Assumed rate of return on investment of damages

Civil Liability Bill [Lords] – in a Public Bill Committee am 2:30 pm ar 11 Medi 2018.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Ellie Reeves Ellie Reeves Llafur, Lewisham West and Penge 2:30, 11 Medi 2018

I beg to move amendment 24, in clause 10, page 9, line 20, leave out from “SCHEDULE A1” to end of page 14, and insert—

“SCHEDULE A1

Assumed Rate Of Return On Investment Of Damages: England And Wales

Periodic reviews of the rate of return

1 (1) The Lord Chancellor must instruct the expert panel to review the rate of return periodically in accordance with this paragraph.

(2) The first review of the rate of return must be started within the 90 day period following commencement.

(3) Each subsequent review of the rate of return must be started within the 5 year period following the last review.

(4) It is for the Lord Chancellor to decide—

(a) when, within the 90 day period following commencement, a review under sub-paragraph (2) is to be started;

(b) when, within the 5 year period following the last review, a review under sub-paragraph (3) is to be started.

(5) In this paragraph—

‘90 day period following commencement’ means the period of 90 days beginning with the day on which this paragraph comes into force;

‘5 year period following the last review’ means the period of five years beginning with the day on which the last review under this paragraph is concluded.

(6) For the purposes of this paragraph a review is concluded on the day when the Lord Chancellor makes a determination under paragraph 2 as a result of the review.

Conducting the review

2 (1) This paragraph applies when the Lord Chancellor is required by paragraph 1(2) or (3) to instruct the expert panel to conduct a review of the rate of return.

(2) The Lord Chancellor must instruct the expert panel to review the rate of return and determine whether it should be—

(a) changed to a different rate, or

(b) kept unchanged.

(3) The expert panel must conduct that review and make that determination within the 140 day review period.

(4) When deciding what response to give to the Lord Chancellor under this paragraph, the expert panel must take into account the duties imposed on the Lord Chancellor by paragraph 3.

(5) During any period when the office of Government Actuary is vacant, a reference in this paragraph to the Government Actuary is to be read as a reference to the Deputy Government Actuary.

(6) In this paragraph ‘140 day review period’ means the period of 140 days beginning with the day which the Lord Chancellor decides (under paragraph 1) should be the day on which the review is to start.

Determining the rate of return

3 (1) The expert panel must comply with this paragraph when determining under paragraph 2 whether the rate of return should be changed or kept unchanged (‘the rate determination’).

(2) The expert panel must make the rate determination on the basis that the rate of return should be the rate that, in the opinion of the expert panel, a recipient of relevant damages could reasonably be expected to achieve if the recipient invested the relevant damages for the purpose of securing that—

(a) the relevant damages would meet the losses and costs for which they are awarded;

(b) the relevant damages would meet those losses and costs at the time or times when they fall to be met by the relevant damages; and

(c) the relevant damages would be exhausted at the end of the period for which they are awarded.

(3) In making the rate determination as required by sub-paragraph (2), the expert panel must make the following assumptions—

(a) the assumption that the relevant damages are payable in a lump sum (rather than under an order for periodical payments);

(b) the assumption that the recipient of the relevant damages is properly advised on the investment of the relevant damages;

(c) the assumption that the recipient of the relevant damages invests the relevant damages in a diversified portfolio of investments;

(d) the assumption that the relevant damages are invested using an approach that involves—

(i) more risk than a very low level of risk, but

(ii) less risk than would ordinarily be accepted by a prudent and properly advised individual investor who has different financial aims.

(4) That does not limit the assumptions which the expert panel may make.

(5) In making the rate determination as required by sub-paragraph (2), the expert panel must—

(a) have regard to the actual returns that are available to investors;

(b) have regard to the actual investments made by investors of relevant damages; and

(c) make such allowances for taxation, inflation and investment management costs as the expert panel thinks appropriate.

(6) That does not limit the factors which may inform the expert panel when making the rate determination.

(7) In this paragraph ‘relevant damages’ means a sum awarded as damages for future pecuniary loss in an action for personal injury.

Determination

4 When the expert panel makes a rate determination, the expert panel must give reasons for the rate determination made.

Expert panel

5 (1) For each review of a rate of return, the Lord Chancellor is to establish a panel (referred to in this Schedule as an ‘expert panel’) consisting of—

(a) the Government Actuary, who is to chair the panel; and

(b) four other members appointed by the Lord Chancellor.

(2) The Lord Chancellor must exercise the power to appoint the appointed members to secure that—

(a) one appointed member has experience as an actuary;

(b) one appointed member has experience of managing investments;

(c) one appointed member has experience as an economist;

(d) one appointed member has experience in consumer matters as relating to investments.

