What does a new Labour government mean for the management liability market?

05 July 2024. Published by Rachael Healey, Partner and Matthew Watson, Partner and Andrew Oberholzer, Senior Associate and Zoe Melegari, Associate and Kim Wright, Senior Associate

We have a new government and the first Labour government for 14 years. What does it mean for the management liability market? We look at what Labour has promised and with that the areas those in the market will want to consider across directors and officers, employment liability and pensions.

Employment

Labour has focused heavily on employment rights in its manifesto, proposing a significant shakeup with plans to table new legislation within 100 days of coming into power. 

Unfair dismissal is set to become a day 1 right with the removal of the 2-year qualifying service period that has been in place for so long and to be widened to cover workers as well as employees. An extension of time to the current three-month time limit for bringing unfair dismissal claims is also planned (although to what is yet to be confirmed) as well as a removal of the cap on the level of compensation that can be claimed (which currently stands at £115,115, or 52 weeks wages if this is less).

In what is set to be the biggest change so far, Labour is proposing to make directors of companies who fail to comply with tribunal orders, such as paying compensation awards, personally liable for these awards. Historically, claimants have only ever been able to enforce judgments against companies, unless they have also brought their claim against an individual director, which is only permitted in limited circumstances such as in respect of individual acts of discrimination.

To tackle low pay and insecurity in the job market, one of Labour's central measures in its “New Deal” for workers, which was launched by Angela Rayner at the Labour Conference in 2021, is a ban on zero-hour contracts.

Labour have had 14 years to work on their proposals and, in that time, they have been working in partnership with trade unions to put these plans in place. They are therefore now in a position to take quick and decisive action upon coming into power. These changes are a full-scale strengthening of workers' rights. Should they come into force, we will certainly see a corresponding impact on the "gig economy" and a dramatic increase in the number of claims that are likely to come before the Employment Tribunals.

Pensions

Labour's manifesto is light when it comes to its ambitions for the pension industry. Instead, Labour promises to undertake a "review of the pension landscape to consider what further steps are needed to improve pension outcomes and increase investment in UK markets".  But what can we learn from what Labour does say in its manifesto and also what it has talked about but is not referred to in its manifesto.    

Labour has committed to retaining the Conservative's triple lock on the State Pension. This means that publicly funded pensions will continue to increase by the level of earnings, inflation or 2.5% - whichever is highest. The triple lock has become increasingly expensive to fund in recent years.  With inflation at its lowest level for 3 years, Labour's plan seems uncontroversial in the immediate period. However, if inflation begins to rise again, the plans will likely come under scrutiny.

Reform of the industry has also been suggested, however what this entails is unclear. The manifesto does provide a clear commitment to "act to increase investment from pension funds in UK markets" and to adopt the Conservative reforms for consolidation in the pension market.  There is also a reference in the context of climate change for pension funds (as well as banks, asset managers and insurers) to "develop and implement credible transition plans that align with the 15C goal of the Paris Agreement" (as already noted above) – and so perhaps an onus on 'green' investments for pension funds as well – but the manifesto sets out no plan for how that is to be achieved.

Outside of the Triple Lock, the manifesto does commit to implementing the Select Committee's 2021 recommendation to return the 'Investment Reserve Fund' back to the members of the Mineworker's Pension Scheme.  However, the manifesto is silent on whether it plans on compensating the WASPI Women following the UK Parliamentary and Health Service Ombudsman's landmark decision earlier this year calling for compensation for women affected by changes to state pension age.  It is also silent on the taxation of pensions including the lifetime allowance where Labour appear to have backed away from re-implementing the lifetime allowance.

The manifesto makes no suggestion of a fundamental shake-up of the pensions industry – whether tax or otherwise – the onus is on pension fund investments to stimulate growth and potentially assist in meeting 'green' targets – but a lot will depend on the review Labour intend to undertake and there is no timescale for that.

Labour's manifesto pledges are certainly diluted compared to some of the specific published commitments for the pension sector earlier this year; the manifesto is silent on Auto-Enrolment (albeit there may be a knock-on impact dependent on what Labour does more broadly with workers rights), the lifetime allowance, the pensions dashboard (with connection due in 2027) and the Mansion House reforms (save for endorsing investment in UK industries).  The fact the manifesto does not propose radical change is likely to be welcomed by the pension industry which has seen in the last 10 years the pension freedoms, changes to the tax system and the Pension Schemes Act 2021, coupled with large-scale corporate failures impacting pensions – Carillion and BHS.  If pensions take a "back burner" whilst Labour focuses elsewhere that might not be a bad thing.

Directors and Officers 

The Labour Government will no doubt try to change the current upwards trend in corporate insolvencies and director disqualifications with its promise to "kickstart economic growth". The Insolvency Service's recently published statistics identified high levels of corporate insolvencies for construction companies in particular so directors of these types of companies may welcome Labour's promise to "reform our planning rules" to build more "railways, roads, labs and 1.5 million homes".

We also expect that the new government may be influenced by public opinion regarding "corporate scandals" with the ongoing investigation into the workings at the Post Office and the recent successful wrongful trading claim against the former directors of BHS. This may lead to greater scrutiny of D&Os decision-making processes resulting in more onerous requirements than currently set out in the FRC's Corporate Governance Code Guidance. Labour has previously supported the FCA's plans to ‘name and shame’ those firms that are under investigation by the regulator at an early stage. Again, this may be an indication that D&Os will face increased regulatory scrutiny.

Labour's manifesto indicated that it wants to invest in green energy and to "invest in the industries for the future". A potentially more environmentally conscious Government may result in legislative changes that bring into focus D&Os' ESG considerations at board level. However, absent a fundamental change to the Companies Act it seems likely that derivative actions against D&Os for allegedly failing to adopt environmental policies will face the same hurdles as ClientEarth came up against in their unsuccessful claim against Shell.

The Labour manifesto also identified that it wanted to "grasp the opportunities of new technologies, with an AI sector plan…" D&Os will need to ensure that they carefully monitor the reliance they place on AI and technology for decision-making processes. D&Os also need to be mindful of falling into the trap of potential "AI-washing" type claims if they are seen to be overselling their company's technology credentials.

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