Report on the Damages (Return on Investment) Bill

Committee for Justice - Report on the Damages (Return on Investment) Bill (1.34 mb)

Powers and Membership

Powers 

• consider and advise on Departmental budgets and annual plans in the context of the overall budget allocation;
• approve relevant secondary legislation and take the Committee Stage of primary legislation;
• call for persons and papers;·
• initiate inquiries and make reports; and·
• consider and advise on matters brought to the Committee by the Minister of Justice.

Membership 

• Mr Mervyn Storey MLA (Chairperson) ⁽¹⁾
• Ms Sinéad Ennis MLA (Deputy Chairperson) ⁽²⁾
• Mr Doug Beattie MLA
• Ms Sinéad Bradley MLA ⁽³⁾
• Ms Jemma Dolan MLA ⁽⁴⁾
• Mr Robin Newton MLA ⁽⁵⁾
• Ms Martina Anderson ⁽⁶⁾
• Ms Emma Rogan MLA ⁽⁷⁾
• Mr Peter Weir MLA ⁽⁸⁾
• Ms Rachel Woods MLA
  
  

Executive Summary

1. This report sets out the Committee for Justice's consideration of the Damages (Return on Investment) Bill.

2. The Damages (Return on Investment) Bill consists of six Clauses and one Schedule and its purpose is to introduce a new statutory methodology for calculating the personal injury discount rate (PIDR), which is an adjustment made to an award of damages for wrongfully inflicted personal injury. Such awards are often in the form of a lump sum and should put the injured person in the same financial position had they not been injured, including loss of earnings and future care costs, without over- or under-compensating them (known as the 100% rule.) The PIDR is used to adjust the lump sum to reflect interest that may be earned from investing the lump sum as well as the effect of tax, expenses and inflation on these returns to reflect the 100% rule.

3. The Bill will also ensure that the rate is regularly reviewed at least every five years and will transfer the responsibility for setting the rate from the Department of Justice to the Government Actuary.

4. The Committee requested evidence from interested organisations and individuals as well as the Department of Justice as part of its deliberations on the Bill.

5. In doing so the Committee identified a range of key issues on which views would be particularly welcome. They included:

• Whether the new statutory methodology to calculate the personal injury discount rate was the most appropriate to achieve as close to 100% compensation as possible
• Whether the new methodology had the potential to veer towards over compensation and if so how this could be rectified
• Whether the new methodology had the potential to veer towards under compensation and if so how this could be rectified
• Whether the new statutory methodology better reflects how a claimant would be advised to invest their award
• What the likely effects of using an investment period of 43 years rather than 30 years in the model are and whether respondents agreed with this approach
• What the advantages or disadvantages of transferring responsibility for setting the rate from the Department of Justice to the Government Actuary are and whether there is an appropriate level of accountability in the new statutory methodology

6. Thirty-one written submissions were received and the Committee held seven oral evidence sessions with organisations as well as exploring the issues raised in the written and oral evidence with the Department of Justice both in writing and in oral briefings. The Committee also sought information from the Minister of Health and the Minister of Finance on the cost implications of changes to the PIDR and the position regarding funding and commissioned a research paper on the wider impacts of changes to the discount rate in England and Wales and in Scotland.

7. The Committee sought advice from the Examiner of Statutory Rules in relation to the range of powers within the Bill to make subordinate legislation. The Examiner considered the Bill and Delegated Powers Memorandum and was satisfied with the rule making powers provided for in the Bill.

8. The Committee considered the provisions of the Bill and related issues at 13 meetings.

Key Issues Relating to the Clauses and Schedule in the Bill

9. At its meeting on 7 October 2021, the Committee undertook its formal clause by clause consideration and agreed the Clauses and Schedule in the Bill as drafted.

10. The evidence received on the Bill was set within the context of the Department of Justice bringing forward secondary legislation to change the PIDR from 2.5% to -1.75% from 31 May 2021. The new rate had been calculated in accordance with the legal principles established by the House of Lords in Wells v Wells that personal injury claimants are to be treated as very risk averse and the rate should be set with reference to returns on Index-Linked Gilts (ILGs).

11. The Department advised that the impact of the change of the rate on business, charities and voluntary bodies and the public sector would be to increase the amount of damages for future financial loss that may be payable in any personal injury action to which they are a party and it may have an effect on the cost of insurance.

12. The main areas covered in the evidence received by the Committee included:

• to what extent, if any, the social and economic impact of the PIDR could be taken into account when setting the framework
• whether responsibility for setting the PIDR should remain with the Minister of Justice rather than transfer to the Government Actuary
• the provision of 5-yearly reviews of the rate
• the use of an assumed investment period of 43 years
• whether the proposed standard adjustments to take account of the impact of taxation and the costs of investment advice and management and as a further margin to recognise that there is a risk inherent in even the most carefully advised and invested portfolio are necessary and are set at an appropriate level to avoid over-compensation or under-compensation
• the composition of the notional investment portfolio
• the description of the hypothetical investor.

13. While not specifically covered in the Bill, the use of periodical payment orders (PPOs) was also raised.

General Comments on the Bill

14. All the organisations who submitted evidence supported and were committed to the 100% compensation principle to ensure a person is fully compensated for their losses but no more or no less. There was however distinctly differing views on whether the new framework for setting the PIDR in the Bill is the most appropriate approach to adopt.

15. While some respondents to the call for evidence supported the proposed new framework set out in the Bill others, who represent or support claimants, are of the view that the current Wells v Wells methodology should be retained. Organisations who represent businesses, insurance companies and public sector bodies who are the defendants in such claims do want the methodology changed but are of the view that the framework veers towards over-compensation and adjustments are needed.

16. As a result of the PIDR changing from 2.5% to -1.75% at the end of May 2021 many of the organisations who are defendants in personal injury claims that involve the use of the PIDR wanted the legislation to be completed by the Assembly as soon as possible given the rate under the new framework is likely to be somewhat higher than -1.75%

17. The Committee appreciates the need for a stable, longer-term PIDR to be set in Northern Ireland, with provision for it to be reviewed at regular intervals, to replace the current -1.75% rate, particularly given the uncertainty there has been in recent times and the reported negative impact on progressing cases under the previous and current rate.

18. Whilst noting that those organisations representing claimants view Wells v Wells as the best and most appropriate methodology the Committee is of the view that it no longer reflects how a claimant would be advised to invest their lump sum and therefore a new framework for setting the PIDR is needed.

19. The Committee understands the difficulties with the current rate in relation to potential over-compensation in many cases and the resultant economic and social ramifications. During the oral evidence session with departmental officials on 9 September the current rate was discussed and officials advised that the Department has no power to change the rate except under the Wells v Wells criteria until such times as a new framework is introduced by legislation. While they had no way of knowing what the new rate would be using the new framework contained in the Bill given when the rate is set plays a part in determining what it is, officials expected that the rate would go up on the basis that it would be calculated on a portfolio that allows for investments in other products which should provide a better rate of return rather than solely on ILGs.

20. The Committee is committed to assisting the progression of the legislation through the Assembly as quickly as possible without compromising on the scrutiny that needs to take place.

Clause 1 – Assumed return on investment

21. Clause 1 inserts a new Section C1 into the Damages Act 1996. New Section C1:

• Removes the role of the Department in setting the discount rate
• Provides that a court must take into account the rate of return set by the rate-assessor in determining the return a claimant is expected to receive from investing a sum awarded as damages for future financial loss – this is the same duty that a court already has under the 1996 Act
• Preserves the ability of a court to take into account a different rate of return if any party can show this more appropriate in the circumstances of the case
• Provides that the rate-assessor is the Government Actuary and in the event this office is vacant, the Deputy Government Actuary will be the rate-assessor. The Department of Justice also has a power by regulations, subject to the draft affirmative procedure, to appoint a person other than the Government Actuary to be the rate-assessor and someone to deputise for that person, subject to their agreement.

22. In the evidence received in relation to Clause 1 the key issue raised was whether it is more appropriate to transfer responsibility for setting the rate to the Government Actuary or whether responsibility should remain with the Minister of Justice. Opinion was divided on the matter with concerns raised by those who are not supportive of the proposed change regarding the lack of flexibility and discretion in the model and a lack of political accountability. The need for Clause 1(1) subsection (2) was also questioned by the International Underwriting Association of London (IUA) who does not believe it is necessary.

23. A number of organisations support the transfer of responsibility for setting the rate to the Government Actuary as provided for in the legislation stating that the setting of the rate is an actuarial exercise and there is no need for political involvement once the methodology has been agreed.

24. Other organisations did not support the proposed model citing a lack of flexibility, discretion and political accountability and indicating that it is more appropriate for the responsibility for setting the rate to continue to reside with the Minister of Justice. One organisation expressed the view that the PIDR should be set by the Executive collectively as there are important cross-sectoral assessments to be made. Many of these organisations stated that there is a need to consider and weigh in the balance fair and just compensation for claimants with the additional costs that would be borne by taxpayers and citizens more widely by the setting of a very low rate.

25. The Committee took the opportunity to explore the issues raised in more detail during the oral evidence sessions with organisations and in writing and during oral evidence sessions with Department of Justice officials. The Committee also commissioned a research paper on any wider impacts observed in England and Wales and Scotland following the changes to the legislative framework and the resultant PIDR in those jurisdictions and any relevant information available from other jurisdictions.

26. Having considered the research paper, which highlighted that the Justice Select Committee that undertook pre-legislative scrutiny of the Civil Liability Bill in Westminster noted a report by the British Institute of International and Comparative Law (BIICL) that observed that the setting of the discount rate in other countries was "often not a neutral application of figures" but represents "a balance between competing considerations" the Committee sought further clarification from the Department of Justice regarding why the wider economic and societal impacts of changes to the rate cannot be considered, whether those parameters apply in other jurisdictions and, if not, why not.

27. The Department responded advising that the position that wider impacts cannot be taken into account in setting the rate stems from the established legal principle that the purpose of an award of damages for future financial loss is to provide full compensation - no more no less - i.e. the 100% rule, applies in all the UK jurisdictions and dates back as far as a nineteenth century House of Lords case. The House of Lords Wells v Wells judgement in 1999 affirmed the principle. The Department also stated that the same legal principle applies in the RoI and highlighted that, in a case in the Irish Court of Appeal in 2015, the Judge observed that the outworking of the principle is that the economic consequences for the defendant or society are not relevant in the calculation of the amount of damages payable.

28. The Department stated that taking into account wider societal or economic factors such as the impact on the health service would have the effect that a person who suffered serious injuries due to the actions/negligence of another person would only be entitled to be compensated to the extent that society is able or willing to pay and this would be a fundamental departure from the 100% principle.

29. The Department recognised that the Assembly may consider legislating so that the 100% principle no longer applied and the amount of compensation payable to a personal injury claimant is instead determined by factors outside the loss they have suffered but it suggested that such a significant change could not be properly addressed in this Bill. In its view it would require specific consultation with stakeholders including personal injury claimants and, as it would be a change to substantive civil law, would be a matter for the Department of Finance.

30. Subsequently, during an oral evidence session on 9 September 2021, the officials reiterated the Department's position that, once the parameters are laid out in the legislation, the setting of the discount rate is an actuarial exercise and there is no role for political judgement. Political accountability is still in place however as the portfolio and deductions are prescribed in the Bill and subject to review before any rate is set. This provides the Minister and the Assembly with the necessary oversight of and accountability for the framework but removes the opportunity for attempts to influence the outcome.

31. The Committee also explored whether the proposed framework provides sufficient flexibility to change the portfolio or make adjustments quickly if circumstances warranted this and the rationale and necessity for Clause 1(1) subsection (2).

32. The Committee fully supports the application of the 100% compensation principle for those who have been injured as a result of the negligence of another person and, noting the information and rationale provided by the Department, respects the position that wider economic and societal impacts should not be taken into account when considering the framework to set the personal injury discount rate.

33. The Committee noted that the Scottish Government produced a Financial Memorandum in which it provided information on the possible impact of a change in the discount rate together with illustrative figures even though the Bill itself did not change the discount rate and therefore the illustrations were not direct costs or savings arising from the Bill. While the impact and implications of changes to the PIDR cannot be taken into account when considering the framework for setting it, the Committee does believe that information should be available so that the potential consequences and costs are fully understood and necessary mitigations and actions can be considered by Government and the relevant organisations in preparation for a new rate coming in. The Committee therefore recommends that the Department should publish an impact assessment setting out the potential implications of different rates on Departments and businesses when a review is due to take place.

34. Having considered the issues raised in the evidence, the Department of Justice's response and the further clarification it provided regarding the accountability arrangements, the flexibility to review and change the framework if circumstances necessitated this and the rationale for retaining Clause (1) subsection (2) the Committee agreed that it is content with Clause 1 as drafted.

35. The Committee also expressed the view that it may be useful for the Department to clarify the position regarding Clause (1) subsection (2) in the Explanatory and Financial Memorandum to the Bill.

Clause 2 – Process for Setting the Rate of Return and Schedule C1

36. Clause 2 inserts a new Schedule C1 into the 1996 Act as set out in the Schedule to the Bill. The Schedule sets out the detail about how the Government Actuary is to approach the task of reviewing and setting the discount rate.

37. A number of issues were raised regarding the Schedule to the Bill in the evidence received. These largely related to the timing of reviews of the rate, the provision of a 43-year assumed investment period for the notional portfolio, the adjustment to the rate to take account of inflation, the provision of standard adjustments to take account of the impact of taxation and costs of investment advice and management and for a further margin and the actual percentages, the composition of the notional portfolio and the description of the hypothetical investor.
Schedule C1 Paragraphs 1 to 3

38. Paragraphs 1 to 3 of the Schedule obliges the rate-assessor to review the discount rate and deals with the timing of reviews:

• The first review is a review of the discount rate set under existing section 1 of the 1996 Act as it applied immediately before the provisions of the Schedule are brought into operation and is to start on the date on which the Schedule is brought into operation
• A subsequent review to start on 1 July 2024 (to align Northern Ireland with the cycle of regular reviews of the rate in Scotland)
• Thereafter establishes a five-year cycle of regular reviews
• Requires reviews to be concluded within a 90-day period beginning on the day on which it must be started

39. There was support for regular reviews of the rate amongst those organisations that commented on the review arrangements with all but one of the organisations agreeing that a five-year cycle is appropriate.

40. The Committee discussed the rationale for preferring a three-year review period with the organisation and also sought the views of departmental officials on the advantages and the challenges if a three-yearly review period was to be adopted.

41. The Committee supports regular reviews of the rate and considers these necessary to avoid a situation where the PIDR could be out of kilter for a substantial period of time. The Committee views the five-year cycle of reviews provided for in the Bill as an appropriate approach particularly as an additional review can be carried out if considered necessary.

Schedule C1 Paragraphs 4 to 6

42. Paragraph 4 provides an overview of the rate-setting process, Paragraph 5 provides that a review will determine whether the rate is to remain the same or be changed and Paragraph 6 provides that the rate-assessor must have regard to the views of any person the rate-assessor chooses to consult, or whose advice has been sought, provided these are received within a reasonable time.

43. There were no issues raised in the evidence received by the Committee on Paragraphs 4 to 6 of Schedule C1.

Schedule C1 Paragraphs 7 and 8

44. Paragraph 7 sets out the basis upon which the rate-assessor is to determine the rate of return. Subject to standard adjustments and rounding of figures it provides that the rate should reflect the rate of return for the notional portfolio (provided for in Paragraph 12) over a 43-year period. Paragraph 8 gives the Department a power, by regulations subject to the draft affirmative procedure, to change the period of 43 years.

