Scope of exceptions to the prohibition of corporate directors – Sackers’ response to consultation
As part of the Government’s “Transparency and trust” reforms, The Small Business, Enterprise and Employment Bill (the Bill) is being introduced with a view to, among other things, precluding the appointment of corporate directors of UK companies.
In the light of this, the Department for Business Innovation and Skills (BIS) is consulting on the “Scope of exceptions to the prohibition of corporate directors”, seeking views on the circumstances where the use of corporate directors of UK companies should be allowed. One area of focus is the use of corporate trustees of pension funds, which BIS intends to permit under an exception to the general prohibition.
In this response
We welcome the proposal to permit corporate directors of corporate pension fund trustees to continue under an exception to the prohibition of corporate directors.
As the consultation notes, there are many types of pension fund trustee, including companies which have the same responsibilities as individual trustees.
Corporate pension fund trustees are used for a variety of reasons, including ease of administration and liability protection for the trustee directors. The potential risks which have given rise to the changes outlined in the Bill, such as sub-optimal behaviour and sub-standard corporate governance, or the potential lack of transparency and accountability, are not, in our experience, drivers for the use of corporate directors of pension scheme trustee companies.
All types of workplace pension fund trustee are already highly regulated, under the supervision of the Pensions Regulator (TPR). TPR has powers to suspend or prohibit trustees, whether individual or corporate. As such, the risk of abuse is already small.
In the light of increasing regulation in the field of workplace pensions, there has been a significant increase in recent years in the number of professional independent trustees appointed to the boards of trust-based workplace pension schemes. Indeed, there are many advantages to appointing an independent trustee, including their significant professional expertise regarding the issues facing pension schemes and an independent view which can allow scheme procedures to be reviewed from an experienced standpoint and be challenged or improved upon if necessary.
A professional independent trustee may be appointed as a director of a pension scheme trustee company, either in the individual’s own name, or in the name of the corporate entity that the individual represents. Both methods of appointment are common.
A particular advantage for pension schemes whose independent trustee appointment is a corporate entity rather than an individual, is continuity of cover. For example, in the event of the unavailability of a named individual, a firm of independent trustees is readily able to provide an alternate to deal with routine or special business. In addition, a firm of independent trustees is also able to pool resources, in terms of sharing knowledge and experience, which translates into a significant benefit for the pension schemes they are appointed to.
It is also envisaged that Independent Governance Committees (IGCs) for contract-based pension schemes will work in a similar way. Ahead of their introduction in April 2015 the FCA, in its 2014 consultation on the “Proposed rules for independent governance committees”, recommended that corporate persons should be able to serve as IGC members, with the option of appointing more than one corporate person to an IGC.
Corporate directors of corporate pension fund trustees have been in use for many years and, in our experience, this structure functions well. As noted above, all pension fund trustees, whether individual or corporate, are already well regulated and supervised by TPR. As such, we agree with the proposal to create an exception in this context.
Workplace pension schemes use a variety of investment and funding arrangements, including asset backed funding arrangements. One such example is the pension funding partnership.
These can be established through a special purpose vehicle (SPV), using a Scottish limited partnership formed by the employer. Where all partners in the partnership (including the pension scheme trustee) are body corporates in the same corporate group, such an arrangement can benefit from exemptions under the Financial Services and Markets Act 2000 (FSMA) and The Collective Investment Schemes Order (SI 2001/1062).
By virtue of being body corporates in the same corporate group, the operator of the SLP is exempt from requiring authorisation under FSMA. In addition, this structure ensures that the trustee’s interest in the funding vehicle does not fall foul of the employer-related investment provisions of the Pensions Act 1995.
Without the proposed exception, this practice would not be able to continue, leaving many funding structures in need of review and, potentially, alteration, which could have an adverse impact on the funding position of the pension schemes which have such structures in place.