(3) An expert panel established for a review of a rate of return ceases to exist once it has responded to the consultation relating to the review.

(4) A person may be a member of more than one expert panel at any one time.

(5) A person may not become an appointed member if the person is ineligible for membership.

(6) A person who is an appointed member ceases to be a member if the person becomes ineligible for membership.

(7) The Lord Chancellor may end an appointed member’s membership of the panel if the Lord Chancellor is satisfied that—

(a) the person is unable or unwilling to take part in the panel’s activities on a review conducted under paragraph 1;

(b) it is no longer appropriate for the person to be a member of the panel because of gross misconduct or impropriety;

(c) the person has become bankrupt, a debt relief order (under Part 7A of the Insolvency Act 1986) has been made in respect of the person, the person’s estate has been sequestrated or the person has made an arrangement with or granted a trust deed for creditors.

(8) During any period when the office of Government Actuary is vacant the Deputy Government Actuary is to be a member of the panel and is to chair it.

(9) A person is ‘ineligible for membership’ of an expert panel if the person is—

(a) a Minister of the Crown, or

(b) a person serving in a government department in employment in respect of which remuneration is payable out of money provided by Parliament.

(10) In this paragraph ‘appointed member’ means a person appointed by the Lord Chancellor to be a member of an expert panel.

Proceedings, powers and funding of an expert panel

6 (1) The quorum of an expert panel is four members, one of whom must be the Government Actuary (or the Deputy Government Actuary when the office of Government Actuary is vacant).

(2) In the event of a tied vote on any decision, the person chairing the panel is to have a second casting vote.

(3) The panel may—

(a) invite other persons to attend, or to attend and speak at, any meeting of the panel;

(b) when exercising any function, take into account information submitted by, or obtained from, any other person (whether or not the production of the information has been commissioned by the panel).

(4) The Lord Chancellor must make arrangements for an expert panel to be provided with the resources which the Lord Chancellor considers to be appropriate for the panel to exercise its functions.

(5) The Government Actuary’s Department, or any other government department, may enter into arrangements made by the Lord Chancellor under sub-paragraph (4).

(6) The Lord Chancellor must make arrangements for the appointed members of an expert panel to be paid any remuneration and expenses which the Lord Chancellor considers to be appropriate.

Application of this Schedule where there are several rates of return

7 (1) This paragraph applies if two or more rates of return are prescribed under section A1.

(2) The requirements—

(a) under paragraph 1 for a review to be conducted, and

(b) under paragraph 2 relating to how a review is conducted, apply separately in relation to each rate of return.

(3) As respects a review relating to a particular rate of return, a reference in this Schedule to the last review conducted under a particular provision is to be read as a reference to the last review relating to that rate of return.

Interpretation

8 (1) In this Schedule—

‘expert panel’ means a panel established in accordance with paragraph 5;

‘rate determination’ has the meaning given by paragraph 3;

‘rate of return’ means a rate of return for the purposes of section A1.

(2) A provision of this Schedule that refers to the rate of return being changed is to be read as also referring to—

(a) the existing rate of return being replaced with no rate;

(b) a rate of return being introduced where there is no existing rate;

(c) the existing rate of return for a particular class of case being replaced with no rate;

(d) a rate of return being introduced for a particular class of case for which there is no existing rate.

(3) A provision of this Schedule that refers to the rate of return being kept unchanged is to be read as also referring to—

(a) the position that there is no rate of return being kept unchanged;

(b) the position that there is no rate of return for a particular class of case being kept unchanged.

(4) A provision of this Schedule that refers to a review of the rate of return is to be read as also referring to—

(a) a review of the position that no rate of return is prescribed;

(b) a review of the position that no rate of return is prescribed for a particular class of case.”

This amendment would require that the discount rate was set by the expert panel, not the Lord Chancellor.

Photo of Henry Bellingham Henry Bellingham Ceidwadwyr, North West Norfolk

With this it will be convenient to discuss the following:

Amendment 22, in clause 10, page 10, line 13, at end insert—

“( ) the expert panel established for the review;”

This amendment, together with Amendment 23, would require the Lord Chancellor to consult the expert panel before the initial discount rate determination, rather than just the subsequent ones as currently required.

Amendment 23, in clause 10, page 10, line 21, at end insert—

“( ) The expert panel must respond to the consultation within the period of 90 days beginning with the day on which its response to the consultation is requested.”

See explanatory statement for Amendment 22.

