2% and that the English approach might deliver a PIDR of around 0% it becomes very obvious that either would lead to higher awards for future pecuniary losses in Ireland than the present guideline levels of 1% and 1.5%. All other things being equal, this would be expected to drive up insurance costs for Irish businesses and consumers and to increase spend on state-indemnified cases to a similar extent. Such an outcome looks far from ideal at a time when the new coalition Government has just set out insurance reform as an important part of its programme.
Ireland is something of an outlier in British and Irish common law jurisdictions in not having a statutory rate. But if this current consultation is able to deliver a new legislative approach such that the Irish PIDR is based, as in England & Wales, on actual investment behaviours and yields then it may prove possible for Ireland to avoid the adverse effects of the trough of really low PIDRs which England experienced in 2017/19 and that Northern Ireland may be forced to experience for a limited time pending the new legislation heralded in the Department of Justice’s current consultation.