45. There was widespread support for the use of a 43-year period amongst organisations representing defendants and others who highlighted that it is based on evidence unlike the 30-year period used in the Scottish model. However, organisations who represent claimants in cases raised some issues and concerns about the length of the period.

46. The Committee sought further information on the likely effect of adopting a 43-year investment period rather than a 30-year investment period from the Department of Justice and was advised that the Government Actuary had indicated that, in practice, the difference between an assumed investment period of 30 years and one of 43 years is likely to make only a very small difference of 0.1% or 0.2% in the rate calculation, if everything else is equal. Officials outlined that, since the discount rate is rounded to the nearest 0.25%, the material effect on the rate will be nil or 0.25% and provided examples to illustrate this.

47. Whilst there is evidence to support the use of a 43-year investment period for setting the discount rate, and it would therefore appear to be a more appropriate approach to adopt, the Committee is of the view that it must be considered in the round with the other parts of the Schedule that provide the composition of the notional portfolio and the adjustments to take account of inflation, the impact of taxation and costs of investment advice and management and the further margin to ensure, as far as possible, that the model will deliver the 100% compensation principle and does not veer too far towards either over-compensation or under-compensation.

Schedule C1 Paragraph 9

48. Paragraph 9 provides for an adjustment to the rate of return to take account of inflation by reference to the retail prices index or to an alternative source of information as prescribed by the Department in regulations subject to the draft affirmative procedure.

49. There was a mix of views received regarding the adjustment to take account of inflation by reference to the retail price index from those organisations that commented on this aspect of the Schedule with one believing the Retail Price Index (RPI) is the appropriate inflation measure to use to calculate the PIDR and another stating it is now regarded as unsuitable for official purposes. Forum of Complex Injury Solicitors (FOCIS) stated that it is well established and recognised by the periodical payment regime that earnings inflation in the long term rises at an average of at least 1.5% more than prices inflation. The proposed RPI provision is therefore the minimum acceptable inflationary adjustment and if the alternative of the Consumer Price Index (CPI) were to be contemplated it would require an adjustment of at least 1% to rebalance the position.

50. Having sought assurances from the Department that there is provision to change the inflation measure if necessary the Committee considers that provision for an adjustment to the rate of return to take account of inflation by reference to the Retail Price Index is an appropriate approach to adopt.

Schedule C1 Paragraphs 10 and 11

51. Paragraph 10 provides for standard adjustments to the rate of return arrived at. The rate-assessor is to:

• deduct 0.75 of a percentage point to take account of the impact of taxation and the costs of investment advice and management.
• also deduct 0.5 of a percentage point as a further margin (which recognises that there is risk inherent in even the most carefully advised and invested portfolio)

52. Paragraph 11 provides that the adjustment figures may be changed by the Department by regulations subject to the draft affirmative procedure. The resulting figures may be zero or a positive number. They cannot be a negative number (so the adjustments can never raise the rate of return). They do not need to be whole numbers but can include a decimal fraction. Unlike the rate ultimately set by the rate-assessor these numbers are not limited to being expressed in steps of a quarter percentage point.

53. There were contrasting views expressed in the evidence received on the Bill in relation to the adjustments provided for in Paragraph 10 of the Schedule.

54. Those organisations supporting claimants welcome the inclusion of the 0.5 % further margin adjustment but do not think it goes far enough and are also of the view that the 0.75% adjustment to take account of the impact of taxation and the costs of investment advice and management is too low. On the other hand all the organisations who represent defendants strongly believe that the inclusion of the 0.5% further margin adjustment will lead to over-compensation, particularly if the notional portfolio remains the same as provided for at Paragraph 12 of the Schedule, and should be removed from the Bill otherwise it appears to be allowing for the same risk twice i.e. double counting the risk of under-compensation and rendering the resultant PIDR lower than it should be, an outcome that will veer towards over-compensation. Some organisations also questioned the 0.75% adjustment for tax and investment advice.

55. The Committee appreciates the significant concerns a wide range of organisations and respondents have in relation to the inclusion of the standard further margin adjustment of 0.5% and therefore spent some considerable time discussing this provision during the oral evidence sessions with key stakeholders and with the departmental officials and considering the information and clarification provided by the Department on the need for it, whether its inclusion is, in effect, double counting the risk of under-compensation and the potential ramifications if it was removed from the Bill.

56. The Committee also sought additional clarification from the Department on whether it had moved from its position regarding achieving as close to 100% compensation as possible but no more or no less and what level of over-compensation, if any, the Department believes is acceptable.

57. The Committee acknowledges that the setting of the methodology for calculating the PIDR is not an exact science and it is an exercise in informed judgement based on expert advice. While the risk that a claimant will be under-compensated cannot be entirely eliminated given a range of factors could lead to this situation e.g. the claimant's needs are wrongly calculated, the investments do not perform as expected, inflation increases more than projected or the person lives longer than expected, the Committee notes that the inclusion of a further margin of adjustment of 0.5% recognises that the risk of under-compensation exists and moves the balance slightly in favour of the claimant from a position of 50:50 risk of over/under compensation to a position of 35:65.

58. The Committee is of the view that the inclusion of the 0.5% further margin adjustment and the 0.75% adjustment to take account of the impact of taxation and the costs of investment advice and management must be considered in conjunction with the other parts of the Schedule that provide the composition of the notional portfolio and the 43-year investment period for setting the discount rate to ensure, as far as possible, that the model in its entirety does not veer towards over-compensation and will deliver, as close as possible, the 100% compensation principle.

Schedule C1 Paragraphs 12 to 15

59. Paragraph 12 sets out the notional portfolio with the types of investments and percentage holdings on which the rate-assessor is to determine the rate of return. Paragraph 13 provides that, if the type of investment is not defined by regulations under Paragraph 14, it is to be interpreted by the rate-assessor in the way it is commonly understood in investment contexts. Paragraph 14 provides that the Department may make regulations, subject to the draft affirmative procedure, to define any of the types of investment. Paragraph 15 provides that the Department may make regulations to make changes to both the list of investments and the percentage holdings.

60. There were again distinctly different views expressed in the evidence received on the Bill regarding the notional portfolio. While some organisations support the proposed composition, others believe the notional portfolio is too cautious or, contrastingly, that it poses unacceptable levels of risk. The lack of evidence on how claimants actually invest their lump-sum award was also highlighted.

61. The Committee recognises that the composition of the notional portfolio in terms of the types of investments and percentage holdings is one of the key elements of the new framework. Noting the issues raised in the evidence received and the Department's written response the Committee took the opportunity to explore a number of issues further during the oral evidence session with departmental officials including the difference between the notional portfolio in the Bill and that used in England and Wales, whether the longer investment period of 43 years was taken into account when the Government Actuary Department reviewed the notional portfolio and if so, were any adjustments made.

62. The Committee is of the view that the notional portfolio provided for in the Bill, and whether its composition is appropriate to achieve as close to 100% compensation as possible or is either too cautious or too risky, must be considered in conjunction with the other key elements of the framework including the 0.5% further margin rather than in isolation.

Schedule C1 Paragraph 16

63. Paragraph 16 provides that, before any review of the rate of return, the Department must consider whether it is necessary to make regulations (under Paragraphs 14 and 15) to ensure that the notional portfolio remains suitable for investment by a hypothetical investor. In considering this the Department must consult such persons as it considers appropriate (no such consideration is required before an extra review).

64. The Committee noted the Department's written and oral responses to the issues raised regarding a lack of clarity around if and how the investment portfolio is to be reviewed each time a new rate is to be set and the fact that the legislation does not define 'with whom' the Department must consult when carrying out the mandatory review.

Schedule C1 Paragraph 17

65. Paragraph 17 describes the hypothetical investor as:

• A recipient of damages
• Who will invest the damages as properly advised
• Who has no financial resources apart from the damages that can be used to meet the losses and expenses for which the damages are awarded and will make withdrawals from the investment fund deriving from investment of the damages
• Whose objectives are to secure that the damages will meet the losses and expenses for which they are awarded and be exhausted at the end of the period of the award

66. The main issue raised in relation to Paragraph 17 was the lack of available data on how claimants actually invest their compensation awards. Reference was also made to the fact that the notional portfolio makes assumptions that may not properly reflect investment behaviour.

67. The Committee discussed the potential for the Department to commission research to gather evidence of actual claimant investment behavior at its meeting on 23 September. The departmental official outlined that the evidence available to date had been provided by financial advisers indicating how they believe that claimants are advised to invest rather than first-hand knowledge from claimants and indicated that it would be hard to see how an obligation could be placed on a person to provide that information.

68. While the Committee appreciates it may be difficult to obtain such information, it does believe there are benefits in doing so to inform future consideration of the framework to set the PIDR, and therefore recommends that the Department undertakes an assessment of the potential options to gather evidence of actual claimant investment behaviour.

Schedule C1 Paragraph 18

69. Paragraph 18 clarifies that, for the purposes of Paragraphs 16 and 17, the damages are damages for future pecuniary loss in an action for personal injury and are paid in a lump sum.

70. There were no issues raised in the evidence received by the Committee on Paragraph 18 of Schedule C1.

Schedule C1 Paragraphs 19 and 20

71. Paragraph 19 provides that the rate will be set as a percentage figure, whether a whole number of percentage points or multiple of a quarter percentage point. It can be expressed in quarter percentage points and rounded to the nearest whole number or quarter percentage point. Paragraph 20 provides for the rounding of the figure so as to comply with that requirement.

72. The Committee noted the comments of the IUA that paragraph 20(2) is agreeable only if it applies in the unlikely event that two permitted figures are equally near when rounding. While acknowledging that in such circumstances the nature of the rounding provision will result in an increased chance of over-compensation IUA understands that in all other circumstances the rate will be rounded to the nearest 0.25 percentage points.

Schedule C1 Paragraphs 21 and 22

73. Paragraph 21 provides that there will be single rate of return which will apply to all cases unless regulations provide otherwise. Where the Department sets out in regulations, subject to the draft affirmative resolution procedure, that there should be more than one rate, a review is to be carried out separately for each rate of return. Under Paragraph 22 such regulations must set out the circumstances in which each rate is to apply and require the rate-assessor to report separately on each rate of return.

74. One organisation commented on this part of the Schedule indicating that while it agreed with the provision allowing a dual discount rate approach to be considered, if it was adopted there should be absolute certainty that two rates should apply to a claimant with a life expectancy longer than the period beyond which a different rate applies.

75. The Committee noted the confirmation provided by the Department in its oral evidence that it has no plans to set a dual rate in the near future but it may wish to consult at some point on whether a dual rate would be a better model.
Schedule C1 Paragraphs 23 to 26

76. Under Paragraph 23 the rate-assessor must send a report to the Department when the review has concluded and no later than the last day of the 90-day period for carrying out the review. The report must be dated and contain the rate determination and a summary of how the rate is calculated. Under Paragraph 24 the Department must lay the report before the NI Assembly as soon as practicable after it has been received and on the same day the rate-assessor must publish the report. Paragraph 25 provides that the rate will come into effect on the day after the report is laid. Paragraph 26 provides for the Department to reimburse the rate-assessor for costs incurred in connection with a review.

77. While only two organisations commented on these paragraphs they expressed conflicting views. One stated that, for consistency and fairness, the legislation should ensure that any new discount rate set as a result of the review applies to all settlements, regardless of incident date or date of issue of proceedings to avoid arguments on the appropriate discount rate to be applied based on retrospectivity. It should be the date of the resolution of a court case or the settlement date and not the date of the incident or the date of the issue of proceedings.

78. The other believed the framework should rule out any retrospective effect and any new discount rate should only apply to compensation awards relating to incidents that took place after the change in rate.

79. The Committee noted that the purpose of the discount rate is to reflect the return on investment of a lump sum award. By definition, it is applied at the time the damages are awarded, which is the point after which the claimant has the opportunity to invest the funds regardless of the date of incident or date of issue of proceedings.

Schedule C1 Paragraphs 27 to 34

80. Paragraphs 27 to 30 make provision for transitional arrangements so that the rate of return currently prescribed under Section 1 of the 1996 Act will continue to apply until such times as a rate is set under the provision in the Bill when enacted

81. Paragraph 31 deals with regulations made under the Schedule. Sub-paragraph (1) allows regulations to make different provision for different purposes. Sub-paragraph (3) provides that regulations made under the Schedule will be subject to the draft affirmative resolution procedure.

82. Paragraphs 32 to 34 are interpretation provisions for the purposes of the Schedule.

83. There were no issues raised in the evidence received by the Committee on Paragraphs 27 to 34 of Schedule C1.

Committee Position on Schedule C1

84. The Committee appreciates and understands the significant concerns a wide range of organisations have in relation to whether the new framework provided for in Schedule C1 to set the PIDR will deliver, as far as possible, the 100% compensation principle, whether it is those organisations representing claimants who are concerned about under-compensation or those organisations who defend personal injury claims and are concerned about over-compensation.

85. Any new framework will set the PIDR for the foreseeable future; therefore, it was important for the Committee to ensure that claimants receive the compensation they are entitled to while being satisfied as far as possible, recognising that achieving 100% compensation is not an exact science and assumptions have to be made about the future, that the model being adopted will not over-compensate with the ramifications of that for Government Departments including the Health Service, businesses, insurers etc.

86. The key elements that make up the framework are the assumed investment period, the composition of the notional portfolio and the standard adjustments for inflation, the impact of taxation and the costs of investment advice and management and a further margin to recognise that there is risk inherent in even the most carefully advised and invested portfolio. While the Committee considered each of the elements of the Schedule, when coming to a view on it the Committee considered the elements in conjunction rather than in isolation to ensure an overall view was taken of the likely effect they would have together on the potential for achieving close to 100% compensation or providing for over or under-compensation.

87. Given the specific concerns raised that the inclusion of the 0.5% further margin would lead to over-compensation, particularly when considered in conjunction with the composition of the notional portfolio, the Committee spent some time discussing this aspect and seeking clarification from officials on it.

88. The Committee noted the information provided by the Department that the inclusion of the 0.5% further margin shifted the balance of risk between under and over-compensation more towards the defendant and away from individual claimants while still aiming for the principle of 100% compensation and Members indicated that they supported this approach.

89. Having considered all the elements of the new framework in the round the Committee agreed that it was content with Clause 2 and Schedule C1 as drafted.

90. In doing so the Committee noted that the Department can order an in-cycle review if necessary and expects the Department to exercise this power if circumstances require it.

Clauses 3 to 6 – Ancillary Provision, Interpretation, Commencement and the Short Title

91. Clause 3 provides a power for the Department of Justice by regulations to make ancillary provision. Any such regulations which amend primary legislation are subject to the draft affirmative procedure.

92. Clause 4 is an interpretation provision.

93. Clause 5 provides for the commencement of Clauses 3 to 6 of the Bill on the day after it receives Royal Assent. It also allows for the remaining Clauses to be commenced by order made by the Department.

94. Clause 6 describes the short title of the Act.

95. The Committee agreed that it is content with Clauses 3, 4, 5 and 6 as drafted.

Other issues raised in the consideration of the Bill

96. The evidence received by the Committee also highlighted the potential impact changes to the PIDR, both those introduced by the Department on 31 May 2021 and under the proposed new framework, would have in relation to health and social care provision in Northern Ireland in terms of costs of settlement, subscription costs for healthcare professionals including GP indemnity costs and the potential knock-on effect on the stability of the health and social care workforce and the implications for insurance premiums in Northern Ireland. In addition, the promotion of PPOs as an alternative to a lump sum payment was also raised.

