To litigate or not to litigate? That, for trustees, is the question

Trustees should not shy away from litigating to protect scheme interests says DWF litigation lawyer Samantha Hulme. In fact they could be in breach of the obligations if they don’t

A recent Financial Times article entitled “Pensions fail to cash in on damages of $18 billion” discussed instances where pensions funds trustees could have, but chose not to, participate in class actions taking place in the US. While the article addressed the issue in America, the discussion is just as relevant for UK trustees. So when should trustees take legal action?

In the FT piece, author Maddison Marriage suggested the reasons for the lack of actions pursued were three-fold – pension fund trustees are not aware of relevant actions, there is often fear at the potential reputational damage that could arise from pursuing a case and trustees often believe the administration involved in pursuing a claim is too expensive.

While it is understandable that costs will be a large factor for trustees to consider, if the prospect of legal action is ruled out as cost prohibitive without due consideration, this could put trustees in breach of their fiduciary duties.

The most fundamental duty of a trustee is to act in accordance with the trust deed and rules. In addition, a trustee is required to act prudently, honestly and responsibly – which means in a way that an ordinary prudent person of business would act in managing their own affairs. A key example of this is, when deciding to exercise a power, trustees must consider the circumstances impartially and must take account of all relevant facts, seeking professional advice where necessary.

Trustees must always act in the best interests of their beneficiaries –  those who are already entitled or may receive a benefit from the scheme, now or in the future. In doing so, the trustee must act impartially between all classes of beneficiary covered by the trust deed and rules, as well as between individual beneficiaries and the beneficiaries as a whole.

Applying this means that in some circumstances, trustees must take action to secure trust property and failure to recover sums due could, dependent upon the circumstances, mean the trustees have breached their duties.

Where a matter is straightforward and it is clear that the financial costs of seeking to recover sums due to the fund will be outweighed by the recovery of those sums, trustees will find it very difficult to argue that they have not breached their duties if they have taken no action at all.

If the matter is more complicated and the cost/benefit analysis is not clear, trustees need to be very careful. Simply dismissing the chance to take legal action on the assumption that it will be too costly is very dangerous. It will almost certainly constitute a breach of trust unless a trustee can show that they, for example, have sought legal advice and have been told that prospects of success are low and the costs will be very high. This may be the case, for instance, if it is a very complex matter of law at issue or if the case is difficult from an evidentiary perspective.

Seeking advice does not absolve the trustee of the need to make a reasoned decision on the matter but a recommendation from a professional will provide evidence to support their position, indicating that they have paid due consideration to the matter and demonstrating that they have acted in accordance with their duties and powers. Bearing this in mind, trustees need to think carefully and, as ever, document and record their deliberations as to the relevant costs and benefits of pursuing legal action.

It is important to always remember that there is no “one size fits all” approach – what may be correct for one pension fund will not necessarily be so for another. Trustees should therefore make use of their professional advisers on matters such as these to avoid a breach of duty arising from a dismissal of taking legal action based solely on a fear of costs.