New clause 5—Review of assumptions on which calculation of the personal injury discount rate is based—

“(1) Within 3 years from the date on which this Schedule comes into force, the Lord Chancellor must arrange for the expert panel to review the assumptions on which the personal injury discount rate is based, and review how investors of relevant damages are investing such damages.

(2) The review must report to the Lord Chancellor whether the assumptions on which the personal injury discount rate is based should be changed and set out recommendations.”

This new clause would require the Lord Chancellor to arrange for the expert panel to conduct a review of the assumptions on which the discount rate is based in light of how claimants are in practice investing their compensation.

Clause stand part.

Photo of Ellie Reeves Ellie Reeves Llafur, Lewisham West and Penge

The personal injury discount rate is a pivotal part of the compensation process. It must be carefully reviewed, calculated and set. The rate is critical as it helps to determine what an injured person receives following what can often be life-changing injuries. Damages are paid to individuals, usually as a lump sum, to account for the losses caused by an injury. The level at which the personal injury discount rate is set is based on assumptions about the risk of the recipient’s investment of the damages they are awarded, which helps to ensure that any future market fluctuations are accounted for. The rate ensures that recipients ultimately receive the level of compensation that was intended and do not enter a state of extreme over or under-compensation.

The need for the rate to be set correctly is clear. An individual involved in a major car crash who breaks their back and may as a result never work again might need to adapt their home and pay for care, and might have loss of earnings. When they receive their compensation as a lump sum, they would need to invest it. At present, injured individuals are treated as very risk-averse investors, rightly so given the impact that a major injury would likely have on one’s perception of risk. Also, they are not investors looking at the stock market. Their future quality of life depends on ensuring that they have enough money to live on and to provide important care. It is therefore imperative that the rate is set at the correct level to ensure that compensation awards are delivered as intended—based on the risk of the investments that the sums are put in.

The amendment would replace schedule A1 as drafted with a far more appropriate means of setting the discount rate—allowing it to be set by an expert panel, rather than it being politicised as a decision by the Lord Chancellor. Amendments 22 and 23 would ensure that the expert panel set the rate right from the beginning and not just in subsequent reviews. Throughout the Bill there are too many instances of handing power from experts to Ministers without sufficient checks and balances. That is not right, and the concessions offered by the Government—for Ministers to liaise with some experts—do not go far enough. Our amendment would shift the emphasis from the Lord Chancellor to the independent expert panel.

Furthermore, the Justice Committee recommended in its pre-legislative report on the draft personal injury discount rate that the panel should advise on the first review and, if the Lord Chancellor chose not to follow the panel’s advice in setting the rate, that information should be made public, along with his or her reasons for so doing. The requirement to consult a panel appeared in the original Bill, but unfortunately it was removed from the Bill in the House of Lords. Opposition amendments seek to address that, and they would add much-needed clarity and transparency on how the rate is set initially and in future, avoiding politically or ideologically driven decisions by shifting the balance in favour of experts.

Paragraph 5 of proposed new schedule A1 in the amendment clearly outlines the necessary credentials of members of the expert panel, whether as experienced actuaries, investment managers or economists. Transparency and independence, and external expertise are vital in setting the rate, and they should be welcomed. To hand decision making over to the Lord Chancellor, as the Bill does in many places, will remove independence from a process that helps to deliver access to justice. Confidence in politicians is at a low, and we cannot allow confidence in the justice system—or our constituents’ faith in their ability to access justice—fall to equally low levels.

New clause 5 would see the expert panel conduct a review of the assumptions on which the rate is set within three years of the legislation coming into force. That is set to be within three years of the date of the schedule coming into force so, although both the existing schedule A1 and the alternative proposed in amendment 24 maintain the period of review for the rate as being within five years, as amended in the House of the Lords, I hope that the Minister will give us assurances that should it be found during the review of the assumptions that the most prevalent investments by injured claimants are determined to be very low risk—as such, people would not be receiving appropriate compensation payments—the rate would be changed sooner rather than later during that period.

It is imperative that the vast changes to be introduced by the Bill have sufficient checks and balances in place to ensure that they work as intended, so that injured claimants are not left suffering further in the pursuit of justice. As I outlined in my speech on Second Reading, the changes to be introduced by the Bill have the potential to be a textbook example of a change in the law with ramifications that we will not truly know until much further down the line, at which point it will be too late, with the damage done and access to justice eviscerated for many.

For that reason, it is important that we should ensure that the correct checks and balances, regular reviews and expert-led setting of the rate form part of the Bill. I hope that by implementing those measures we will not see a repeat of the access-to-justice crisis caused by LASPO, employment tribunal fees and—an anticipated impact—changes to the small claims limit. The Government should take the time to implement the amendments to part 2 of the Bill.