Promotion of periodical payment orders

97. The Minister of Health and a number of organisations commented on the use of PPOs and the reasons why there was a low-uptake. Views where expressed that PPOs may result in a degree of greater certainty and fairness to both plaintiffs and compensators given they obviate reliance on estimates of future returns and inflation rates and can also help mitigate the risk of over or under-compensation. The role of the court in relation to PPOs together with the need for the court and the plaintiff to be satisfied that the defendant is in a position to meet the payments going forward and what legal protections are in place in that regard were also issues covered.

98. To assist its consideration of the comments and suggestions made regarding the use and promotion of PPOs the Committee requested the views of the Department regarding the potential to make PPOs compulsory, particularly in cases involving government backed bodies, by bringing forward a policy on this, or if necessary, legislative changes and any information or analysis on why the use of PPOs was so low.

99. The Committee also discussed with the Department at its meeting on 23 September how the court system operated in relation to PPOs, whether any action had been taken to promote the use of them, particularly for vulnerable claimants who may rely on the goodwill of others to protect their long-term investments, and whether there is sufficient awareness of the PPO option.

100. The Committee noted the information provided by the Department setting out the requirements placed on the court by the Damages Act 1996 that outlined that, as well as enabling the court to make a PPO without the consent of the parties, the 1996 Act requires the court to consider whether or not to make a PPO. Under the associated Court Rules, which are made by the Court of Judicature Rules Committee with the Department's approval, claimants must state in the documents used to initiate legal proceedings whether they consider a PPO or a lump sum to be the most appropriate form of award therefore they have to actively consider the option of a PPO and their legal representative will advise them in this regard. Defendants who admit liability also must state which form of award they consider to be appropriate. Both parties also need to explain their preferred form of award.

101. The Committee also noted that the Department considered the existing legislative provision to be sufficient and that it would not be appropriate, or practical, to require a court to make a PPO in a particular type of case, without any consideration of all the relevant circumstances, and whether or not this form of order best meets the claimant's needs and the information provided in relation to the position in the other UK jurisdictions.

102. The Committee discussed the suggestion by the Department that the Committee may wish to recommend that the Rules Committee considers adding to those factors that could help to increase uptake of PPOs. The Department also proposed that the Committee may consider it helpful to invite the Lady Chief Justice to consider a judicial studies training event around PPOs.

103. At its meeting on 7 October 2021 the Committee agreed to write to the Lady Chief Justice, in her capacity as Chair of the Court of Judicature Rules Committee, to recommend that the Rules Committee considers adding to those factors that a court is required to take into account when considering whether or not to make a PPO to include, as an example, consideration of the inherent risk that a lump sum award may not best deliver full compensation consistent with the 100% principle, or other factors that could help to increase uptake of PPOs.

104. The Committee also agreed to invite the Lady Chief Justice to consider a judicial studies training event around PPOs and the challenges with securing 100% compensation on investing a lump sum, perhaps in conjunction with the Bar and the Law Society.

Consequences of changing the rate on GP practices and Health and Social Care Northern Ireland (HSCNI)

105. The Minister of Health, Health and Social Care NI, the British Medical Association Northern Ireland General Practitioners Committee (BMA NIGPC), the Medical Defence Union (MDU), the Medical Protection Society (MPS) and a range of other organisations all highlighted their concerns about the impact and implications of the recent sharp reduction to the PIDR on the provision of health and social care in Northern Ireland including the cost of indemnity provision for GPs and the likely consequences of this.

106. In a letter to the Committee the Minister of Health set out in detail the likely negative impact of the current -1.75% PIDR and the significant impact on GPs of a significant long-term reduction in the PIDR from the previous 2.5%. The Minister did note that the legislation is expected to increase the PIDR and will therefore partially reverse the impact that the current rate is having on the cost of settlements, however the extent of this will depend on the eventual rate determined.

107. The Minister of Health also advised that the Department of Health is considering the issue of future GP indemnity arrangements in Northern Ireland and future options for GP indemnity provision are under active review. He did however highlight that, irrespective of the mechanism by which indemnity provision is secured for GPs, the impact of a rise in the cost of settling clinical negligence cases as a result of a significant change to the PIDR places a significant additional financial burden on the health and social care system which is already facing a range of challenges exacerbated by the impact of Covid-19.

108. To assist its consideration, the Committee commissioned a research paper on a range of issues relating to the PIDR including what types of government-backed indemnity schemes for GPs are in place in other jurisdictions. The Committee noted that the Department of Health and Social Care had recently introduced two state indemnity schemes in England and Wales while in Scotland there is no state backed indemnity scheme however indemnity costs are lower.

109. In the expectation that payments to individuals in Northern Ireland would increase given the changes to the PIDR, the Committee had already sought information from the Minister of Finance on whether any request had been made to HM Treasury for the same approach to apply in Northern Ireland as had applied in England and Wales and in Scotland when the PIDR changed in those jurisdictions. The Committee understood that the Treasury made some allocation to the budgets of those Departments/Agencies affected to recognise that there would be an increase in the payments made to individuals. The Committee had welcomed the confirmation from the Minister of Finance that he had highlighted the issue to the Chief Secretary of the Treasury and advised that if the legislation is brought forward, access to the Reserve would be sought in line with that afforded to Whitehall departments and other devolved administrations.

110. Following receipt of the response from the Minister of Health the Committee again wrote to the Minister of Finance regarding the position in relation to whether funding would be available from the Treasury to cover some or all of the costs of a state-backed GP indemnity scheme. In response the Finance Minister outlined that the Executive will have received Barnett consequentials on all changes to the Department of Health and Social Care DEL budget including that associated with the introduction of the new state-backed GP Indemnity Scheme and indicated that Treasury have confirmed that no further funding would be provided; therefore, if the Minister of Health wishes to introduce a state-backed GP indemnity scheme, the costs will have to be funded from the Department of Health budget settlement.

111. The Committee also requested information on funding pressures that have been highlighted by other Departments, and in particular the Department of Health, and whether these have been reflected in the discussions with Treasury to secure additional funding and the Department of Finance confirmed that it is in discussions with Treasury to secure funding for the 2021/22 pressures. It also indicated that from 2022/23 onwards no additional funding will be provided by Treasury to offset any pressures arising from the change in the PIDR and this will require the Executive to manage the cost increase through the normal budgetary process.

112. The Committee appreciates that the issue of indemnity costs for GPs is a matter for the Department of Health but is concerned about the ramifications if the issue is not addressed satisfactorily. The Committee also expects the Department of Finance to continue its discussions with Treasury to secure funding to address the pressures identified as a result of the change in the PIDR.

Implications on insurance premiums

113. The Association of British Insurers (ABI), the IUA, AXA, Zurich and Aviva highlighted that the PIDR is a key component for underwriters calculating insurance premiums and set out the pressures placed on insurers' claims costs the lower the rate is set. They outlined the impact the current rate of -1.75% will have on the cost of motor insurance, employer's liability insurance and public liability insurance and the level of liability cover a business would need to purchase. The lack of a detailed impact assessment accompanying the Bill was also raised.

114. In contrast FOCIS stated that the incidence of lifelong disabling injuries that result in calculations that significantly engage the discount rate is low. In its view the impact of a fair discount rate on insurance premiums would be spread across all policyholders and, whether they are consumers or businesses, they would hardly notice the difference. Conversely if the discount rate is set too low the adverse impact on those who have wrongly sustained life-changing injuries is profound. There will be impacts on their families and in all likelihood it will fall back on the state to support them and hence fall back on taxpayers.

115. The research paper commissioned by the Committee covered any impacts observed in England and Wales and in Scotland on the cost of insurance following the changes to the legislative framework resulting in changes to the PIDR in those jurisdictions and how insurance costs in Northern Ireland compare with other jurisdictions.

116. In considering the paper, the Committee noted that research across the United Kingdom (UK) in 2018 on the cost of insurance found that claims tend to be greater in Northern Ireland given the nature of the roads, the market is not as competitive as a number of UK insurers do not offer cover in NI and the NI courts tend to make higher serious injury awards in a legal market which is different to England and Wales.

117. While the Committee respects the position that wider economic and societal impacts should not be taken into account when considering the framework to set the personal injury rate and this is covered in detail at paragraphs 257-272 of the report it did press the Department on why it had not provided more detailed costings. The Committee also sought an explanation for the higher awards for damages for pain and suffering in Northern Ireland compared to other UK jurisdictions and whether the Department intended to consider any legislative reforms similar to those in England and Wales and the Republic of Ireland designed to lower claim costs and assist consumers.

118. As highlighted earlier the Committee believes that information should be available so that the potential consequences and costs related to the PIDR are fully understood and recommends that the Department should publish an impact assessment setting out the potential implications of different rates on Departments and businesses when a review is due to take place.

119. At its meeting on 21 October 2021 the Committee agreed its report on the Damages (Return on Investment) Bill and ordered that it should be published.

142. The Committee also engaged with the Minister of Health and the Minister of Finance regarding the cost implications of changes to the PIDR and what additional funding would be available from HM Treasury in respect of increased costs and the potential for a state-backed indemnity scheme for GP’s in Northern Ireland similar to that introduced in England and Wales when the PIDR rate changed in 2019. Correspondence from the Ministers is included at Appendix 5.

143. The Committee carried out its informal deliberations on the Clauses of the Bill and the Schedule at its meeting on 23 September 2021 and undertook its formal Clause by Clause scrutiny of the Bill on 7 October 2021.

144. At its meeting on 21 October 2021 the Committee agreed its report on the Damages (Return on Investment) Bill and ordered that it should be published.

Consideration of the Provisions of the Bill

145.The Damages (Return on Investment) Bill contains six Clauses and one Schedule.

Personal Injury Discount Rate

146. When a person has suffered a serious life changing personal injury as a result of the negligence of another, the compensation settlement will include damages for any future financial losses e.g. loss of earnings, cost of future care and support and the provision of specialist equipment. Where the compensation is paid to an individual in a lump sum he/she is expected to invest the money with the aim of ensuring that it lasts for the rest of his/her life.

147. The PIDR is a mechanism which aims to ensure that a person is fully compensated for their losses but no more or no less i.e. the 100% compensation rule where the award should be sufficient to meet all the losses as they arise and should be used up at the end of the period for which it is given. The Court applies the rate to adjust the lump sum to take account of the return that may be earned from investing it.

148. The effect of the rate depends 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 the effect the discount rate has. It can therefore make significant differences to the amount of the award.

149. The PIDR in the main applies to claims arising from medical negligence, road traffic accidents and industrial accidents.

150. The power to set the rate currently sits with the Department of Justice, in consultation with the Government Actuary and the Department of Finance, under the Damages Act 1996.

Context of the Legislation

151. Until 30 May 2021 the discount rate in Northern Ireland was 2.5% as set by the Lord Chancellor in 2001, prior to the devolution of justice.

152. The Damages Act 1996 does not specify how the discount rate should be set therefore to date it has been set in accordance with legal principles established by the House of Lords in Wells v Wells. As well as setting out the object of an award of damages as being "... to place the injured party as nearly as possible in the same financial position he or she would have been in but for the accident ...." Wells v Wells also specified that claimants in personal injury cases should be treated as very risk adverse investors reflecting that they may largely be financially dependent on the lump sum awarded, often for the duration of their lives. This resulted in the PIDR being based on an investment portfolio that contained 100% ILGs as offering the least risk.

153. In 2017, the Ministry of Justice and the Scottish Government issued a joint consultation on how their discount rates should be set in the future. Both jurisdictions consequently decided to move away from Wells v Wells and adopted new legal frameworks for setting their rates in 2018 and 2019 respectively.

154. In England and Wales, the rate is now set with reference to assumed returns from a diversified portfolio of low-risk investments, having regard to the actual investments made by claimants. While the rate continues to be set by the Lord Chancellor, he/she must consult an expert panel, which includes the Government Actuary and the Treasury and the rate must be reviewed at least every five years. Under the new framework, the Lord Chancellor set a new rate of -0.25% for England and Wales in 2019.

155. In Scotland the rate is now set with reference to projected returns on a notional portfolio of 'cautious' investments with a downward adjustment of 1.25 percentage points to reduce the likelihood of under-compensation. The notional portfolio is prescribed in the legislation and specifies different types of investment products and what percentage of the portfolio they represent. Responsibility for setting the rate was transferred from Scottish Ministers to the Government Actuary and a minimum review period of five years was introduced. In Scotland, following a review of the rate under its new framework, the rate remained at -0.75%

156. In February 2020 the Department of Justice advised the Committee for Justice that it was taking forward the statutory consultation required under the Damages Act 2006 with the Government Actuary and the Department of Finance on a proposal to change the discount rate from 2.5% to -1.75%.

157. The Department subsequently advised the Committee in June 2020 that it intended to consult on whether the legal framework for setting the personal injury discount rate should be changed and if so, how. The consultation document set out a number of assumptions which the Department believed should be made in relation to setting the rate and sought views on which of the frameworks that apply in England and Wales and in Scotland would be most appropriate for Northern Ireland or proposals for an alternative framework.

158. Following the consultation, the Department decided to bring forward legislation to provide for a new statutory methodology for calculating the discount rate based on the Scottish model but with the use of an assumed investment period of 43 years rather than 30 years, provide that the task of reviewing and setting the rate should fall to the Government Actuary and establish a timeframe for review of the rate. The Department also indicated that it had decided not to change the current PIDR at this time in view of its decision to legislate for a new legal framework which it hoped would be in place by autumn 2021 and under which a new rate could then be set.

159. On 24 March 2021 the Department advised the Committee that, now it was anticipated that it would be 2022 before a personal injury discount rate could be set under the new framework provided for in the Damages (Return on Investment) Bill, the Permanent Secretary had reviewed his previous decision not to change the rate until the new framework was in place. In his view, the time until a rate could be set under the new framework was longer than would be reasonable to wait and he had therefore decided that the Department should bring forward secondary legislation, the purpose of which was to amend the personal injury discount rate to -1.75%. This rate had been calculated in accordance with the legal principles established by the House of Lords in Wells v Wells that personal injury claimants are to be treated as very risk averse and the rate should be set with reference to returns on ILGs.

160. The Department advised that the impact of the change on business, charities and voluntary bodies and the public sector would be to increase the amount of damages for future financial loss that may be payable in any personal injury action to which they are a party. This may have an effect on the cost of insurance. A regulatory impact assessment had not however been carried out as these impacts could not be taken into account in applying the legal principles that govern the setting of the rate.

161. The Statutory Rule was laid in the Assembly on 29 April 2021 and the new rate came into effect on 31 May 2021.

Response to the Call for Evidence

162. The Committee identified a range of key issues to consider when scrutinising the Bill and in the call for evidence indicated that views on these would be particularly welcome. They included:

• Whether the new statutory methodology to calculate the personal injury discount rate was the most appropriate to achieve as close to 100% compensation as possible
• Whether the new methodology had the potential to veer towards over compensation and if so how this could be rectified
• Whether the new methodology had the potential to veer towards under compensation and if so how this could be rectified
• Whether the new statutory methodology better reflects how a claimant would be advised to invest their award
• What the likely effects of using an investment period of 43 years rather than 30 years in the model are and whether respondents agreed with this approach
• What the advantages or disadvantages of transferring responsibility for setting the rate from the Department of Justice to the Government Actuary are and whether there is an appropriate level of accountability in the new statutory methodology

163. Thirty-one written submissions were received from a range of organisations in response to the Committee's call for evidence. The Committee appreciates the time and effort that was taken to submit the evidence which covered a range of different views relating to the proposed new framework to set the PIDR. The Committee also held eight oral evidence sessions to explore the key issues in further detail with a number of the organisations and with departmental officials and sought further information from the Minister of Health and the Minister of Finance. The evidence received was used by the Committee to undertake detailed scrutiny and consideration of the provisions in the Bill.

