16 Feb ARC’s response to Department for Business, Energy and Industrial Strategy green paper on corporate governance reform

We are pleased to have this opportunity to comment on these proposals. ARC Pensions Law is a leading firm of specialist pension lawyers specialising in workplace pension schemes. Our client base consists of defined benefit, defined contribution and hybrid schemes and their sponsors.

Appropriate regulation

We fully support the need for strong regulation of schemes, for the protection of their beneficiaries. We also accept the view that businesses can be impacted either positively or negatively by the way in which they treat their stakeholders, including their present and former employees, and that for economic and societal reasons it is a valid area for corporate regulation.

It is important that new regulation is not disproportionate to the issue it is trying to address, is not duplicated or overlapping with existing regulation, and does not lack clear focus. Any one of these situations on their own could present a handicap to business, which is of particular importance in the post-Brexit world where the contributions of UK businesses to the economy will be at a premium.

We are concerned that the proposals as set out in the Green Paper have the potential to present all of these outcomes in respect of defined benefit pension schemes which have private companies as their sponsors.

Pension scheme priority

We have a specific concern around the suggestion of adding to the “enlightened shareholder value” provisions. Including a new statutory duty under section 172(1) of the Companies Act 2006 for directors to have regard to the interests of trustees as unsecured creditors runs the risk of fundamentally reshaping directors’ decision-making.  Directors then may even be obliged to determine that the insolvency of a distressed sponsoring employer and PPF entry is the correct route, to avoid reducing the amount the scheme will recover in the insolvency of the sponsor. We would urge caution here before adding a new unsecured creditor to the list.  The legislative regime currently achieves a finely poised balance between insolvency law, company law and pensions law, with some tension between them.  There is a clear danger that tinkering with one provision could have unintended consequences.

The issue of whether pension schemes should effectively be given “super creditor” status has previously been considered by parliament and others, including the courts. It is widely believed that, amongst other things, such a provision could hamper companies’ ability to raise finance if the priority of potential lenders’ financial interests as creditors were to be relegated. In the post-Brexit world, this seems a more pertinent point than ever.

Proper assessment of need

There are, as the Green Paper recognises, already highly-developed regulatory systems in respect of both workplace pension schemes and companies. Those systems are the subject of frequent review. If regulations are to be augmented, it must be clear that the additions are both needed and appropriate in their detail.

If it is thought that there is a need to strengthen existing regulations, the logical place for it to be done is through the existing pensions structure, rather than running the risk of complicating the obligations on affected businesses and bringing duplication.

In this respect there is also an issue of proportionality. The Green Paper cites “a limited number of examples of particularly poor corporate conduct where the views and needs of stakeholders … have not been given appropriate consideration”. We would caution here that care should be taken to restrict the introduction of further regulations to situations where there is a widespread and serious issue that warrants such attention, with a considered assessment of the likely effectiveness of the new law in addressing the problem.

Whilst there have been recent cases that have excited public comment, they are happily very few (and certainly fewer than before the current system was developed). They are also subject to existing regulatory attention, and there are protections for members who might otherwise lose their entitlements.

In addition, the issues that such cases raise are being considered in the pensions arena by other areas of government, as part of the ongoing effort to ensure that the system remains effective.

Private companies

There are sound reasons for treating private and public companies differently in respect of some areas of regulation. The main justification for this is the potential for the owners (shareholders) in public companies to be more remote from the managers of the company than are the owners of private companies, particularly where the private company shareholdings are narrowly held by an individual or family rather than a wider group of management, staff and external investors.  In principle therefore specific additional requirements on public companies are appropriate.

However, we would question the Green Paper’s premise that a small number of recent cases demonstrate the need for the regulatory system for private companies to be brought up to the level of that for listed public ones, thereby dismissing the value of the self-regulatory effect of owners’ desire to protect their own investment in the company.

There are serious practical difficulties of crafting a suitable definition to catch only the targeted businesses. In addition, we return to two of our earlier points about proportionality. There is a need to avoid placing significant additional obligations on the majority of business owners as a result of an occasional difficult case – and specifically in respect of pension schemes, also a need to take account of existing effective regulatory tools. This would suggest that there would be few, if any, such situations that would justify the creation of further obligations as envisaged by the Green Paper.