Photo of Bambos Charalambous Bambos Charalambous Llafur, Enfield, Southgate 2:45, 11 Medi 2018

Let us be clear what we are talking about with the discount rate: damages for people who have suffered catastrophic, life-changing injuries. The lump sum they receive is to last them their entire life and is to pay for urgent treatments, care, support, adaptations—a whole host of things. We need to be very careful how we deal with this, as very small variations in the discount rate can have serious impacts.

As an example, I have been advised by a leading law firm that it settled a claim in 2015 for a client in her 30s who suffered cardiac arrest and irreparable brain damage due to negligence. She was awarded £9.95 million when the discount rate was 2.5%. That award was to pay for extensive medical treatments, childcare and live-in carers for the rest of her life. Had the claim been settled in 2017, when the discount rate was changed to -0.75%, it would have resulted in a settlement of £20 million.

Such cases are relatively few in number, but when they do occur, we must make sure that they are dealt with as precisely as possible, without leaving such large fluctuations to chance. We would all agree that the time between the setting of the two discount rates was far too long. I very much support a shorter period of time for that to take place. Someone who receives such a lump sum would surely choose to invest it in as low risk a manner as possible—they would not want any risk if possible—because it has to last them their entire life. The discount rate should be set on the basis that the investment will be very low risk.

In setting the discount rate, the Lord Chancellor is given wide-ranging discretion. That opens up potential for other factors to influence the Lord Chancellor, which could adversely impact the compensation received by someone who has suffered catastrophic injuries. We need to be clear about the reasons why the Lord Chancellor will be setting the rate. As my hon. Friend the Member for Lewisham West and Penge mentioned, the Justice Committee recommended setting up an independent panel of experts to advise the Lord Chancellor on setting the rate. It also recommended that the panel’s advice be published in full. The Bill has removed that transparency. I have grave concerns about the reasons for that and how the rate will be set. We need to know how the rate has been set. When the Bank of England sets interest rates, it has a panel of experts and it gives reasons why. A similar system should apply here.

I support the amendments and new clause. It would be right and proper for the power to be taken away from the Lord Chancellor and for the rate to be set by an independent panel of experts, at regular periods.

Photo of Rory Stewart Rory Stewart The Minister of State, Ministry of Justice

I have enormous sympathy for the amendments, in particular the arguments on amendments 24, 22 and 23. As the hon. Member for Lewisham West and Penge and the hon. Member for Enfield, Southgate have clarified, we are dealing here with people who have suffered catastrophic, life-changing injuries and we have a very particular responsibility, particularly since some of those people can be immensely vulnerable. They can include children who have catastrophic, life-changing injuries. We all have an obligation to ensure that the principle of 100% compensation is met.

The discount rate can seem a slightly technical mathematical formula. It is there to try to hedge effectively against inflation and the expected rate of investment returns in setting an award. As the hon. Member for Enfield, Southgate pointed out, a shift in the discount rate could mean a difference between an award of £10 million and an award of £20 million—a very significant difference.

In setting the discount rate, our first obligation has to be to the very vulnerable individuals who have suffered a catastrophic or life-changing injury. We need to ensure that they are able to make an investment that does not carry substantial risk. We cannot guarantee everything because inflation and markets can move. Insofar as we can do so in advance, we should attempt to arrive at a rate that fairly reflects the likelihood of their getting the compensation that it was anticipated they would receive from the judge. That means that we should not aim to chase a median rate. We should aim to chase a rate on the basis of advice from the Government Actuary and later from the expert panel, to determine the fair rate of return.

In that case, why are the Government challenging amendments 24, 22 and 23? The answer is that amendments 22 and 23 reflect the original position of the Government on the Bill, so we are slightly going round in circles. We had originally suggested in the version of the Bill that we presented to the House of Lords that the Lord Chancellor should consult the expert panel before setting the rate. Under pressure from Opposition Members in the House of Lords, in particular Lord Sharkey, the Lords pushed us into a position where we agreed that, instead of an expert panel, it should be the Government Actuary, working with the Lord Chancellor, who set the first rate.

The argument made by the Lib Dem peer and backed by others, including Lord Beecham, was that the problems for the NHS caused by the discount rate are so extreme and the costs on the public purse so extreme, that the first change in the discount rate should happen relatively rapidly, on the advice of the Government Actuary. Were we now to reject that amendment, which we accepted after long negotiation in the House of Lords, we would have to go back to the drawing board and set up the expert panel again, leading to a very significant delay, which would impose costs on the NHS.