164. All the organisations who submitted evidence supported and were committed to the 100% compensation principle to ensure a person is fully compensated for their losses but no more or no less and most of them were of the view that reform of the formula by which the PIDR is set is long overdue. However, while some respondents to the call for evidence supported the proposed new framework set out in the Bill others, who represent or support applicants, were of the view that the current Wells v Wells methodology should be retained and organisations who represent businesses, insurance companies and public sector bodies who are the defendants in such claims were of the view that the framework veered towards over-compensation and adjustments were needed. A number of these organisations also wanted the responsibility to take the decision on the PIDR to remain with an elected representative such as the Minister of Justice rather than residing with the Government Actuary as provided for in the legislation.

165. As a result of the PIDR changing from 2.5% to -1.75% at the end of May 2021 many of the organisations who are defendants in personal injury claims that involve the use of the PIDR wanted the legislation to be completed by the Assembly as soon as possible given the rate under the new framework is likely to be somewhat higher than -1.75%.

166. The evidence received also highlighted the potential impact changes to the PIDR, both those introduced by the Department on 31 May 2021 and under the proposed new framework, would have in relation to health and social care provision in Northern Ireland in terms of costs of settlement, subscription costs for healthcare professionals including GP indemnity costs and the potential knock-on effect on the stability of the health and social care workforce and the implications for insurance premiums in Northern Ireland. In addition, the promotion of PPOs as an alternative to a lump sum payment was also raised.

General Support for the legislation

167. The Lord Chief Justice (LCJ) advised that the review of the personal injury discount rate is overdue and the continued uncertainty has had a negative impact on case progression of personal injury claims at both the High Court and County Court tiers.

168. The LCJ outlined that the overall aim is that the award for personal injuries will neither under-compensate nor over-compensate the injured party and the discount rate forms a vital part of a calculation which converts an assumed further stream of income into a present lump sum. The prescribed rate must be taken into account in all cases in which the court has to determine the return to be expected from the investment of a sum awarded as damages for future financial loss in a personal injury action on or after that date, irrespective of when the injury occurred, the cause of action arose or the proceedings began. He stated that the courts in Northern Ireland should not be expected to approve settlements of such actions in which the future damages lump sum award would be regarded as substantially inadequate for the plaintiff. Neither should they be expected to approve settlements which place an undue burden on the tax-payer who ultimately bears the cost of over- compensation if awarded against the Departments defending such actions.

169. On behalf of the judiciary the LCJ requested an expedited legislative remedy to restore the balance between the interests of plaintiffs and defendants with regular time-bound reviews as soon as possible.

170. The LCJ also referred to documents published by the Ministry of Justice when considering the discount rate and a research report commissioned by the British Institute of International and Comparative Law (BIICL) in 2017 to examine the issue of the discount rate applying to quantum in personal injury cases from a comparative law perspective. The report focused on the jurisdictions of Australian States, Canadian Provinces, France, Germany, Hong Kong, Ireland, Spain and South Africa and showed that there are a wide variety of rates and approaches to its setting in the jurisdictions considered, but all give effect to the principle of full compensation and, where relevant, give the claimant the benefit of a defensive investment strategy.
The BIICL also noted a broad range of rates (at that time) from 6% in the Australian State of Victoria for motor vehicle and workplace accident victims, to 3.5% in Spain. No jurisdiction with a single discount rate had a negative rate as currently is the case in the UK.

171. The Minister of Health stated that the framework for setting the discount rate and subsequent compensation levels is a matter for the Department of Justice to formulate with consideration to ensuring plaintiffs are suitably compensated. Any framework should adhere to the principles of reimbursement to maintain compensation at near 100% levels i.e. there should be full compensation for losses but no more and no less. He did however highlight the implications for the health and social care sector.

172. The Department of Finance noted that the advice from the Department of Justice is that, of the options available, the new statutory methodology to calculate the PIDR is envisaged to be the most appropriate to achieve as close to 100% compensation as possible, which is fair to both claimants and defendants.

173. The Law Society expressed the view that, in setting the PIDR, the overarching objective should be to ensure that the plaintiff receives full compensation in real terms. The outcome should also be fair to the defendant in not requiring him to over compensate the plaintiff. The Society supports the Department's intention to give effect to the principle of 100% compensation and favours an approach that offers a plaintiff a 'full compensation' position without under- or over-compensation.

174. The Society had previously voiced concerns that the rate of 2.5%, which was set in 2001, should have been adjusted before now. Failure to do so has been disadvantageous to plaintiffs and has led to a number of high value cases having to be delayed. The Society hopes that, by setting an interim rate of - 1.75%, the Department of Justice will move to a permanent rate more quickly.

175. The Bank of England Prudential Regulation Authority is of the opinion that the methodology and parameters strike a fair balance between claimants and defendants or their insurers.

176. Lisburn and Castlereagh City Council highlighted that the transparency and clarity offered by the legislation along with the control and oversight are important and valuable advantages of the new framework.

177. The Institute and Faculty of Actuaries (IFoA) believes that the needs of the injured parties should be at the centre of any compensation paid and supports the principle that settlements should aim to provide 100% compensation, but neither more nor less. The IFoA did however state that whatever methodology is used to set the discount rate will not ensure 100% compensation, even if the aim is to ensure 100% compensation on average. Individuals will live either longer or shorter than expected which may then lead to under- or over- compensation. In its view, aiming to assure full compensation to the majority of claimants would require a bias towards over- compensation.

178. The IUA firmly supports the overall intention to ensure the rate is set in a way that gives effect to the 100% rule and is fair to both claimants and defendants. It is also broadly supportive of the legislation and stated that it should be progressed as a matter of urgency in order to bring a stable, longer-term rate to replace the interim rate of -1.75% which is based on an outdated methodology and will severely impact upon the well-established 100% compensation principle.

179. The IUA highlighted the advice provided by the Government Actuary to the Lord Chancellor in June 2019 that illustrated that a rate as low as -1.75% would likely result in over-compensation in more than 90% of claims.

Concerns that the new framework will lead to under-compensation

180. The Association of Personal Injury Lawyers (APIL) pointed out that the PIDR is vital to ensure that compensation does what it is required to do - return the injured person to the position in which he/she would have been if it were not for the injury - no more, no less. It stated that it is important to recognise that the people who are affected are those who have sustained catastrophic, life- changing injuries at the hands of other people – and that those responsible have been proven to have caused needless, avoidable harm. If an injured person is given a lump sum payment, he/she is expected to invest that sum to ensure it lasts for the rest of his/her life.

181. The APIL believes that the current method of Wells v Wells is the most appropriate to calculate the personal injury discount rate and moving away from that methodology risks leaving people under- compensated for injuries that were caused by someone else's fault. It noted however that the Department of Justice has decided to adopt the model used in Scotland as opposed to the model used in England and Wales. While neither system is perfect as they move away from treating injured people as "risk free" investors, there are aspects of the Scottish system that, in the view of the APIL, make it preferable to the system implemented in England and Wales.

182. FOCIS also views the Wells v Wells formula as the best and most appropriate way to ensure full compensation, stating that it is the only methodology that avoids plaintiffs being exposed to both investment and inflation risk.

183. FOCIS stated that the debates about fixing the discount rate in England and Wales, Scotland and now in Northern Ireland have tended to focus on the fear of over-compensation despite there being no credible evidence that that has ever been the case under the Wells v Wells regime.

Concerns that the new framework will lead to over-compensation and a lack of Ministerial accountability

184. The ABI welcomed the legislation stating that reform is long overdue as the PIDR is currently set using an out-dated formula which does not reflect real- life circumstances. This means Northern Ireland is an outlier in both UK and international terms and plaintiffs and defendants need to see a more stable and fairer method for setting the PIDR. Urgent reform is required as the NI rate will swing from one extreme to the other under the current Wells v Wells methodology. This provides limited incentive for one party to settle at either extreme, is not fair or equitable and requires reform urgently.

185. While the ABI shares the commitment to the principle of 100% compensation which means both claimant and defendant are treated fairly in a settlement, it does not support the decision to use the methodology based on the Scottish Act as, in its view, this does not meet the principle of 100% compensation. It believes the Bill as introduced will have a significant financial impact on individuals and organisations that purchase liability insurance and on compensators including insurers, organisations that self-insure and public bodies including the HSCNI. It noted that the Justice Minister had said "higher awards of damages are ultimately funded by businesses and consumers through higher insurance premiums, and by the taxpayer through higher payments made directly by, for example, the health service."

186. The NFU Mutual Insurance Society Limited (NFU), Aviva, Zurich Insurance and AXA all share the commitment to the 100% rule of compensation and welcomed a revision to the PIDR methodology which best achieves this overriding principle. That said, they all have concerns about the new proposed methodology.

187. The NFU stated that it is vital that the methodology of determining the PIDR is transparent and truly reflects the reality of investment decisions of claimants considered "low risk" investors and which factors in sufficient caution to ensure the 100% rule is consistently attained whilst also addressing the interests of justice for all parties. It does not believe that the new methodology is the most appropriate to achieve the desired result and highlighted that in the Department of Justice consultation on a new methodology it supported the adoption of the England and Wales model as this is the framework which best achieves the 100% compensation rule and delivers a fair and reasonable outcome to plaintiffs and defendants.

188. Aviva stated that it is essential that any new discount rate methodology for Northern Ireland delivers a clearer system that strikes a fair balance between the interests of claimants and the requirement for affordable access to insurance for consumers and businesses. It believes that further consideration should be given to adopting or mirroring the methodology from England and Wales to achieve a fairer outcome. Aviva stated that the framework used in Scotland is based on a policy decision taken by Scottish Ministers to over-compensate claimants which has the consequence of generating additional costs for compensators including HSCNI and other public bodies as well as insurers.

189. Zurich Insurance also does not believe that the proposed methodology to calculate the PIDR is the most appropriate to achieve as close to 100% compensation as possible and highlighted that the recent interim discount rate of -1.75% will lead to over-compensation in approximately 90% of cases.

190. AXA does not support the use of the methodology based on the Scottish model stating it does not meet the principle of 100% compensation which is fair to all parties and if introduced would have a significant financial impact on consumers and organisations that purchase liability insurance, and on insurers, self-insureds and public bodies including the Health and Social Care Service.

191. AXA recommends the adoption of the England and Wales methodology as this would be a more equitable model and would align to the principle of 100% compensation. It also stated that the new rate of -1.75% is too low and is the lowest in all of the UK jurisdictions as well as the Republic of Ireland and will result in over-compensation with significant implications for consumers, business, key professions and the wider Northern Ireland economy and its competitiveness.

192. The Forum of Insurance Lawyers Northern Ireland (FOIL NI) and the British Insurance Brokers' Association (BIBA) acknowledged that the new proposed statutory methodology for calculating the PIDR is infinitely preferable to the current methodology used under Wells v Wells under which the new rate of - 1.75% is based. They stated that the key consideration in achieving the principle of 100% compensation is in striking a fair balance between the plaintiff and the defendant and between the risk of over and under compensation. In the context of the urgent need to complete consideration of the legislation given the recent decision by the Department of Justice to strike a new rate of -1.75% under the current Wells v Wells methodology which will carry significant risk of over-compensation FOIL NI and BIBA did not seek at this time to argue that a model based on the English framework would be preferable but if the passage of the Bill were to be delayed further they would wish to return with further submissions around the efficacy of a methodology for calculating the PIDR using the English model and referred to the content of their original submission to the Department's consultation.

193. The Confederation of British Industry NI (CBI NI) fully supports the overarching commitment to the principle of 100% compensation and pointed out that upholding it is crucial as it ensures both insurers and claimants are treated fairly. It accepts that designing a framework to deliver on that principle is not without its challenges and indicated that such a framework needs to be both:

• Fair – one that strikes the balance between adequately compensating claimants whilst avoiding driving up costs or limiting choice for policyholders; and
• Flexible – one that affords a sufficient degree of flexibility to allow the rate setter to avoid overcompensating

194. CBI NI noted that the process for setting a new rate comes at a critical time for the NI business community as it navigates through both the implementation of the NI Protocol and recovery from the Covid-19 pandemic. It wants to ensure that a framework is developed that avoids imposing additional costs on local businesses, consumers and the public purse and stated that it is imperative that the Bill is progressed as soon as reasonably practicable to replace the out-of-date methodology currently used to calculate the rate and to mitigate the potential implications of the adoption of the temporary rate of -1.75%. It would however have liked to have seen a much more fulsome impact assessment from the Department.

195. While the proposed new methodology is a welcome step away from the flawed, existing methodology the CBI NI does not accept it is the most appropriate way of achieving the 100% principle and guards against adopting the more rigid and prescriptive approach taken in Scotland with little discretion as to the final rate stating that low returns stemming from the

Scottish rate risks over-compensation and ultimately additional costs for insurers and compensators, often in the form of public bodies.

196. The Department of Infrastructure highlighted that changes to the discount rate will have implications for it in terms of personal injury and property and/or vehicle damage compensation awards and settlements. If the discount rate is set lower the Department will have to settle at a higher amount to ensure the plaintiff receives full compensation. The change is, however, unlikely to have any major budgetary or resource impact in the 2021/22 financial year.

197. BLM Law also agreed that the legal framework for setting the PIDR should no longer be tied to Wells v Wells because the principles of that case are no longer fit for purpose. While favouring the England and Wales model in which setting the PIDR is a matter for Ministerial discretion as opposed to the Scottish model which requires the Government Actuary to perform a series of technical adjustments to the investment return on a prescribed notional investment portfolio BLM acknowledges that the Department has set out its reasons for selecting the Scottish model.

198. BLM stated that it is reasonably straightforward to apply the 100% principle in vehicle damage cases and in minor injury claims because there will generally be concrete forensic evidence of past losses and case law guidance on injury damages. However, cases in which the PIDR is used to calculate lump sum awards are by definition the most serious injury claims types involving the future needs of the plaintiff, often over a long period, in respect of ongoing medical care and/or loss of earnings. The levels of these elements are not at all certain. In order to arrive at financial figures to resolve cases, hypothetical assumptions inevitably have to be made about clinical progress and care needs as well as about probable future career development (in respect of future loss of earnings claims). Assessing future losses in personal injury cases using a discount rate based approach will always have inherent flaws because assumptions about the future necessarily have to be made, and fixed, once and for all at a given point in time (the day of settlement or trial). The overall objective of achieving 100% compensation is not an exact science.

199. It highlighted that it is also possible to look at 100% compensation at a macro level. The statistical concept is that over a large number of cases any levels of over- or under- compensation due to the approach adopted would broadly even out over the group of cases as a whole. Under this, the 100% principle would be respected by setting a PIDR at the median point in the population of claims, meaning that half of the claims were over-compensated and half were under-compensated. Although finding the median point would simply be a question of statistical analysis, as a policy choice BLM acknowledges that it may be unattractive as it is implicit in it that half of the claimants will be under-compensated and it noted that the Government Actuary commented on this in his advice to the Lord Chancellor in 2019 when he said
"Whilst it is possible to set the PIDR equal to this net median level of return, there is a 50/50 likelihood that a claimant experiences a rate of return that is lower than this. To safeguard claimants from the likelihood of not being able to meet their needs, it may be considered appropriate to set the PI discount rate at a lower level."

200. While BLM expressed the view that enacting the 100% principle in a legal framework requires a number of subjective (and difficult) choices about investment and risk and inevitably there is room for argument on such matters the Department has explained its choices and for the most part has been able to provide evidence in support of them.

201. In respect of the new statutory rate of -1.75% BLM indicated that it could be described as 'veering' inevitably towards guaranteed over-compensation, the adverse effects of which have been clearly set out by the Department:

"if claimants receive higher returns than are assumed under the discount rate, they will be over-compensated. Over-compensation means that compensators, including insurance companies and the public sector (most significantly the health service) pay more than is necessary to compensate people for personal injuries. This may increase the cost of insurance to businesses and consumers and is likely to reduce the amount of funds available for direct spending on health and other public services”.

