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Lord Ackner: The observation of my noble and learned friend Lord Simon of Glaisdale that this provision has given rise to disquiet has in no way been negated. I ask myself why it gives rise to disquiet. The Explanatory Memorandum makes it perfectly clear that the Treasury is likely to have a stake in the way in which the specific prescribed limit is eventually worked out. If that disquiet is justified, then the disquiet concerns consulting the Treasury at all and it will not be removed by it being publicised, "We have taken it out because it looks better, but we propose to do exactly what we would have done if it had been left in." The disquiet would continue and justifiably so.

I should like an opportunity to consider in more detail the observations made by my noble and learned friend the Lord Chancellor with a view to considering whether or not to return to this matter at Report stage. On that basis, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Irvine of Lairg moved Amendment No. 3:

Page 1, line 15, after ("Treasury") insert ("and in particular shall take into account the net return on any existing index-linked government security").

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The noble Lord said: This is the second of the two amendments which I heralded on Second Reading. I regard Amendment No. 3 as a probing amendment to clarify the approach that it is intended that the Lord Chancellor and the Secretary of State for Scotland should take when setting the prescribed rate which courts will have to take into account when discounting a lump sum because of the "accelerated payment" element in compensation for future pecuniary loss.

On Second Reading, the noble and learned Lord said that he would consider what the Court of Appeal had to say on this issue later this year before setting the prescribed rate. That, I accept, is sensible. He also said that he would consult widely before setting the rate. That too is sensible. However, the Law Commission has already considered this issue and consulted widely on it. In its report, Structured Settlements and Interim and Provisional Damages, the Law Commission concluded that the appropriate rate was the net return on an index-linked government security. Paragraph 2.28 of the report states:

    "We share the views of the majority of those who responded to us, that a practice of discounting by reference to returns on index-linked government securities would be preferable to the present arbitrary presumption. A 4-5% discount which emerged from the case law was established at a time when index-linked government securities did not exist. Index-linked government securities now constitute the best evidence of the real return on any investment where the risk element is minimal, because they take account of inflation, rather than attempt to predict it as conventional investments do".

We on this side of the Chamber--I have said this before--are anxious to ensure that any under-compensation of victims should not continue. We would therefore like to hear from the noble and learned Lord the Government's current view on the specific Law Commission recommendation that the prescribed rate should be based on the net return on index-linked government securities. I beg to move.

Viscount Chelmsford: I regret that the insurance community does not agree with the Law Commission on this point. I hope that the Committee will agree with me that the most appropriate discount rate is the one that most accurately matches the investment return available in the commercial markets for prudent and wisely-managed investments.

The courts to date have consistently held that a rate of between 4 per cent. and 5 per cent. is appropriate and that rate is derived from considering the rate of return available on a balanced portfolio of investments, including equities--a "balanced" portfolio. The insurance industry believes that it is unrealistic to use such a low discount rate as the 2.5 per cent. which is the index-linked rate of today. It has three basic reasons for suggesting that.

First, there is the analysis carried out by the stockbrokers Barclays de Zoete Wedd in January this year. It shows that the real return available on index-linked gilts is less than half that available on equities. Index-linked gilts have under-performed both cash and conventional gilts. They also do not feature in an optimised portfolio run for UK assets over the period 1983 to 1995.

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Secondly, independent financial advisers indicated that they would not recommend investment of a large lump sum--that is to say, several hundred thousand pounds--only in index-linked gilts. That is simply because, with a prudent investment strategy and with minimal risk, a much greater rate of return can be achieved on the investment. Typical advice would be to select a spread of equities, gilts and with-profit investments.

Finally, there is the Court of Protection. That is a body which exists to approve investments made on behalf of persons under a disability--for example, minors or mentally incapable persons. Advisers to the Court of Protection indicated that they generally invest in a balanced portfolio of assets. As much as 70 per cent. of that might be in equities. Of the remainder only a small fraction is generally placed in index-linked gilts.

In summary, therefore, the proposed amendment fails to take account of the higher rates of investment which can be achieved with a minimal risk to the investor; that is, the accident victim. And using the lower rate will also lead to higher lump sum awards which the insurance industry believes amount to over-compensation. Incidentally, any such increase will be passed on in increased premiums to all policyholders, especially to motorists and employers.

