Changes in corporate law to protect pension schemes need a careful cost-benefit analysis, says Anna Rogers
Last November, the UK government published for consultation its Green Paper, Corporate Governance Reform. It proposed a range of options to strengthen the UK's corporate governance framework, designed to increase accountability and trust between businesses, their stakeholders and shareholders.
In relation to pensions, there is a clear consensus on the need for strong regulation of schemes, and for the protection of their beneficiaries. However, new law should not be passed as an overreaction to isolated events.
It should not be disproportionate to the problem it seeks to remedy, nor duplicate or overlap with current regulation, or lack clear focus.
Any one of these deficiencies could potentially present a handicap to business. This is of particular importance in a post-Brexit world where the contributions of UK firms to the economy will be at a premium.
Increasing pension scheme priority
A specific concern arises regarding 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 may even be obliged to determine that the insolvency of a distressed sponsoring employer with entry of the pension scheme into the Pension Protection Fund is the correct route; to avoid reducing the amount the scheme will recover if the sponsor's insolvency is delayed.
Caution is necessary here before adding a new party to the list. Presently, the legislative regime achieves a finely poised balance between the competing legislation in insolvency law, company law and pensions law, although some tension still occurs. A clear danger exists that tinkering with one provision could have unintended consequences elsewhere.
The issue of whether pension schemes should effectively be given "super creditor" status has previously been considered by parliament and the courts. It is widely believed that, among 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. Post-Brexit, this may become more pertinent than ever.
As the Green Paper recognises, highly developed regulatory systems already exist in respect of both workplace pension schemes and firms, which are subject to frequent review. If regulations are to be augmented, it must be clear the additions are necessary and appropriate in their detail.
If there is a perceived need to strengthen existing regulations, the logical place for this to be done is through the existing pensions structure, rather than running the risk of complicating and duplicating the obligations on businesses. In this respect, the issue of proportionality emerges. 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". Care is needed 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.
The burden on private companies
There are sound reasons for treating privately and publicly owned companies differently in some areas of regulation. The principal justification is the potential for the shareholders in public companies to be more remote from the managers of the company than are the owners of private companies. The Green Paper seems to rely on a flawed 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.
Arguably it is a lottery whether an employee works for a public or private company, though it is pretty transparent compared to other pensions risks that employees run.
Crafting a suitable definition to catch only the larger businesses that are targeted presents serious practical difficulties. But the overriding concern remains one of proportionality. Placing significant additional obligations on the majority of business owners as a result of an occasional difficult case may be a sledgehammer to crack a nut. Specifically, in relation to pension schemes, the better way forward would seem to be more focus on using existing regulatory tools.
Better accountability in corporate governance is a noble aspiration. But greater consideration is needed to determine the cost/benefit analysis of imposing a fundamental shift in the existing legal framework of company and insolvency law, instead of refining the existing pensions regulatory regime.