206. The MDU stated that the setting of the personal injury discount rate was not just a legal decision. Decisions on what the rate should be have profound financial consequences for the healthcare system in NI and ultimately the taxpayer and no Minister or Executive should be required through legislation to wilfully overlook the full financial consequences of a PIDR change. While the court held in the 1998 House of Lords decision in Wells v Wells that the financial impact on society was not a matter for them, the MDU views it as certainly a matter for government. The MDU advised that it had experience of the sizeable effect on public services of a large drop in the PIDR and outlined that when the rate in England and Wales was changed from 2.5% to -0.25 % a claim that was valued at approximately £4.5m at the previous rate settled for £10.6m.

207. HSCNI stated that there is a balance to be struck between the legitimate right of plaintiffs to get proper and adequate compensation and the compensator’s ability to pay and noted that achieving 100% compensation is not an exact science. In the case of the health and social care system public funds are used to pay the damages. HSCNI highlighted that the gap between the new rate of -1.75% for Northern Ireland against the rest of the UK creates a stark difference which has implications for various industries including the commercial insurance industry, public sector bodies and the health budget. The proposed interim discount rate creates further uncertainty for the Government and insurers in creating adequate reserves againstpresent and potential future claims – a claim settlement of c.£9m would now translate into c.£26 million – and it emphasised the issue of potential over- compensation to many plaintiffs with the resultant ramifications for public funds. HSCNI advised that the new rate would not resolve the uncertainty as it is rightly viewed by defendants as being an interim rate that will be replaced by a long-term rate. The situation therefore needs to be resolved speedily.

213. The Committee understands the difficulties with the current rate in relation to potential over-compensation in many cases and the resultant economic and social ramifications. During the oral evidence session with departmental officials on 9 September the current rate was discussed and officials advised that the Department has no power to change the rate except under the Wells v Wells criteria until such times as a new framework is introduced by legislation. Officials indicated that if the Department was to fix another rate under the Wells v Wells methodology it could go even lower. While they had no way of knowing what the new rate would be using the new framework contained in the Bill given when the rate is set plays a part in determining what it is, they expected that the rate would go up on the basis that it would be calculated on a portfolio that allows for investments in other products which should provide a better rate of return rather than solely on index-linked gilts

231. ABI stated that the framework for Scotland is significantly more rigid and inflexible than the framework for England and Wales and under the Scottish framework the rate-setter’s discretion as to the final rate is very limited.

247. The MDDUS states that most of the assumptions are set out in the legislation and can only be changed by regulations by the Department therefore the Government Actuary will have relatively limited discretion when setting the PIDR - it is left with deciding on the investment returns to assume. MDDUS views this as an appropriate transfer of technical responsibility as this is part of the typical actuarial skill set and the Government Actuary will be required to comply with professional guidance and standards. However, it considers that there should still remain political oversight of the PIDR given the impact that changes in this may have on public, corporate and individual finances and therefore the PIDR should be set by the Northern Ireland Executive collectively rather than either the Government Actuary – as what is involved is a matter of public policy judgement as well as a technical calculation – or by any individual Minister as there are important cross-sectoral assessments that should be made, especially in relation to the impact on health financing which seem to have been ignored in the decision-making process undertaken thus far.

248. In response to the views expressed that transferring responsibility for setting the rate to the Government Actuary reduces political accountability the Department of Justice stated that it considers that there is more, rather than less, political accountability in adopting the Scottish model.

249. The Department pointed out that under the provision in the Bill, the Government Actuary will set the rate according to the detailed methodology prescribed in primary legislation. The Northern Ireland Assembly is responsible and accountable for setting these detailed parameters, and any subsequent changes will be made by the Minister of Justice by way of secondary legislation requiring the approval of the Assembly. This ensures that there is still full political accountability.

250. Once the detailed parameters for setting the rate are determined in this way, the Department views the setting of the rate as simply an actuarial exercise which the Government Actuary is, therefore, best placed to carry out. Under the framework proposed in the Bill, the Government Actuary will be required to set the rate in accordance with the detailed methodology set out in legislation and professional guidance and standards. The technical assumptions that he requires to make in doing so – about investment returns, asset classes and investment approach – are actuarial assumptions, informed by expert advice as necessary, and he will publish a report of his review and determination of the rate.

254. The Department stated that, if it was to legislate to move away from the 100% principle by setting a rate that takes into account factors other than those relating to investment returns and associated costs, it would mean accepting that those suffering serious physical and mental injury through no fault of their own should not necessarily be fully compensated to meet their future needs and who would then have to rely on publicly funded services. Maintaining the 100% principle means the calculation is an actuarial exercise rather than a political one in which a Minister would be encouraged to take into account matters other than the actual loss to a personal injury victim.

Necessity of Clause 1(1) subsection (2)

255. The IUA does not believe that Clause 1(1) subsection (2) is necessary and recommends that it should be removed from the Bill. It indicated that allowing courts to set rates in individual circumstances could produce legal arguments over the appropriate rate to use, as well as introduce a level of unpredictability in respect of rate setting which could add costs, uncertainty and delays. A single rate being set would mean consistency could be applied across all courts, in all cases. This would better reflect overall economic circumstances, rather than be influenced in circumstances of one individual case. The IUA is of the view that the discount rate should be set by the rate assessor.

256. In response the Department of Justice highlighted that this power for a court to take a different rate into account if any party can show that it is more appropriate in the circumstances of the case is already in the Damages Act1996 and there is case law that constrains its use. As far as the Department is aware, the power has not been much, if ever, invoked.

Committee Consideration of Clause 1

257. The Committee took the opportunity to explore the issues raised regarding whether there is a lack of flexibility in the new statutory framework, whether there is an appropriate level of accountability and the potential impact on public services, particularly the Health Service, businesses, insurers etc. in more detail during the oral evidence sessions with ABI, APIL and FOCIS, FOIL and CBI NI, HSCNI, MDU, MPS and BMA (GPCNI),

258. The Committee also commissioned a research paper on any wider impacts observed in England and Wales and Scotland following the changes to the legislative framework and the resultant PIDR in those jurisdictions and any relevant information available from other jurisdictions. Having considered the research paper, which highlighted that the Justice Select Committee that undertook pre-legislative scrutiny of the Civil Liability Bill in Westminster noted a report by the BIICL that observed that the setting of the discount rate in other countries was “often not a neutral application of figures” but represents “a balance between competing considerations” the Committee sought further clarification from the Department of Justice regarding why the wider economic and societal impacts of changes to the rate cannot be considered, whether those parameters apply in other jurisdictions and, if not, why not.

259. The Department responded advising that the position that wider impacts cannot be taken into account in setting the rate stems from the established legal principle that the purpose of an award of damages for future financial loss is to provide full compensation - no more no less - i.e. the 100% rule, applies in all the UK jurisdictions and dates back as far as a nineteenth century House of Lords case. The House of Lords Wells v Wells judgement in 1999 affirmed the principle. The Department also stated that the same legal principle applies in the RoI and highlighted that, in a case in the Irish Court of Appeal in 2015, the Judge observed that the outworking of the principle is that the economic consequences for the defendant or society are not relevant in the calculation of the amount of damages payable.

260. The Department stated that taking into account wider societal or economic factors such as the impact on the health service would have the effect that a person who suffered serious injuries due to the actions/negligence of another person would only be entitled to be compensated to the extent that society is able or willing to pay and this would be a fundamental departure from the 100% principle.

261. The Department recognised that the Assembly may consider legislating so that the 100% principle no longer applied and the amount of compensation payable to a personal injury claimant is instead determined by factors outside the loss they have suffered but it suggested that such a significant change could not be properly addressed in this Bill. In its view, it would require specific consultation with stakeholders including personal injury claimants and, as it would be a change to substantive civil law, would be a matter for the Department of Finance.

262. Having considered the written and oral evidence received in respect of these issues and the additional information provided by the Department the Committee took the opportunity to discuss them and the necessity for Clause 1(1) subsection (2) when departmental officials attended the meeting on 9 September 2021.

263. In response to questions on why most of the organisations that represent defendants would prefer to see the England and Wales model introduced even though both it and the Scottish model are intended to deliver the 100%compensation principle, the officials expressed the view that defendants may think there could be more scope for influencing the outcome of that model and making representations to the Minister. There is a lot more room for the exercise of discretion whereas there is no scope for that in the Scottish model because the portfolio and the deductions to be made are prescribed in the Bill. Providing discretion could result in the Minister being lobbied or placed under pressure to adopt a more risky portfolio or change the adjustments. The officials also outlined that an expert panel is involved in the England and Wales Scheme which results in extending the time taken to fix the rate and highlighted that previous experience of such panels, in the context of the statutory discount rate, have not been helpful as the experts cannot agree.

264. The officials reiterated the Department’s position that, once the parameters are laid out in the legislation, the setting of the discount rate is an actuarial exercise and there is no role for political judgement. Political accountability is still in place however as the portfolio and deductions are prescribed in the Bill and subject to review before any rate is set. This provides the Minister and the Assembly with the necessary oversight of and accountability for the framework but removes the opportunity for attempts to influence the outcome.

266. The Committee also explored the need for and purpose of Clause 1(1) subsection (2), particularly given the Department had indicated that, as far as it is aware, the power has not been much, if ever, invoked.

267. The officials outlined that Clause C1(2) allows the court to take a different rate into account if it shows that it is more appropriate but clarified that the power is heavily restricted by Court of Appeal in England and Wales case law so it is only possible for the court to apply a different rate where the party to the proceedings can show that the particular circumstances of their case were not considered or dealt with in the context of setting the statutory discount rate. Officials could not envisage what such circumstances would be and were not aware of the courts in Northern Ireland ever setting a different rate from the prescribed discount rate.

268. When pressed as to the rationale for having the provision the officials stated that it was already provided for in the Damages Act 1996 and it was therefore simply being retained, there was no harm in having the power and it is useful to have in the event that there is a case where the court would find the power helpful.

269. The Committee fully supports the application of the 100% compensation principle for those who have been injured as a result of the negligence of another person and, noting the information and rationale provided by the Department, respects the position that wider economic and societal impacts should not be taken into account when considering the framework to set the personal injury discount rate.

270. The Committee noted that the Scottish Government produced a Financial Memorandum in which it provided information on the possible impact of a change in the discount rate together with illustrative figures even though the Bill itself did not change the discount rate and therefore the illustrations were not direct costs or savings arising from the Bill. While the impact and implications of changes to the PIDR cannot be taken into account when considering the framework for setting it, the Committee does believe that information should be available so that the potential consequences and costs are fully understood and necessary mitigations and actions can be considered by Government and the relevant organisations in preparation for a new rate coming in. The Committee therefore recommends that the Department should publish an impact assessment setting out the potential implications of different rates on Departments and businesses when a review is due to take place.

289. There was widespread support for the use of a 43-year period amongst organisations representing defendants and others who highlighted that it is based on evidence unlike the 30-year period used in the Scottish model. However, FOCIS and APIL who represent claimants in cases, raised some issues and concerns about the length of the period.

297. The ABI outlined that, in 2017, it provided the Ministry of Justice with an analysis of more than 2,500 settlements which shows the average investment period for a PIDR award is 46 years. ABI therefore agrees with the use of an investment period of 43 years as it reflects evidence of how seriously injured people invest their settlements and gives a longer period to smooth out investment performance. It stated that an investment period of 30 years is not based on evidence, does not reflect the real-world investment environment for low risk investors, and would significantly reduce the period of investment to achieve the returns sought, which would result in a lower PIDR than necessary.

298. Both HSCNI and Aviva agree that using an investment period of 43 years is an objective one, backed up by evidence in the form of the analysis from the ABI that concluded that the average investment period was 46 years. Aviva noted that the 43-year period errs on the side of caution.

299. AXA also referred to the findings of the ABI analysis and strongly agrees that it is prudent to assume a longer investment period to ensure a more stable return for added certainty and to the benefit of both the injured claimant and paying defendant.

300. In the view of FOIL NI and BIBA, the amendment to the Scottish based framework to use a longer assumed investment period of 43 years as provided for in the Bill (rather than 30 years) more accurately reflects the average or typical investment period for a lump sum award of damages and also references the ABI analysis.

332. Whilst believing that the standard adjustments included in the Schedule will add transparency to the setting of the discount rate, APIL is concerned that the standard adjustment of 0.75 per cent for the impact of taxation and the cost of investment advice and management is too low and could lead to under-compensation. APIL consulted an independent financial adviser who said: “with regard to investment costs, financial advice … is made up of financial planning advice and investment management. Suitable independent advice and investment management will incur a charge of between 1.5 per cent and 2 per cent per annum. As a result the impact of advice costs has been materially under-estimated”. In independent briefing for APIL at the time the legislation was going through the Scottish Parliament the same financial adviser said that “the impact of taxation is impossible to estimate accurately in advance as it depends on many factors, all which change over time, and some of which change day by day.” On that basis he said the allowance for investment advice and tax “is almost certainly bound to be too little”.

335. FOCIS understands from experts that investment advice is likely to be charged at 1.5% - 2% per annum and the costs of investment advice is likely to be higher the lower the sum of compensation is. It therefore views the 0.75% adjustment as too low and should be replaced by a 1.5% adjustment to represent the impact of taxation and the cost of investment advice and management and avoid under-compensation.

336. While welcoming the 0.5% further margin adjustment to moderate under- compensation FOCIS believes that it does not go far enough, noting that the Government Actuary in its advice suggested that the Lord Chancellor consider a margin adjustment between 0.25% and 0.75% to mitigate the incidence of under-compensation. The Government Actuary report provided a graph that showed that even with the 0.5% adjustment about a third of plaintiffs would still run out of their compensation before the end of their lifetime under the rate set and 22% would suffer a shortfall of 10% or more.

337. In contrast, in its written evidence, the ABI stated that the Department of Justice has not provided any evidence to show that the further adjustment of 0.5%, which has been adopted from the Scottish legislation, is required in order to achieve 100% compensation. It believes that including it in the Bill exceeds the target of 100% compensation and it should be removed.

348. BLM indicated that the 0.75% adjustment to take account of the impact of taxation and the costs of investment advice and management is prescribed in the Scottish legislation and was also selected as a matter of discretion by the Lord Chancellor in England and Wales following advice from the GAD. The 0.5% further margin is prescribed in the Scottish legislation and was also selected as a matter of discretion by the Lord Chancellor in England and Wales in order to move away from median compensation and to protect against the risk of under-compensation.

349. It expressed the view that using a notional portfolio that is more conservative from an investment risk perspective and thus different from that in England and Wales and then making the same 0.5% further margin adjustment for the risk of under-compensation appears to be allowing for the same risk twice – i.e. double counting the risk of under-compensation and rendering the resultant PIDR lower than it should otherwise be, an outcome that will tend towards over-compensation. BLM indicated that it seems logical that the risk should be allowed for only once. It may be that reducing the further margin to 0.25% could be a reasonable way to proceed as a rough rule of thumb and in the absence of specific evidence on the point.

350. MDDUS also indicated that the further margin percentage should be reduced to reduce the potential for over-compensation.

351. AXA challenged the 0.75% deduction as it was not aware of any factual evidence having been supplied to support a standard adjustment for taxation and investment advice and stated that the figure should not be accepted at face value just because another jurisdiction might use similar figures.

