Part of Executive Committee Business – in the Northern Ireland Assembly at 12:30 pm on 17 June 2024.
Thank you, Mr Speaker. At the outset, I advise the Assembly that I have declared a conflict of interest in relation to the personal injury discount rate on account of my husband's membership of a medical defence union. Medical defence unions have an interest in the level of discount rate, as it may affect the cost of indemnity and, consequently, the cost of membership. In view of that, I delegated to the then permanent secretary of the Department policy decisions about which of the parameters for setting the rate ought to be modified.
(Mr Deputy Speaker [Dr Aiken] in the Chair)
Before I turn to the detail of the draft regulations, which make amendments to the statutory parameters by which the personal injury discount rate is set, I want to explain the wider context for the changes proposed. It is a well-established principle of our law that a person who is injured as a result of the negligence of another is entitled to be compensated in full — no more and no less — for any future financial needs that arise from the injury. That is called the 100% compensation rule. Claimants who have suffered serious — often life-changing — injuries will, generally, be dependent on their damages award to meet their basic needs and the cost of their care. The purpose of applying the personal injury discount rate is to give effect to the 100% compensation principle. The rate is a percentage adjustment to a lump sum award of damages for future financial losses to reflect the return that can be earned from investing it.
In the previous mandate, I brought forward primary legislation — the Damages (Return on Investment) Act (Northern Ireland) 2022 — that changed the process by which the rate for Northern Ireland is set. That legislation amended the Damages Act 1996 to transfer responsibility for setting the rate from the Department of Justice to the Government Actuary, prescribe a new methodology for setting the rate and require a regular review of the rate every five years. Under the legislation, the rate must be set to reflect the expected return from investing a lump sum award of damages in a prescribed notional portfolio of investments for an assumed period of 43 years and be adjusted to take account of inflation, the cost of taxation and investment advice and management costs. The rate must also include a further margin to take account of investment risk.
The first review of the rate under the new legislative framework led to the rate being set at -1·5% in March 2022. The next review of the rate by the Government Actuary must commence on 1 July, which will align Northern Ireland with the cycle of regular reviews of the rate in Scotland. In anticipation of that, the Department conducted an exercise to determine whether any of the statutory parameters by which the rate is set ought to be modified, and whether there should continue to be a single discount rate or more than one rate. That exercise involved consultation with stakeholders and the commissioning of professional actuarial advice from the Government Actuary's Department (GAD).
Having considered the consultation responses and GAD's advice, the permanent secretary concluded that two of the parameters by which the rate was set needed to be updated to reflect current economic projections and ensure that the rate continued to give effect to the legal principle of 100% compensation. The first of those is the measure used to take account of inflation. Currently, the legislation prescribes the retail price index. However, the way in which RPI is calculated is going to change from 2030. Stakeholders and GAD were of the view that that meant that RPI was no longer the best measure to use. The Department notes that many stakeholders suggested that an adjusted measure would be appropriate; for example, the consumer price index plus a percentage adjustment. However, under the current statutory framework, a single unadjusted index must be chosen.
Given the choice between a price-based measure and an earnings-based measure, the Department took the view that the latter would be more appropriate because, having given regard to the consultation responses, it recognised that earnings and care costs were likely to make up a significant part of any damages award. Therefore, the draft regulations prescribe annual weekly earnings as the measure to be used for the purposes of tackling inflation. However, looking beyond the immediate needs of this year's review, the Department intends to review how the legislation makes provision for the impact of inflation to consider the scope for providing more flexibility, including the potential future use of an adjusted index. Any such amendment would require primary legislation in the next mandate.
The other modification that the draft regulations propose is an increase to the deduction for taxation and the cost of investment advice and management from 0·75% to 1·25%. The new adjustment of 1·25% is based on advice from GAD that changes to the investment yields and tax rates have increased the tax costs for claimants by 0·5% on average. It is worth noting that Scotland has recently made regulations that make the same changes in that jurisdiction to those to be made by the draft regulations in Northern Ireland. That means that, subject to the draft regulations being approved by the Assembly, the rates in Northern Ireland and Scotland will be set using exactly the same parameters.
I thank the Committee for Justice for its detailed consideration of the draft regulations, and I am pleased that the Committee has recommended that the House should affirm the regulations. However, the Committee also wrote to the Department noting some concerns, and I want to address those today. In particular, the Committee highlighted concerns expressed about the impact of the discount rate on insurance premiums and public bodies. As the rate affects the total sum of damages payable to those who have suffered personal injuries, it will affect the liabilities of public compensators and insurance companies. It is therefore likely to be one of many factors that affect the cost of insurance.
Importantly, we do not know what the outcome of the Government Actuary's upcoming review of the discount rate will be, so we do not yet know if the discount rate will go up or down or stay the same. However, the impact of changes in the rate for defendants, insurers and other compensators is not something that can or should be taken into account when the Department and the House consider the need for modifications to the parameters for setting the rate. The cost to insurers and the health and social care service flows from the liability of defendants to compensate claimants in full.
To be clear, the only factors that are relevant for the setting of the rate are those that relate to the expected return on investment. The changes to the statutory methodology proposed in the draft regulations reflect updated economic projections since the rate was last set and are the best means by which the legal principle of 100% compensation will continue to be protected. I therefore commend the draft Damages (Process for Setting Rate of Return) Regulations (Northern Ireland) 2024 to the Assembly.