UK: Negligence Actions Against Pension Fund Managers - Unilever Superannuation Fund v. Mercury Asset Management plc

Last Updated: 31 March 2002
Article by Christa Band
Negligence Actions Against Pension Fund Managers - Unilever Superannuation Fund v. Mercury Asset Management plc

Pension fund litigation does not usually grab the headlines, but it has certainly received significant attention in Unilever Superannuation Fund v. Mercury Asset Management plc. Perhaps unfortunately for the industry and its advisers, this case settled – during the trial in the High Court but before judgment. It had all the makings of a claim that would have given valuable guidance to those involved in fund management, and would either have given them comfort that professional negligence actions against them were going to continue to be rare, or would have sent everyone rushing to examine their client agreements to see what could be done to lower the risk of claims.

As it is, we are left to speculate what might have been. All claims of this nature are in large part dependent on their particular facts. Thus it would be wrong to deduce from the fact of settlement too strong a conclusion about the likelihood of liability in other cases.

The Unilever v. MAM litigation

Unilever claimed £130 million in damages on the basis that £1 billion of its pension fund assets had been negligently mismanaged. MAM started to manage the fund in 1987. A document was produced setting out the Investment Benchmark, Objectives and Guidelines which applied from the start of 1997 and which were to be included in a new Investment Management Agreement.

The benchmark was specific for this fund and set by reference to a number of factors. The Investment Management Agreement provided that MAM had to maintain the market exposure of the fund within permitted ranges. In normal circumstances, the return was expected to be no more than 3% below the benchmark in any period of four successive calendar quarters.

The Investment Management Agreement provided that in carrying out its duties under the Agreement, MAM should at all times comply with the terms of the Agreement, including the specific restrictions set out in the Investment Guidelines and Annexures. The Investment Objectives were to achieve a return on the fund in accordance with the Investment Guidelines (which were set out in an annexure to the Agreement).

The Investment Management Agreement also provided that MAM should exercise the highest standards of care and expertise in carrying out its duties and fulfilling its obligations under the Agreement. This, it was said, included the obligation to use the highest standards of care in managing the assets with the object of both achieving the target return and not breaching the downside tolerance.

It is important to note that it was not alleged that MAM guaranteed that the downside tolerance would not be exceeded. MAM only had an obligation to use care and skill in relation to the downside tolerance as well as the target return. Whether there was debate over "highest standards" as referred to in the Investment Management Agreement and the more usual standard of "reasonable care and skill" is not apparent from the public information on the case.

The fund performed in fact, over the period specified, at about 8% - 10% below benchmark, against the background of the target being 1% above benchmark and the downside tolerance being 3% below.

Unilever asserted that the real reason that the fund had under-performed was because of the management of the UK equities element. MAM, it was said, failed to take account of the risk of under-performance of the fund and failed to contain that risk. There was a disproportionate exposure of the fund to certain sectors and a corresponding under-representation in others. Moreover, MAM had concentrated the overall UK equities holding into too few stocks.

The fact that the fund had performed badly did not automatically mean that MAM had been negligent. Once Unilever had conceded that MAM had not guaranteed or underwritten the fund’s performance, it had still to show that MAM had failed to use reasonable care and that it was as a result of that that the benchmarks had not been met. In this, Unilever relied on a comparison with the performance of other specialist managers and funds.

The damages sought represented the difference between the return achieved by MAM and that which Unilever claimed would have been achieved had the fund been managed in a reasonably careful manner. This clearly involves a degree of speculation, as do most damage calculation exercises. Here, however, Unilever would have been assisted by reference to the performance of other, comparable funds.

This is not helpful for a Defendant: there is readily available information on how other funds performed and thus there will be little scope for the discount which one would normally expect to apply for speculation in a calculation of damages on the basis of "had you done your work properly this is what would have been likely to happen …"

Unilever did not rely solely on the fund’s performance results in support of their claim that MAM were negligent. Another issue which received attention was that Carol Galley, the MAM client contact for the Unilever Trustees, had handed over day to day management of the fund to one of her more junior staff in 1993, but had only told Unilever that this had happened in 1995. This did not necessarily result in less careful management of the fund, but in presentational terms at least was clearly unhelpful to MAM.

More specifically, Unilever claimed that the level of risk to which the fund was exposed increased significantly once the more junior manager took over. MAM stood by their manager and said that his approach was fully consistent with house style.

Without sight of all the statements of case and evidence, it is not possible to give full details of the defence which MAM ran. However, certain themes are clear from the public comment on the case. MAM tried to assert that the client was fully aware of the style of management which applied and that the trustees never complained about the concentration of stocks. Moreover, in the period 1988 to 1995, Mercury claimed that this investment strategy allowed the Unilever fund to make an extra £126 million over the returns which would otherwise have been generated.