352. In its view if the investment portfolio is already prescribed in the Bill, investment advice and subsequently the cost of this would not be necessary. Applying a flat rate adjustment to the discount rate is a broad-brush approach and unfairly inflates all heads of damage for further losses when such actual costs might be incurred on an intermittent basis only, if at all. AXA suggested that a better option would be for these standard adjustments to be removed from the Bill but allow defendants to consider paying for the reasonable cost of future financial advice as a separate head of claim through negotiation or award at the time of settlement – organisations already pay in similar fashion for the cost of case managers who organise claimant’s on-going/future care.

353. AXA stated that it understands the reasoning behind the further margin adjustment is to remove inherent risk but believes it completely contradicts the principle and objective of 100% compensation, undermines certainty and fairness in the process and should be removed. Even a very small % movement in the rate such as this can have a very significant and detrimental financial impact. The adjustment appears unduly artificial, inflexible and likely to promote over-compensation. It is also unnecessary as the notional portfolio is already cautious. Claimants who want to avoid risk totally can avail of PPOs which will compensate them for the remainder of their lives and which completely avoids the need for extra margins. AXA believes that there is good evidence to support the removal of both standard adjustments as these appear to be a major contributor to potential over- compensation.

354. AXA also drew attention to the Annual Accounts of the Courts Funds Office and a consultation into management of funds held on behalf of minors and patients. The Northern Ireland Courts and Tribunals Service (NICTS) issued its conclusions in December 2019 and stated “currently, where appropriate, funds held in court are invested on the recommendation of a contracted investment manager. The investments are monitored by the Judicial Liaison Group, which includes independent individuals with investment expertise. The returns on the invested funds have consistently exceeded targets and benchmarks; NICTS does not believe that there is any reason to alter these arrangements.’ It is evident from the information published that the funds for these claimants are carefully managed and protected with investment returns made. AXA therefore suggested that in any claims where damages are managed by the court, the 0.75% investment charges should not apply, the 0.5% extra margin should not apply and the assumed notional investment portfolio should represent being “no worse” than the basket of investments currently used by the Courts Funds Office. Over-compensation would therefore be avoided in these examples.

361. The Department stated that the policy memorandum for the Scottish Bill noted that it did nothing to disturb the 100% compensation principle. However, Scottish Ministers recognised that assessment of a lump sum award of damages for future financial losses can never be an exact science and there will inevitably be levels of under- and over- compensation because of a range of factors. The further margin was included in recognition of the fact that any investment, however carefully advised, may fail to meet a claimant’s needs and that any losses are likely to be material to a claimant’s ability to meet their needs. It was acknowledged that the corollary of reducing the likelihood of under-compensation is that there would inevitably be a probability of over-compensation, although less than if the rate were set by reference to ILGs. The Lord Chancellor applied the same further margin in England and Wales because he considered that not doing so would ‘give rise to too great a risk that the representative claimant will be under-compensated’.

Committee Consideration of Schedule C1 Paragraphs 10 and 11

362. The Committee appreciates the significant concerns a wide range of organisations and respondents have in relation to the inclusion of the standard further margin adjustment of 0.5% and therefore spent some considerable time discussing this provision during the oral evidence sessions with key stakeholders and with the departmental officials and considering the information and clarification provided by the Department on the need for it and the potential ramifications if it is removed from the Bill.

363. During the oral evidence session with departmental officials on 9 September 2021 the Committee questioned whether the Department had moved from its position regarding 100% compensation, whether the inclusion of the further margin adjustment was in effect ‘double counting’ and what level of over-compensation the Department believes is acceptable.

369. Paragraph 12 sets out the notional portfolio with the types of investments and percentage holdings on which the rate- assessor is to determine the rate of return. Paragraph 13 provides that, if the type of investment is not defined by regulations under Paragraph 14, it is to be interpreted by the rate- assessor in the way it is commonly understood in investment contexts. Paragraph 14 provides that the Department may make regulations, subject to the draft affirmative procedure, to define any of the types of investment. Paragraph 15 provides that the Department may make regulations to make changes to both the list of investments and the percentage holdings.

376. The ABI recommends following the framework for England and Wales under which the PIDR rate is now set with reference to assumed returns from a diversified portfolio of low-risk investments, having regard to the actual investments made by claimants, which it views as better than the “cautious” investment approach and the statutory adjustments in the framework for Scotland which leads to over-compensation and the resultant additional costs borne by defendants including public bodies, taxpayers and ultimately consumers as well as insurers. In relation to the notional portfolio in the Bill ABI recommends that the Department increases the size of the portfolio of equities within the overall portfolio.

377. FOIL NI and BIBA also believe that the composition of the notional portfolio is overly cautious and light in equities and it is not one that an adviser would advise for an injured claimant. They note that the Bill uses the same set of investments and percentage holdings as was used in the Scottish legislation. Due to the type of investment and the percentage holdings prescribed, a more conservative and risk-averse model has been produced when compared to the portfolio that was used by the Government Actuary Department when it advised the Lord Chancellor in England and Wales. A lower gross rate of return may therefore be produced, which is a factor that will influence the possibility or likelihood of over-compensation.

378. In the English methodology the details of the investment portfolio are left to the discretion of the Lord Chancellor subject to certain assumptions that the plaintiff will invest in a diversified portfolio and be willing to take more risk than “very low risk” but less risk than a prudent investor who is properly advised.

379. FOIL NI and BIBA noted that, in its advice to the UK Government, GAD recommended a midpoint of the portfolios that had been proposed by the respondents to the consultation. By taking that approach and formulating advice to the Lord Chancellor a slightly higher risk was assumed than that in the notional portfolio in the Bill. In evidence to the Scottish Economy, Energy and Fair Work Committee the Scottish Minister acknowledged that the composition and makeup of the notional portfolio chosen for Scotland reflected a “very cautious” but low risk portfolio. The difference in composition and selection of investments within the notional portfolios is one of the key differences between the methodologies used in England and Wales and in Scotland leading to the notional “lower risk investor” in England and Wales and the “cautious investor” in Scotland.

380. FOIL NI and BIBA indicated that the composition of the notional portfolio will dictate, to a large extent, the outcome i.e. what the rate turns out to be. By choosing a new methodology based largely on the Scottish model (save for the 43- year duration of the notional investment portfolio) the factors that have an influence on the PIDR and on the balance between under and over-compensation have come pre- prepared and mainly borrowed from the Scottish experience and they questioned whether they are ‘oven ready’.

A number of insurance companies are of the same view that the notional portfolio is over-cautious and will lead to a lower PIDR that will result in over-compensation, particularly if the 0.5% further margin is also retained.

382. NFU Mutual stated that if it is considered that a cautious notional portfolio is appropriate to meet the needs of the hypothetical investor, then the additional 0.5% adjustment downwards by definition goes beyond the needs of the plaintiff and therefore beyond the 100% compensation principle. In its view if the 0.5% is removed it will rectify some of the risk of over- compensation.

383. Aviva noted that the Bill adopts a notional investment portfolio from the Scottish legislation that is over- cautious and so will lead to a lower discount rate which will then lead to over-compensation. It recommended that further consideration should be given to adopting or mirroring the methodology from England and Wales to achieve a fairer outcome or alternatively the 0.5% further margin adjustment should be removed from the Bill stating these changes would still not veer towards an outcome of under-compensation.

384. Zurich expressed the view that the notional investment portfolio to be used is overly cautious and not reflective of the investment portfolios which will be arranged. It stated that utilising such a notional portfolio will provide an undervalued representation of the returns which will be achieved and will subsequently result in the PIDR being set too low which will, in turn, lead to excessive over-compensation and the notional investment portfolio needs to be reflective of real-life practice.

385. Zurich referred to the evidence submitted by the ABI to the Department of Justice consultation which showed that the proposed notional investment portfolio is overly cautious and not consistent with independent financial analysis. It also noted that the Government Actuary’s advice to the Lord Chancellor on the PIDR in June 2019 highlighted the risk of over- and under- compensation when assessing the PIDR. That assessment was based on a more realistic investment portfolio rather than the more cautious portfolio in the legislation so the likelihood of over-compensation may be further exacerbated. It was concerned that taking the proposed notional portfolio in tandem with the proposed 0.5% further margin adjustment would magnify the over-compensation impact.

393. APIL expressed a different view from those organisations that believe the notional portfolio is over cautious stating that to achieve as close to 100 per cent compensation as possible, the most appropriate methodology to calculate the discount rate is the current method as set out in Wells v Wells and any move away from that methodology risks leaving injured people under-compensated. Under the current method injured people are assumed to be very risk averse or “risk free” investors and this is the best hope they have of obtaining full compensation for their catastrophic injuries. APIL outlined that injured people are right to be risk averse. The compensation they are given is all they will ever have. Many survive – rather than actually live – in fear of what will happen if the money runs out. According to APIL damages must therefore be calculated on the assumption of risk-free investments and the actual needs of people who have been injured through negligence must be met in a fair and just way.

399. The IFoA indicated that whatever methodology is used to set the discount rate will not ensure 100% compensation, even if that is the aim to achieve on average. Individuals will live either longer or shorter than expected, which may then lead to under or over-compensation. Aiming for full compensation to the majority of claimants would require a bias towards over-compensation.

400. The Law Society NI advised that it had responded to the Department of Justice consultation in 2020 and suggested a hybrid Northern Ireland model moulded by blending elements of the English and Scottish models based on a mathematical exercise carried out by the Government Actuary (having fully consulted with all interested parties) with the Minister of Justice having overriding discretion to approve or vary the rate (again only after having consulted on any proposed variation away from the rate proposed by the Government Actuary). Such a model should be subject to the following caveats:

• The power for the rate to be set in the absence of a sitting Assembly; and
• The courts retaining a discretion to take a different rate of return into account if any party in the proceedings shows that it is more appropriate in the case in question.

The Department responded to the issues raised by stating that a discount rate that assumes investment solely in ILGs does not reflect how a claimant would be advised to invest their lump sum award based on the evidence from consultation and the advice of the Government Actuary. It tends towards over-compensation and an assumed mixed portfolio of low-risk investments is considered more appropriate.

402. The Department also does not accept that the portfolio is over-cautious and stated that it is intended to meet the specific needs of the hypothetical claimant investor described in the Bill. The portfolio has been reviewed by the Government Actuary’s Department which has confirmed that it remains appropriate, even with a 43-year assumed investment period. In the Department’s view there is no basis for saying that the Scottish model is more likely to lead to over-compensation than the England and Wales model. The notional portfolio was constructed by GAD and based on investments that were categorised as ‘low risk’ by Morningstar (an investment research company). It is not known what portfolio of investments would be assumed if the England and Wales model was adopted in Northern Ireland (or the amount of any adjustments) as this would be a matter for the Minister’s discretion. The Bill provides for a five-yearly review of the rate. In anticipation of each such review the Department is required to review whether the notional portfolio remains appropriate.

403. The Department outlined that the discount rate is a single rate designed to be used in all cases so as to avoid the complexity, cost and delay of negotiating an agreed rate in each individual case. By its nature, a single discount rate cannot reflect the investment behaviour of every claimant. Inevitably, some claimants will be over-compensated and some will be under-compensated. In relation to the proposal to require any remaining balance at the end of a claimant’s life to be repaid to the party who paid the compensation the Department does not consider this to be a practicable proposition.

404. The Department also highlighted that It is open to a party to seek a periodical payment order to avoid the risks inherent in a lump sum payment.

Committee Consideration of Schedule C1 Paragraphs 12 to 15

405. The Committee recognises that the composition of the notional portfolio in terms of the types of investments and percentage holdings is one of the key elements of the new framework. Noting the issues raised in the evidence received and the Department’s written response, the Committee took the opportunity to explore further a number of issues during the oral evidence session with departmental officials including the difference between the notional portfolio in the Bill and that used in England and Wales, whether the longer investment period of 43 years was taken into account when the Government Actuary Department reviewed the notional portfolio and if so, were any adjustments made.

410. AXA stated that it is not clear if and how the investment portfolio is to be reviewed each time a new rate is to be set to ensure both investment practice and returns are taken into consideration in future years.

411. FOIL NI and BIBA also highlighted that, in carrying out the mandatory review, the legislation does not define ‘with whom’ the Department must consult but simply states ‘it must consult such persons as it considers appropriate’.

412. In its written response, the Department outlined that the Bill places a duty on the Department to ensure, in advance of each review, that the notional portfolio remains appropriate and confirmed that amendments to the portfolio are made by regulations requiring the assent of the Assembly. When considering whether any changes are required to the notional portfolio before each review this is likely to involve in practice the Department seeking expert advice from the Government Actuary. The Department did not believe it is necessary to specify who it should consult.

421. ABI outlined that the current PIDR is based on an incorrect assumption that a claimant invests all their damages in ILGs. As the evidence it provided to the 2017 Ministry of Justice and Scottish Government consultation on PIDR reform clearly demonstrated, no properly advised investor would invest solely in ILGs or indeed in any other single asset class. ABI stated that it is essential that the PIDR methodology accurately reflects how plaintiffs are advised to invest their awards and it has seen no evidence that claimants in NI invest their compensation awards in a different way or adopt different investment strategies to claimants in other UK jurisdictions.

422. ABI highlighted that there is a lack of evidence on how claimants invest their compensation settlements and, in response to the Department’s 2020 consultation, it encouraged the Department to commission research on the investment choices of claimants who have received compensation awards calculated using the PIDR to establish how they invest their lump sums and, if possible, how those investments have performed. The ABI would expect claimant solicitors to be able to assist with this on behalf of their clients, as after a settlement is reached and an award is made insurers have no further contact with claimants or insight into how they invest.

423. MDDUS believes that further evidence should be obtained that shows how claimants invest their award and it is also important that such evidence is gathered in future to inform later reviews.

424. MDU stated that decisions on setting the PIDR in NI will not be based on evidence of claimant behaviour and the returns they achieve from investing their compensation awards as currently no one knows what happens in practice with those investments. It agrees that research is urgently needed into how compensation awards are invested and what returns are achieved and it should be this that informs government policy rather than a methodology that relies on unsubstantiated guesswork about investment returns. In its view the Department of Justice should be under a duty to gather evidence of actual claimant investment behaviour.

429. AXA advised that it is not a party to the decision-making process for plaintiffs’ investing a lump sum payment but can see how funds are invested by the Courts Funds Office on behalf of minors, patients and those without capacity.

430. BLM stated that the new methodology may be said to reflect how claimants might be advised to invest and it reproduces the approach in Scotland; however, it believes it is somewhat more conservative when compared to the approach in England and Wales.

431. IUA fully supports the intention to break the link to the Wells v Wells case and acknowledges that while claimants should be treated as more risk averse than ordinary prudent investors, in reality they would be advised to invest in a low-risk diversified portfolio rather than very low-risk ILGs alone.

432. HSCNI noted that the current approach assumes that all plaintiffs will adopt a similar investment strategy “at low risk” and this produces over- compensation based on research into actual investment practices. Most personal injury claimants in receipt of significant sums have expert investment advisors (sometimes arms of the legal firm which acted in their claim, and costs are included within their compensation). Plaintiffs will therefore be over-compensated on cases where their investment risk portfolio was higher than that of a “low risk” approach. In terms of rectifying the issues that arise the HSCNI noted that in England and Wales models have been discussed how Government defendants could provide claimants with an investment product which guarantees a rate of return of inflation or above, thus removing the perceived need for a highly conservative (currently negative) discount rate. Promotion of PPOs would also be a safeguard against over/under compensation with as many Heads of Claim being paid on an annual basis thus reducing the need for a lump sum payment calculated using multipliers and discount rates.