We are in the ironic position that the Opposition are now proposing as amendments the original Government position, which the Opposition struck down in the House of Lords. We are slightly in danger of going round in circles. We are where we are and, given the problems of time, I suggest that the pragmatic compromise is that the Government Actuary, who is an independent individual with enormous expertise, works with the Lord Chancellor on the first setting or the rate, and that for subsequent settings of the rate, the expert panel comes in, as the House of Lords recommended.

That brings us to the lengthy amendment 24, which the hon. Member for Lewisham West and Penge introduced with great eloquence. That essentially argues that the rate should be set by the expert panel alone and not by the Lord Chancellor. We disagree fundamentally with that because the expert panel and the Government Actuary would argue that it is not their position to set the rate. It is their position to provide actuarial advice on different investment decisions that could be made, the likely rates of inflation and the likely rates of return.

Ultimately, a Minister accountable to Parliament should set that rate, because they have to balance some very different issues: our obligation towards vulnerable people who have suffered catastrophic life-changing injuries and our obligation on the costs to the national health service, which run into billions of pounds, and balancing these different public goods.

It simply would not be fair to expect an actuary to make those kinds of political and social decisions. It is entirely appropriate to expect actuarial experts to provide the expert advice on what the range of options would be, and to reassure individuals that the Lord Chancellor is not likely to make a decision that would have a significant negative impact. It is only necessary to look at what the Lord Chancellor did two years ago in setting the rate of -0.75%. If it had been the case that the Lord Chancellor was fundamentally driven by Treasury calculations and was not interested in defending the vulnerable individual, they would not have moved the rate from 2.5% to -0.75%, effectively doubling the compensation paid. The Lord Chancellor, in setting this rate, on the advice of the expert panel, will be acting as the Lord Chancellor, not as the Secretary of State for Justice.

Photo of Bambos Charalambous Bambos Charalambous Llafur, Enfield, Southgate

The Minister said there was a big change when a previous Lord Chancellor set the rate at -0.75%. I wonder what advice and from whom she received in setting that rate. Clearly, she would have had some advice, rather than plucking that figure out of the air. I wonder what the situation is now.

Photo of Rory Stewart Rory Stewart The Minister of State, Ministry of Justice

At the moment, the advice received would be from actuaries. Ultimately, we commission the Government Actuary’s Department voluntarily to provide the best advice on what the rate should be. It then arrives at a gilt rate, which drove us towards -0.75%. The Bill puts the role of the Government Actuary into law, so it is no longer voluntary but compulsory. It will be obligatory for the Lord Chancellor to consult, and in future there will be a broader expert panel around the Government Actuary.

The Government will publish the Government Actuary’s report, the panel’s report and later reviews. I am happy to make that commitment to the hon. Gentleman, who asked about transparency. I respectfully ask that the Opposition amendment be withdrawn, and that the Government amendment be accepted.

Photo of Gloria De Piero Gloria De Piero Shadow Minister (Justice) 3:00, 11 Medi 2018

My learned and experienced colleagues have spoken in great detail about our issues with the amendments, so I do not anticipate making a long speech. I wholeheartedly concur with the comments that my hon. Friend the Member for Lewisham West and Penge made about the importance of periodical payment orders and a proper, timely review of the personal injury discount rate. As everybody who has contributed has said, we are talking about the most seriously injured. They cannot and must not be let down by our playing politics or by insurers seeking to save money.

In amendments 22 and 23, we say that, if an expert panel is appropriate for subsequent reviews, why should not expert opinion from the panel be appropriate for the initial determination of the rate of return? That is why we will press them to a Division.

Photo of Ellie Reeves Ellie Reeves Llafur, Lewisham West and Penge

I thank the Minister for his response to the points that I made. For the reasons that I and my hon. Friend the Member for Enfield, Southgate set out, I want to press amendment 24 and new clause 5 to a Division.

Question put, That the amendment be made.

The Committee divided:

Ayes 8, Noes 9.

Rhif adran 14 Caledonian Pinewood Forest — Assumed rate of return on investment of damages

Ie: 8 MPs

Na: 9 MPs

Ie: A-Z fesul cyfenw

Na: A-Z fesul cyfenw

Question accordingly negatived.

Question put, That the clause stand part of the Bill.

The Committee divided:

Ayes 9, Noes 8.

Rhif adran 15 Caledonian Pinewood Forest — Assumed rate of return on investment of damages

Ie: 9 MPs

Na: 8 MPs

Ie: A-Z fesul cyfenw

Na: A-Z fesul cyfenw

Question accordingly agreed to.

Clause 10 ordered to stand part of the Bill.

New Clause 2