Lord Meston: I cannot help feeling that the exchange of views which the Committee has just heard--with the noble Lord, Lord Irvine, on one side and the noble Viscount, Lord Chelmsford, on the other--will encapsulate the debate which will be the subject of pending appeals. The plaintiff will be arguing that he must be properly compensated and protected; the defendant will argue that prudence is not the same as excessive caution.

My only contribution is to point out that the Bar Council, in its response to the Law Commission's consultation paper, favoured the reference to index-linked government securities, which undoubtedly provide good, fresh economic evidence. The Bar Council concluded that in most cases no better guide existed. It said that a discount rate should be based on the ILGS return.

The Lord Chancellor: I am grateful to the noble Lord, Lord Irvine of Lairg, for what he said at the outset of his speech on the amendment. The purpose of setting a rate to be applied generally is to obviate the need for evidence in as many cases as possible, as we discussed in relation to Amendment No. 1. On the other hand the courts are fixing damages in relation to rights of action which accrued some time before and usually are covered by contracts of insurance which operated at that time.

When the court makes a change in the law, if it ever does, it will have retrospective effect because the court is dealing with something that happened in the past and is seeking to compensate. There is no doubt about the principle of law involved; that is, that the court is seeking to award a sum which will compensate the plaintiff for, in this case, the pecuniary loss which is the subject of general damages. The law therefore is clear

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enough in its general principle. As usual, the application of that general principle to the circumstances of a specific case may involve difficult questions.

The difficulty in relation to an Act of Parliament is that it can only properly operate retrospectively in exceptional circumstances. The normal rule of statutory enactment that I have been accustomed to seeing followed is that one does not make retrospective alterations. Therefore, it is extremely important for this power to await the decision of the Court of Appeal on the basis of the present law in the light of the investigations that have been done by the Law Commission over the past year or two to which I referred at Second Reading. I would aim to try to get out of that ultimate decision taken in relation to these cases a principle which would guide one as to the rate that one would take.

There is no doubt that other rates should be considered. It is not just one. The amendment says,

    "and in particular shall take into account the net return on any existing index-linked government security".
The exact return depends a little on the other terms of the security. That is not unique. Therefore, there is more than one. The amendment seeks to take into account the net return. I certainly would be intending that we take that into account but I should also like to know what else is regarded as important. For example, it may well be that a balanced portfolio would have only a portion of such securities in it and that a wise adviser would think that, if a substantial sum was being invested for the purpose of giving a return and in total, along with the return, compensating the plaintiff for future pecuniary loss, that investment would include things other than index-linked government securities. So the estimate would have to try to take account of that.

This is a quite complicated exercise. My approach is that it would be right to take into account what the Court of Appeal says is the correct approach to this matter, put into it such information as we have from time to time as to what these various elements would produce in the way of a return and then try to average it over the total of a typical portfolio. I hope that in the light of that explanation the noble Lord will feel able to withdraw his amendment, on the basis that I would wish to take account of all the information available to me--I am sure that this would be true of the Lord Chancellor of the time, as this is to be done from time to time--and also consult widely the interests of plaintiffs and of defendants. I am sure that the Bar Council would figure among those properly consulted probably on both sides of that boundary.

6.30 p.m.

Lord Irvine of Lairg: We have, on the one hand, the opinion of the Law Commission and, on the other hand, we have the views of the noble Viscount, Lord Chelmsford, who, if I may say so without any discourtesy, dealt a very full hand and acknowledged that he represents the views of the insurance industry. I propose to consider the noble and learned Lord's response and whether this is an issue to which we should revert at Report. We have but one opportunity to legislate. We have to legislate now regardless of when

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the Court of Appeal gives its decision and regardless of when, if there were an appeal from the Court of Appeal to your Lordships' House in its judicial capacity, your Lordships' House gave the final decision on this matter.

This is a modest amendment because its effect, as I think the noble and learned Lord acknowledged, would be no more than that a mandatory relevant consideration for him to take into account in prescribing the rate would be the net return on index-linked government securities, which for my part I am sure is the best evidence of the real return on any investment where it is intended that the risk element in the investment should be minimal. The noble and learned Lord would not be governed by that consideration. I think it would give much confidence if there were written into the Bill an acceptance that the noble and learned Lord should have regard to that which the Law Commission advises him is the best guide but which he would have a discretion not to apply if he thought that there were other overriding considerations indicating a different rate. Nonetheless, for the present, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 1 agreed to.

Clause 2 agreed to.

Clause 3 [Provisional damages and fatal accident claims]:

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