433. APIL noted that the Bill’s EFM refers to evidence which found that “while claimants should be treated as more risk averse than ordinary prudent investors, in reality they would be advised to invest in a low-risk diversified portfolio rather than very low-risk index-linked gilts alone”. In its view any analysis of claimant investment behaviour carried out under the recent 2.5% discount rate is however highly misleading as claimants have often been forced into having either to take chances with their compensation by putting it in higher risk investments or struggling to make ends meet. An article for the Journal of Personal Injury Law by a financial adviser revealed the scale of the challenges faced by injured people stating that “under the 2.5 per cent discount rate, taking into account inflation, charges and tax, an injured person would have had to have made a profit on the investment of between 6.9 per cent and 12.5 per cent a year to ensure the compensation payment reflected what was originally awarded by the court.”

434. APIL indicated that injured people, by their very nature, are not canny investors and they should not be hedging risks. They are not investing to make a gain but rather to make sure their compensation lasts for the period it is supposed to last and puts them, as much as possible, in the financial position they would have been in had the accident not occurred.

435. FOCIS also believes that referring to any evidence of historic plaintiffs’ investment behaviour when the rate was 2.5% is unreliable. It stated that, for some considerable time, plaintiffs have been severely under-compensated and have therefore had to consider investing in higher risk investments to achieve the assumed rate of return underlying the 2.5% discount rate.

439. The Department also highlighted that the option of a PPO is available for claimants who prefer not to accept the risk of investing a lump sum.

Committee Consideration of Schedule C1 Paragraph 17

440. The Committee discussed the potential for the Department to commission research to gather evidence of actual claimant investment behavior at its meeting on 23 September. The departmental official outlined that the evidence available to date had been provided by financial advisers indicating how they believe that claimants are advised to invest rather than first-hand knowledge from claimants and indicated that it would be hard to see how an obligation could be placed on a person to provide that information.

441. While the Committee appreciates it may be difficult to obtain such information, it does believe there are benefits in doing so to inform future consideration of the framework to set the PIDR, and therefore recommends that the Department undertakes an assessment of the potential options to gather evidence of actual claimant investment behaviour.

Schedule C1 Paragraph 18

448. The IUA agrees with the provision allowing a dual discount rate approach to be considered noting that investments in the short term, e.g. 1 to 10 years, often produce very different returns than investments held over more than 10 years. However, it states that if a dual rate approach is adopted there should be absolute certainty that two rates should apply to a claimant with a life expectancy longer than the period beyond which a different rate applies. For example, if the threshold beyond which the second rate applied was decided at 10 years, the discount rates applicable to a claimant with a life expectancy of 15 years would be one rate for the first 10 years and a different rate for the next 5 years. This approach differs from the Jersey model in which the entire period will be subject to the upper rate if the life expectancy threshold e.g. 10 years were surpassed. IUA does not believe the latter approach is appropriate since a claimant with a longer life expectancy, all other things being equal, can be left with lower compensation.

449. The IUA highlighted that there is significantly more stability in long-term investments and, therefore, it would be a simpler process to set an equitable long-term discount rate and there would be less requirement for this long- term discount rate to be subject to regular review. A dual discount rate would however be fairer for compensating individuals with different life expectancies, such as a 5-year life expectancy and a 50-year life expectancy. This is not possible with a single discount rate.

450. The Committee noted the confirmation provided by the Department in its oral evidence that it has no plans to set a dual rate in the near future but it may wish to consult at some point on whether a dual rate would be a better model.

454. The Department outlined that the purpose of the discount rate is to reflect the return on investment of a lump sum award. By definition, it is applied at the time the damages are awarded, which is the point after which the claimant has the opportunity to invest the funds. Using the most up-to-date rate of return maximises the chances of achieving 100% compensation and using an out-of-date rate perhaps from several years previous, when the claimant would not have been in possession of the funds to invest them, would not be appropriate.

455. The Committee noted that the discount rate will be applied at the time the damages are awarded regardless of the date of incident or date of issue of proceedings.

Schedule C1 Paragraphs 27 to 30

456. Paragraphs 27 to 30 make provision for transitional arrangements so that the rate of return currently prescribed under Section 1 of the 1996 Act will continue to apply until such times as a rate is set under the provision in the Bill when enacted

457. There were no issues raised in the evidence received by the Committee on Paragraphs 27 to 30 of Schedule C1.

468. In doing so the Committee noted that the Department can order an in-cycle review if necessary and expects the Department to exercise this power if circumstances require it.

481. The HSC also suggested that it may be the case that some claimant investment advisers have a potential conflict of interest on the question of PPO v lump sum - the larger the lump sum, the higher the fees that could be charged for investment. It was also its view that, with the negative discount rate, further resistance to using PPOs may arise (outside the Care and Case Management Components).

482. HSC representatives highlighted in oral evidence that there was some discussion in England and Wales in recent years about legislating for courts to be able to order PPOs and advised of legislation in Scotland¹² giving the courts power to order PPOs. They suggested that there may be a discussion to be had about how this matter could be tackled in Northern Ireland.

483. HSCNI believes it would be prudent for the Department of Justice to legislate in respect of PPOs so that plaintiffs are required to accept the defendant’s offers of PPOs for further loss rather than being able to argue before the court for lump sums in the highest-value claims. This approach would obviate reliance on estimates of future returns and inflation rates when such estimates will largely be economic and actuarial ‘stabs in the dark’ but would obviously depend on plaintiffs and the courts being satisfied that the defendant will be in a position to meet future payments. HSCNI pointed out that, in this jurisdiction, the vast majority of high value personal injury cases involve Health Trusts as defendants and therefore the solution to this problem should take into account that in most cases the defendants will be a public body who will be in a position to meet future PPO liabilities. Enforcing settlement of future loss claims by way of PPOs would remove the uncertainty around future investment returns.

484. The Law Society also supported consideration being given to an extension of the legislation governing PPOs in high value catastrophic injury cases. In its view this may result in a degree of greater certainty and fairness to both plaintiffs and compensators given PPOs obviate reliance on estimates of future returns and inflation rates. PPOs can also help mitigate the risk of over or under-compensation. This approach would rely upon the court and plaintiff being satisfied that the defendant is in a position to meet the payments going forward.

490. FOCIS stated that the overwhelming experience of its members is that most insurers (not all) are reluctant to offer PPOs and they will often take plaintiffs right to the door of the court before they are willing to switch from a lump-sum offer to a PPO. The reason the majority do not do so is that they know that the long-term cost of taking the investment, inflation and longevity risk is greater than the cost of any of the discount rates that have been discussed. When PPOs are offered, they tend to relate only to one of the many Heads of loss, typically care and case management. FOCIS expressed the view that PPOs are no excuse for setting the discount rate at a level that will result in under-compensation for a third or more of the plaintiffs which would be the result even with the 0.5% under-compensation margin adjustment provided in the Bill.

491. APIL also agreed that the use of PPOs is very rare stating that they are very rarely offered and the reason seems to be that the insurers like to have the risk managed and off the books as opposed to having an ongoing situation. They also cost them more. APIL also noted that PPOs are one way of moderating the risk relating to investments but they usually apply only to one Head of claim and are not suitable for all claims and, while in the majority of cases the FSA will step in and protect the payment, there will be the odd case where that does not happen and that person may be left without compensation.

492. APIL also highlighted that Injured people find the whole court process emotionally draining, exhausting and very stressful. When they get to the end of it they almost like to cut the tie and they do not really want to have their lives managed or to have a connection with something that they found very difficult. They would rather take a lump sum and move on.

493. In response to evidence on the use of PPOs the Department of Justice acknowledged that the use of PPOs can avoid the risks inherent in receiving damages as a lump sum payment but pointed out that courts in Northern Ireland already have the power under Section 2(1) of the Damages Act 1996 to make PPOs without the consent of the parties, similar to the courts in England and Wales. The Rules of Court set out the factors that a court has to take into account in deciding whether to make a PPO. It is the Department’s view that the court will act in the objective interest of the claimant and it would not be appropriate or practical to require a court to make a PPO in certain cases without any consideration of all the relevant circumstances.

497. The Department indicated that it considered that the existing legislative provision is sufficient and that it would not be appropriate, or practical, to require a court to make a PPO in a particular type of case, without any consideration of all the relevant circumstances, and whether or not this form of order best meets the claimant’s needs and noted that the court will act in the objective interest of the claimant.

498. In relation to the position in the other UK jurisdictions, the Department outlined that the Damages Act makes the same provision for England and Wales in relation to PPOs as it does for Northern Ireland. The Scottish legislation that changed how the discount rate is set in Scotland included provision (still to be brought into operation) giving a court the power to make a PPO for future financial losses without the consent of the parties, and was intended to bring Scotland into line with the rest of the UK.

499. The Committee asked departmental officials whether they had any information or analysis on why the use of PPOs was so low when they attended on 9 September. Officials noted that both defendants and claimants appear to have their own reasons for not entering into a PPO and seemed to attribute the difficulties to the other side. They referred again to the fact that a court can impose a PPO without the agreement of the parties but they did not think this happened very often. They also outlined that, where there are injury at birth cases, there may be more PPOs and also mixed orders of periodical payments combined with lump sums.

507. The Minister stated that he was aware that the impact of this Bill is likely to increase the recently introduced rate of -1.75% and therefore it was important for the Bill to pass into law as soon as possible to minimise the potential impacts of that rate on the Health Service. The Minister also stated that the potential impact on health and social care provision in Northern Ireland should be borne in mind during the Committee’s consideration of the proposed methodology for calculating the PIDR.

508. HSCNI highlighted that one of the defendants most impacted by a reduction in the rate is the health service and, while it is incredibly difficult to forecast accurately the financial impact of the recent reduction in the rate to -1.75%, HSCNI estimate that the value of additional compensation in current claims to be anywhere in the region of £40m to £136m. This emphasises the potential over-compensation to many plaintiffs and the resultant ramifications for public funds of the current PIDR.

509. HSCNI also indicated that the premiums for indemnity provision for GPs could as much as double, if not more, for GP practices under the new rate which will be incredibly challenging from a financial perspective for them.

510. The BMA (NIGPC) outlined that GPs in Northern Ireland are now the only doctors within the UK NHS or HSC who are responsible for providing their own indemnity. This is a substantial outlay for doctors on an annual basis amounting to between £8k and £12k for a full time equivalent. A long term reduction in the discount rate is likely to increase these costs over the next number of years and could make indemnity insurance unaffordable for GPs to purchase. In turn this would make general practice untenable as without indemnity GPs cannot practice. In England the rate changed from 2.5% to - 0.25% and the estimated impact on GP indemnity was that it would increase from around £13k per GP per annum to over £30k per GP per annum.

515. The MDU also highlighted that the recent change in the PIDR to -1.75% will have a dramatic impact on health and social care funding and on GPs across NI. It noted that GPs fund their own indemnity arrangements and are already struggling with the highest indemnity costs in any part of the UK. They now face marked increases in their indemnity subscriptions because of the decision to change the rate which will have a severe and adverse effect on them. MDU also drew attention to the fact that any money that goes on compensation awards comes out of front-line patient care.

516. The MDU stated that, even before the recent change to the discount rate, indemnity costs were becoming a very unaffordable burden for GPs and they have been cited as a significant factor in early retirements, in MDU members dropping their sessions and even in the recruitment of new doctors into primary care. It outlined that in England and Wales there was a similar effect which was largely addressed by the introduction of state indemnity for GPs. Removing the indemnity for NHS clinical negligence claims from English and Welsh GPs had the effect of pushing the average indemnity cost down from around £8k - £10k per individual GP to under £1k.

517. The MPS also agreed that changes to the PIDR will have a profound consequence on the cost of clinical negligence which in turn will have an impact on healthcare professionals and the costs for the Department of Health via health and social care. It expressed the view that the wider impact on and the additional costs that may be faced by HSCNI have to be taken into account however the rate is set - it is not just a simple, actuarial mathematical formula.

518. In oral evidence the MPS representative referred to a paper produced by BIICL that looked at countries that set PID rates. In some countries the PIDR is quite positive – it can be as high as +6% or +3.5%. While they could not speculate as to the motives for setting those higher discount rates the inference could be drawn that the impact on society is one of the things that may be taken into account by some countries when setting the rate.

519. The ABI noted that the Health Service in NI is one of the biggest compensators for settlements involving the discount rate, usually in clinical or medical negligence cases, and changing the rate to a negative number will increase compensation costs for the HSCNI and the amount of funds it would need to reserve against future claims. GPs and other medical professionals could also see the cost of their indemnity insurance premiums rise.

520. The ABI claimed that adopting the Scottish model is likely to cost public bodies in Northern Ireland significantly more and highlighted that the Financial Memorandum for the Scottish Bill noted that a difference of 1% between the discount rate in England and Wales and Scotland could result in an additional cost of up to £20m per annum for public bodies in Scotland. The ABI stated that the Scottish Government is required to meet any deficit from its own reserves with no additional funding under the Barnett formula from HM Treasury.

521. Aviva also claimed that the framework used in Scotland is based on a policy decision taken by Scottish Ministers to over-compensate claimants and this has the consequence of generating additional costs for compensators including HSCNI and other public bodies.

522. The IUA expressed the view that wider societal implications such as the cost to the NHS arising from its role in clinical negligence claims and the direct impact of this on taxpayers must be considered when setting the discount rate.

523. The Department of Justice, in responding to the issues raised, noted that costs for public sector defendants of a discount rate set under the proposed new methodology flow from a legal liability to pay full compensation for injuries and losses caused by negligence for which they are responsible and the financial implications are a matter for them to consider and plan for. It also refuted the view that account must be taken of the societal and economic impact when setting the discount rate stating that the purpose of applying a discount rate is to give effect to the long established legal principle that the purpose of an award of damages for future financial loss is to put the claimant in the position they would have been in if they had not been injured, i.e. full compensation, no more and no less and this means that the impact on society cannot be taken into account.

524. The Department stated that the principle of 100% compensation is the basis of the current law in all the UK jurisdictions and in the Republic of Ireland and it was not aware of any other jurisdiction in which 100% compensation is not the legal basis of an award of damages for future financial loss caused by negligence or of the discount rate. The Department stated that it may be the case that some jurisdictions have not reviewed their discount rate and that political factors have influenced this. The Department considers that this demonstrates the importance of introducing a minimum review period and ensuring certainty and transparency in regard to how the rate is set.

525. The Department indicated that it is anticipated that a discount rate set under the proposed new methodology would be higher than one set under the current methodology and will, therefore, reduce the overall costs for defendants. It also stated that the implications for GP indemnity costs of a discount rate set under the proposed new framework is a matter for the profession and the Department of Health and noted that the BMA (NIPGC) acknowledged that this is not a matter that can be taken into account in setting the rate.

526. The Department also highlighted that the policy memorandum for the Scottish Bill that led to its legislation stated that it did nothing to disturb the 100% compensation principle but that the Scottish Government recognised that the assessment of a lump sum award of damages for future loss can never be an exact science and that there will inevitably be levels of under- and over-compensation.

Committee Consideration of the Consequences of Changing the Rate on GP Practices and the HSC

527. To assist its consideration, the Committee commissioned a research paper on a range of issues relating to the PIDR including what types of government-backed indemnity schemes for GPs are in place in other jurisdictions compared to Northern Ireland.

528. The research paper outlined that the Department of Health and Social Care recently introduced two state indemnity schemes in England and Wales. The first one, established in April 2019, is called the Clinical Negligence Scheme for General Practice and covers clinical negligence liabilities arising in general practice in relation to incidents that occurred on or after 1 April 2019. The second called the Existing Liabilities Scheme for General Practice was established in April 2020 to provide indemnity cover for historical NHS clinical negligence claims made against current and former GP members of medical defence organisations in respect of liabilities incurred before 1 April 2019. GPs do not need to pay a subscription and the costs are met centrally. In Scotland there is no state backed indemnity scheme, however indemnity costs are lower. The 2018 General Medical Services Contract in Scotland sets out how the Scottish Government works with partners, including medical defence organisations, to deliver the best solution for indemnity in Scotland.