Further claims

Will other litigation follow? If the press are right then the answer is "yes". Whether such claims will succeed is, of course, a separate question.

Another unwelcome development for the fund management industry is that it has been reported that the Occupational Pensions Defence Union has developed an insurance product for trustees who take legal action against a third party, lose, and then are obliged to pay the Defendant’s costs. This makes the decision on the part of trustees as to whether or not to sue much easier, removing to the extent of the policy, the threat of having to meet costs orders from the fund if the claim does not succeed.

The legal basis of such claims

What follows considers liability in relation to discretionary clients. Non-discretionary clients are even less likely to be able to bring claims for a failure to meet benchmarks (again, except in circumstances where it would be possible to allege negligence in more general terms). In all cases, the critical question will be what the terms of the client agreement require.

There are essentially, four ways in which liability could arise for a failure to meet benchmarks set for the performance of a pension fund:

1 Breach of contract

2 Misrepresentation

3 Negligence

4 Statutory liability

Breach of contract: If it is a term of the contract that the benchmark will be met, then there will be liability for failure to meet it and it will be irrelevant why it was that the performance fell short of the benchmark. The question of whether a benchmark forms a term of the client agreement is not one which can be answered in the abstract: the terms of each client agreement have to be considered. In drafting client agreements, care needs to be taken to ensure that no undertakings are given that the performance objectives will be achieved. Appropriately worded exclusions of liability are often used (although liability for negligence or wilful default is not excluded).

Misrepresentation: An imaginative Claimant might claim that the statement of the benchmark applicable to the fund was a representation and if that benchmark was not met, a misrepresentation as to the fund’s performance. This seems far from easy to establish, and damages would be hard to calculate (being based on a tortious and not contractual basis).

Negligence: In any contractual relationship for the provision of professional services, it will be an implied term of the contract that the services provided for - management of the fund - will be rendered with reasonable skill, care and diligence. This could be framed as a claim in contract, or alternatively as a free-standing claim in negligence against the fund manager. The conduct would be measured by the standards which it would be reasonable to expect of a comparable and competent fund manager in all the circumstances of the case.

The client could not rely on a duty of care in negligence to extend the duties owed to him under the contract. Thus, a failure to meet the benchmark should not per se be determinative of whether that management had been negligent. However, the reasons why the performance fell short of benchmark would have to be explored. If the rest of the market achieved much better performance for comparable funds over the same time period, it may be that there is a basis for concluding that the management of the particular fund was negligent. A failure to meet benchmark - especially if this was by an appreciable margin - could well be taken as evidence of that. Effectively this seems to be what happened in the Unilever case.

Whilst a claim in negligence is a possible basis for liability, fund managers should take comfort from the fact that it only arises where it can be said that there has been a lapse from reasonable standards in the management of the fund.

Statutory liability: One potentially relevant statutory provision is section 35 of the Pensions Act 1995. Section 35 requires that the trustee of a trust scheme ensures that there is a written statement of investment principle which must cover, among other things, the expected return on investments.

The Pensions Act itself does not provide that the statement of investment principles and hence the benchmark must form a term of the contract between the trustees and the client and provides the client with no right to compensation for a failure to set - or meet – the benchmark.

Practical points

  • If a fund is producing disappointing returns, simply relying on the performance reports to the client will not be enough to avoid litigation. However, proper communication can certainly help to avoid claims.
  • Clearly the client has to know at all times who is managing the fund on a day to day basis.
  • It may be that benchmarks and performance targets are rendered inappropriate by the passage of time and changing market conditions. A manager should never assume that it will not be held to them. If an investment management agreement needs to be modified, the manager should take the lead in suggesting this, having, of course, carefully determined what parameters would be reasonable.
  • The manager should never assume that a new investment agreement simply reflects existing practice: it may not, but will still give the foundation for any claim against the manager.
  • The drafting of any investment management agreement requires very careful thought. In no circumstances should the manager find that it is effectively guaranteeing the fund’s performance by reference to benchmarks which it may well be unable to meet. That said, no manager is going to be able to oblige itself to offer a standard of performance which is less than "reasonably careful and skilful management, consistent with industry standards at the time."
  • If the benchmark is reasonable but the fund is not performing as it should, thought needs to be given at an early stage to why this is. It will be difficult for a manager to claim that it is acting reasonably if its systems do not allow it to identify the problem and gauge the best response.

© Herbert Smith 2002

The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.

For more information on this or other Herbert Smith publications, please email us.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.