Court dismisses claims against trustee directors of the USS

Following a preliminary hearing in the High Court, Mr Justice Leech has refused two members of the Universities Superannuation Scheme (USS) permission to pursue four so-called 'derivative claims' against the trustee directors of the USS. Subject to the outcome of any appeal, this decision will come as a relief to trustee directors as it limits the scope for pension scheme members to bring a claim on behalf of a trustee company against the trustee directors themselves. Although, significantly, it does not entirely rule this out.

Background

The Claimants are both University lecturers and active members of the USS. They are seeking to bring four claims against the current directors and some former directors of the corporate trustee of the USS, USS Limited (the Company), and the CEO of USS Limited, Bill Galvin (on the basis that, they allege, he is a shadow director of the Company).

The Company is a company limited by guarantee. As such, it has no shareholders and the Articles provide that a person appointed as a director automatically becomes a member. The Articles provide that the Company was established to undertake and discharge the office of trustee for the benefit of university teachers or other staff of comparable status of universities and similar establishments.

The claims

In short, the claimants contend that:

1. the current and former directors of the Company breached their statutory duties under the Companies Act 2006 and/or fiduciary duties in relation to the valuation of the scheme’s assets as part of the scheme's 2020 actuarial valuation. As a result, the Company has suffered and will continue to suffer loss;
2. the change in benefit and contribution structure proposed by the current and former directors on the back of the 2020 valuation amounts to discrimination on grounds of sex and/or age and/or race and has, therefore, exposed or will expose the Company to claims for discrimination such as to amount to a breach of the statutory and/or fiduciary duties of the directors;
3. in breach of statutory and/or fiduciary duty and/or negligently, the current and former directors have overseen dramatic increases in the scheme's internal and external asset manager costs and in its total operating costs; and
4. the failure of the current and former directors to create a credible plan for disinvestment from fossil fuel investments has prejudiced and will continue to prejudice the success of the Company.

These claims arose out of the Company's decision to prepare a statutory actuarial valuation in 2020, something it was not legally required to do having previously prepared a statutory valuation in 2018. However, the Company chose to do this as it had committed to doing so as part of the 2018 valuation process.

The effective date of the 2020 valuation was shortly after the UK entered its first lockdown and during a period of significant volatility on financial markets. This had the effect of increasing the deficit in the scheme. Subsequently, the value of the scheme's assets had grown 32% in 16 months, namely from £66.5 billion in March 2020 to £87.8 billion in July 2021. The Claimants argued that the trustees had failed to take this into account when preparing the valuation and, in particular, when setting the discount rates to be used as part of the valuation methodology.

In their skeleton argument, the claimants asked the Court to draw the inference from the evidence:

“that the Directors wished to over-estimate the Scheme deficit in order to force the [Joint Negotiating Committee] to reduce rates of future accrual against the threat of marked contribution increases. No other explanation for the Directors’ conduct makes sense.”

In this preliminary hearing, the Claimants sought permission to continue their claims and an order that the Company indemnify them against liability for costs in relation to both this application and the claim itself.

Can a pension scheme member bring a derivative claim?

A derivative claim is a procedural device to avoid the injustice which would occur where a wrong is suffered for which no redress could be claimed by an affected party. The obvious example is where a company is controlled by the wrongdoer against whom a claim could be brought.

The judge was satisfied that there may be circumstances in which a member of a pension scheme would be entitled to bring a derivative claim against the directors of a corporate trustee. However, in order to be granted permission to bring such a claim, a claimant would need to satisfy the Court that:

• they have sufficient interest or standing to pursue the claims on a derivative basis on behalf of the company – to establish this a claimant must demonstrate both that the company has suffered a loss and that this loss is reflective of their own loss;
• the claim falls within one of the four exceptions to the common law rule that prevents shareholders from suing for a loss in the value of their shares brought about by a wrong done to the company – in the context of this case, this meant the claimants needed to show they had an arguable case that the defendants had committed a deliberate or dishonest breach of duty or that they had improperly benefitted themselves at the expense of the company (although the nature of that benefit need not be exclusively financial); and
• it is appropriate in all the circumstances to permit them to pursue the derivative claim.

Permission denied

Applying these tests to the four claims in this case, the judge refused to grant permission for the claimants to pursue any of their claims on several grounds, including:

• In relation to claim 1 (valuation failings) - the judge agreed with the Company's argument that this was not a multiple derivative claim because the Company had suffered no loss which is reflective of a loss suffered by the Claimants themselves. Although the Claimants may well be worse off as a result of the benefit changes and the contribution increases which the Company has introduced, the judge could not see how the Company itself has suffered a loss by carrying out the 2020 valuation, as this did not increase or reduce the Company’s assets or liabilities. Likewise, the effect of the decision to reduce future benefit accrual and increase contribution rates was to reduce its potential liabilities by approximately £750m per year (on the Company's evidence). The judge was also not persuaded that the directors had acted for an improper purpose or that they were pursuing their own ends or motivated by their own personal interests.
• In relation to claim 2 (discrimination) - the judge held that if individual members have claims for discrimination, it is "far better" that they should make them directly against the Company either individually or in group litigation rather than by means of a derivative claim. In addition, in this case, the liability of the Company to an individual member was not reflective of any loss suffered by the Claimants themselves or any of the other members of the Scheme.
• In relation to claim 3 (costs) - the judge was satisfied with the explanations given by the Company for the increase in the scheme's operating costs and that the policies and procedures that the Company has in place prevent the directors and Mr Galvin from being able to control the levels of their own fees or pay. The increase in the scheme's costs over the relevant period could also be justified when inflation and the significant increase in the value of assets under management were taken into account.
• In relation to claim 4 (fossil fuel investments) - the judge was not satisfied there was an arguable case the Company has suffered any immediate financial loss as a consequence of the directors’ alleged failure to adopt an adequate plan for long-term divestment of investment in fossil fuels. Even if the Claimants had been able to establish this, they had not shown that this was reflective of financial losses which they themselves have suffered. In particular, they did not establish that there was a causal connection between the investment in fossil fuels and the benefit changes. Consequently, the Claimants did not have a sufficient interest or standing to continue this claim.

Comment

Prior to this judgment being issued there was concern that this case had the potential to make it easier for members to 'pierce the corporate veil' and pursue claims against trustee directors in their personal capacity in relation to actions and decisions taken by a corporate trustee. Although the judge recognised that there may be circumstances in which pension scheme members may be permitted to do this by way of a derivative claim, they are likely to be limited.

Indeed, to pursue such a claim a member will need to show that they have an arguable claim that one or more trustee directors have committed a deliberate or dishonest breach of duty or that they have improperly benefitted themselves at the expense of the trustee company. This sets a high bar. Therefore, subject to the outcome of any appeal, trustee directors can breathe a sigh of relief as this judgment confirms that they continue to enjoy significant protection from personal liability.

If you would like to discuss the implications of this decision for your scheme or organisation, speak to your usual Herbert Smith Freehills’ adviser or contact the author:

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