529. The Committee also wrote to the Minister of Health seeking further information on the impact the legislation was going to have on the Department of Health and the wider health service, whether he had any plans to offer some kind of indemnity support to GPs in Northern Ireland given the issues highlighted and if a state-backed indemnity scheme is introduced whether funding would be available from the Treasury to cover the costs.

530. The Minister of Health responded setting out in detail the likely negative impact of the current rate of -1.75% which will increase the value of settlements by approximately 50% with an expected additional cost in 2021/22 of £15m - £20m. The Minister did note that the legislation is expected to increase the PIDR and will therefore partially reverse the impact that the current rate is having on the cost of settlements however the extent of this will depend on the eventual rate determined.

531. The Minister also outlined the anticipated impact on GPs from a significant long-term reduction in the PIDR from the previous +2.5% would be a significant rise in the cost of indemnity for GPs. He noted that the immediate response from the medical defence organisations to the -1.75% rate has not been a unilateral increase in subscription costs but understands that this reflects the expectation that the rate is temporary. In the event that the PIDR is calculated significantly lower than the previous long term rate of +2.5% on an on-going basis he outlined a number of very negative and directly related outcomes on the provision of GP services and related health care provision similar to those outlined in the evidence received by the Committee.

532. Regarding the provision of indemnity support the Minister of Health indicated that his Department already provides support to general practice in meeting indemnity costs through its continued investment in this area and highlighted that the 2019/20 GMS contract provided for up to £2.5m to address demography pressures and indemnity costs. The Minister advised that the Department of Health is considering the issue of future GP indemnity arrangements in Northern Ireland and future options for GP indemnity provision are under active review. He did however highlight that, irrespective of the mechanism by which indemnity provision is secured for GPs, the impact of a rise in the cost of settling clinical negligence cases as a result of a significant change to the PIDR places significant additional financial burden on the health and social care system which is already facing a range of challenges exacerbated by the impact of Covid-19. In relation to whether funding would be available if a state-backed indemnity scheme was introduced the Minister indicated that this would be a matter for the Department of Finance to liaise with the Treasury.

533. In the expectation that payments to individuals in Northern Ireland would increase given the changes to the PIDR the Committee had already sought information from the Minister of Finance on whether any request had been made to HM Treasury for the same approach to apply in Northern Ireland as had applied in England and Wales and in Scotland when the PIDR changed in those jurisdictions. The Committee understood that the Treasury made some allocation to the budgets of those Departments/Agencies affected to recognise that there would be an increase in the payments made to individuals. The Committee subsequently welcomed the confirmation from the Minister of Finance that he had highlighted the issue to the Chief Secretary of the Treasury and advised that if the legislation is brought forward, access to the Reserve would be sought in line with that afforded to Whitehall departments and other devolved administrations.

534. Following receipt of the response from the Minister of Health the Committee wrote to the Minister of Finance regarding the position in relation to whether funding would be available from the Treasury to cover some or all of the costs of a state-backed GP indemnity scheme and whether Northern Ireland gets any sort of Barnett consequential funding as a result of the state- backed indemnity schemes introduced in England and Wales when the discount rate changed in that jurisdiction.

535. The Minister of Finance replied outlining the Executive will have received Barnett consequentials on all changes to the Department of Health and Social Care DEL budget including that associated with the introduction of the new state-backed GP Indemnity Scheme and indicated that Treasury have confirmed that no further funding would be provided; therefore, if the Minister of Health wishes to introduce a state-backed GP indemnity scheme the costs will have to be funded from the Department of Health budget settlement.

536. The Committee wrote again to the Department of Finance more recently following consideration of further information provided by the Department of Justice on the funding pressures faced in the current financial year, one of which related to the recent change in the PIDR. The Committee requested information on funding pressures that have been highlighted by other Departments, and in particular the Department of Health, and whether these have been reflected in the discussions with Treasury to secure additional funding.

537. The Department of Finance confirmed that the change in the PIDR will have a significant impact for the Department of Justice and the Department of Health and it is in discussions with Treasury to secure funding for the 2021/22 pressures. The Department of Finance also outlined that going forward, should the Bill be enacted, the PIDR is likely to be set at a rate of - 0.75% which, while lower that the current rate of -1.75% and will lead to a reduction in the costs for both Departments, will nonetheless represent an increase to the previous rate of 2.5%. The Department of Finance indicated that from 2022/23 onwards no additional funding will be provided by Treasury to offset any pressures arising from the change in the PIDR and this will require the Executive to manage the cost increase through the normal budgetary process.

538. The Committee appreciates that the issue of indemnity costs for GPs is a matter for the Department of Health but is concerned about the ramifications if the issue is not addressed satisfactorily. The Committee also expects the Department of Finance to continue its discussions with Treasury to secure funding to address the pressures identified as a result of the change in the PIDR.

Implications on insurance premiums

539. The ABI outlined that the PIDR is a key component for underwriters calculating insurance premiums. The lower the PIDR is set, the more pressure this places on insurers' claims costs and, as a result, puts significant inflationary pressure on motor insurance premiums in Northern Ireland which are already higher than other parts of the UK due to specific local factors such as the costs involved in the civil justice system in NI and higher road traffic accident rates. The potential cost of a serious injury claim is incorporated into every motor insurance policy, so a very low discount rate would put inflationary pressure on motor insurance premiums, in particular for young drivers who are at greater risk of being involved in an accident.

540. The ABI also indicated that businesses in NI are required by law to take out Employer's Liability insurance and many also take out Public Liability insurance to cover the cost of liability claims against them. A lower PIDR would put significant inflationary pressure on business insurance premiums at a time when NI businesses are facing the additional costs generated by Covid-19 and Brexit. In addition, a lower PIDR would also increase the level of liability cover a responsible business would seek to purchase. Businesses have previously bought around £2m worth of cover to meet the potential cost of a liability claim on the basis of a PIDR of 2.5%. A lower PIDR would push

up the cost of compensation settlements and businesses would therefore need to consider taking out a higher level of insurance cover or risk meeting the additional compensation costs from their own revenues.

541. The ABI stated that the lack of a detailed impact assessment accompanying the Bill is in contrast to the impact assessment provided by the Ministry of Justice in its equivalent legislation to reform the PIDR. The MoJ impact assessment noted that setting the PIDR for England and Wales at -0.75% estimated an increase of £50 - £75 on average comprehensive motor insurance policy.

542. The IUA stated that the current -1.75% rate is the lowest discount rate in the world and highlighted that the implementation of similar rate changes such as in England and Wales from 2.5% to -0.75% has resulted in increases in motor and liability insurance policy premiums. The environment created by such a rate in its view may discourage insurers' participation in the Northern Ireland insurance market in turn impacting upon the availability of insurance products.

543. AXA stated that claimants in Northern Ireland already enjoy the benefits of higher damages for pain and suffering than in any other UK jurisdiction e.g. according to the Judicial Studies Board guidelines in the respective areas, a very severe brain injury is valued at £155k - £220k in Scotland, £185k – 265k in England and Wales and £360k to £670k in Northern Ireland. Against this background and with judicial and legislative reforms taking place in England and Wales and in the Republic of Ireland designed to lower claim costs and assist consumers, in its view great care needs taken not to set back Northern Ireland through ever spiralling damages and insurance premiums.

544. Zurich stated that the obvious effect of over-compensation is a significant increase in the cost of the claims involved which inevitably results in an increase in the cost of insurance premiums for all parties within a given jurisdiction whether personal, private enterprise or public sector. It indicated that there is also concern that where the PIDR is set at a level which promotes over-compensation then there is a significant risk that small businesses and enterprises may struggle to arrange insurance on what should be expected to be standard terms where fixed limits of indemnity may no longer be sufficient to cover the potential increase in the cost of catastrophic claims. It highlighted that where a limit of indemnity is breached then any surplus claims would require to be met by the business itself which may lead to considerable financial difficulties.

545. Aviva expressed the view that the framework used in Scotland is based on a policy decision taken by Scottish Ministers to over-compensate claimants and this has the consequence of generating additional costs for compensators including insurers.

546. In contrast FOCIS stated that the incidence of lifelong disabling injuries that result in calculations that significantly engage the discount rate is low. In its view the impact of a fair discount rate on insurance premiums would be spread across all policyholders and, whether they are consumers or businesses, they would hardly notice the difference. Conversely if the discount rate is set too low the adverse impact on those who have wrongly sustained life-changing injuries is profound. There will be impacts on their families and in all likelihood it will fall back on the state to support them and hence fall back on taxpayers.

547. In response to the views expressed regarding the implications on insurance premiums the Department repeated its position that the core legal principle of 100% compensation means that the financial implications for defendants, compensators and wider society are not a relevant consideration when setting the discount rate. It also outlined that the Bill is intended to result in a discount rate that better gives effect to the legal principle of 100% compensation and reduces the risk of over-compensation as compared to a rate set under the current framework. It is anticipated that a discount rate set under the proposed new framework will be higher than a rate set under the current framework therefore the costs for defendants and compensators will be less. The proposed framework is also intended to produce a discount rate that is fair to both claimants and defendants

548. The Department also stated that the impact assessment that accompanied the Ministry of Justice Bill prior to it becoming legislation, like the regulatory impact assessment in relation to the Department's proposals, assessed the overall impact of the proposals relative to the existing framework and noted that the rate would not change until the Lord Chancellor conducted the first review under the new framework so the impact of a rate change had not been quantified.

Committee Consideration of implications on insurance premiums

549. The research paper commissioned by the Committee covered any impacts observed in England and Wales and in Scotland on the cost of insurance following the changes to the legislative framework resulting in changes to the PIDR in those jurisdictions and how insurance costs in Northern Ireland compare with other jurisdictions.

550. In considering the paper, the Committee noted that research across the UK in 2018 on the cost of insurance found that claims tend to be greater in Northern Ireland given the nature of the roads, the market is not as competitive as a number of UK insurers do not offer cover in NI and the NI courts tend to make higher serious injury awards in a legal market which is different to England and Wales.

551. While the Committee respects the position that wider economic and societal impacts should not be taken into account when considering the framework to set the personal injury rate and this has been covered earlier in the report at paragraphs 257 to 272 it did press the Department on why it had not provided more detailed costings in the Regulatory Impact Assessment. The Committee also sought an explanation for the higher awards for damages for pain and suffering in Northern Ireland compared to other UK jurisdictions and whether the Department intended to consider any legislative reforms similar to those in England and Wales and the Republic of Ireland designed to lower claim costs and assist consumers.

552. In response officials indicated that all the Regulatory Impact Assessment was able to do was determine the cost under one framework relative to another as it was not known what the rate would be and the data was not available to work out the cost even if the rate was known. The officials also outlined that general damages for pain and suffering are higher in Northern Ireland than England and Wales due to the fact that damages in this jurisdiction were set for longer by juries. Even when juries in civil cases were abolished the courts tended to apply the precedent for the rate of damages that had been set by juries. 'The Green Book' on damages published by the Judicial Studies Board indicates broadly what a person is likely to get for any particular injury however it is a matter for the judge in the case. The officials also outlined the position in the Republic of Ireland where there is a forum for the resolution of personal injury claims and claims only go to court if the outcome is not accepted.

553. As highlighted earlier in the report the Committee believes that information should be available so that the potential consequences and costs related to the PIDR are fully understood and recommends that the Department should publish an impact assessment setting out the potential implications of different rates on Departments and businesses when a review is due to take place.

Clause by Clause Consideration of the Bill

554. Having considered the written and oral evidence received, the Committee deliberated on the Clauses of the Bill at its meeting on 23 September 2021 and undertook its formal Clause by Clause consideration at its meeting on 7 October 2021 – see Minutes of Proceedings at Appendix 1 and Minutes of Evidence at Appendix 2.

555. The Department indicated on 23 September that it did not intend to bring forward any amendments to the Bill.

556. Information on the Committee's deliberations on the individual Clauses and
Schedule in the Bill can be found in the previous sections of this report.

Clause 1 – Assumed return on investment
557. Agreed: The Committee is content with Clause 1 as drafted.

Clause 2 – Process for setting rate of return
558. Agreed: The Committee is content with Clause 2 as drafted.

Clause 3 – Ancillary Provision
559. Agreed: The Committee is content with Clause 3 as drafted.

Clause 4 – Interpretation
560. Agreed: The Committee is content with Clause 4 as drafted.

Clause 5 – Commencement
561. Agreed: The Committee is content with Clause 5 as drafted.

Clause 6 – Short title
562. Agreed: The Committee is content with Clause 6 as drafted.

Schedule – Schedule C1 to the Damages Act 1996, as inserted
563. Agreed: The Committee is content with the Schedule as drafted.

Long Title
564. Agreed: The Committee is content with the Long Title of the Bill.

List of Appendices

Appendix 1 - Minutes of Proceedings

• 11 March 2021
• 18 March 2021
• 6 May 2021
• 13 May 2021
• 20 May 2021
• 27 May 2021
• 3 June 2021
• 10 June 2021
• 17 June 2021
• 9 September 2021
• 23 September 2021
• 7 October 2021
• 21 October 2021

Appendix 2 - Minutes of Evidence

Appendix 3 - List of Written Submissions

List of links to Written Submissions

• Association of British Insurers
• Association of Personal Injury Lawyers
• Attorney General for Northern Ireland
• Aviva
• AXA
• BLM Law
• British Medical Association NI General Practitioners Committee
• Committee for Communities
• Committee for Health providing a response from the Minister of Health
• Confederation of British Industry
• Department for Communities
• Department of Finance
• Department of Health
• Department for Infrastructure
• Forum of Complex Injury Solicitors
• Forum of Insurance Lawyers and British Insurance Brokers' Association - Joint Submission
• Health & Social Care Northern Ireland including the 5 main Health Trusts
• Institute and Faculty of Actuaries
• International Underwriting Association of London
• Law Society Northern Ireland
• Lisburn and Castlereagh City Council
• Lord Chief Justice
• Medical and Dental Defence Union of Scotland
• Medical Defence Union
• Medical Protection Society
• NFU Mutual Insurance Society Limited
• Personal Injury Bar Association - Specialist Bar Association for Barristers practising in Personal Injury work in England and Wales
• Prudential Regulation Authority (Bank of England)
• Public Prosecution Service
• Road Haulage Association Ltd
• Zurich Insurance

Appendix 4 - Memoranda and papers from the Department of Justice

Appendix 5 - Other Memoranda and papers from others

Appendix 6 - Research Papers

List of Links to RaISe papers considered

May 2021 - Personal Injury Discount Rate

Appendix 7 - List of Witnesses

List of Witnesses who gave oral evidence to the Committee

• Naomi Long, Minister of Justice Peter May, Department of Justice
• Laurene McAlpine, Department of Justice Jane Maguire Department of Justice Martin Moore Department of Justice
• Dr Alan Stout, British Medical Association NI General Practitioners Committee Mark Harvey, Health and Social Care Northern Ireland
• Alphy Maginness, Health and Social Care Northern Ireland Dr Matt Lee, Medical Defence Union
• Thomas Reynolds, Medical Defence Union Tim Jordan, Medical Protection Society
• Julian Chamberlayne, Forum of Complex Injury Solicitors Oonagh McClure, Association of Personal Injury Lawyers Alastair Ross, Association of British Insurers
• Stuart Anderson, Confederation of British Industry NI Kevin Shevlin, Forum of Injury Lawyers

Download the full report (PDF, 172 pages, 1.4Committee for Justice - Report on the Damages (Return on Investment) Bill.pdf