The High Court has emphatically dismissed a claim by Keymed (Medical and Industrial Equipment) Limited (Keymed) against two of its former directors (Keymed (Medical and Industrial Equipment) Ltd v Hillman and another  EWHC 485 (Ch) (the Judgment)).
Keymed had alleged that the directors had acted in breach of their duties as company directors and as trustees of two of its pension schemes. The Court rejected all the allegations made against them.
Aspects of the case were fact-specific and involved issues of company rather than pensions law. However, the Judgment is likely to be of considerable interest in the pensions industry. Until now, there had been no case which considered head-on whether a trustee of a pension scheme owes a fiduciary duty to the employer sponsoring that scheme.
Keymed had argued that, because the trustee of a pension scheme might in certain circumstances be obliged to consider the employer's interests, it followed that the trustee owed a duty to the employer. Moreover, the company argued that, if the proper purpose of the scheme involved the trustee taking into account an employer's interests, then it followed that the trustee owed a duty to the employer to take its interests into account.
The Court's emphatic finding that a pension scheme trustee owes no fiduciary duty to the scheme's sponsor employer will be of considerable interest in the pensions industry, as will what the judge said about the extent to which it is permissible for a trustee to take into account the employer's interests in considering whether and how to exercise its powers.
What was the background to the case?
Keymed is part of the Olympus Group. The defendants were directors of Keymed, as well as trustees of two of its pension schemes. Keymed alleged that the directors had preferred their own interests over those of the company by, in broad terms:
- establishing a separate executive pension scheme for themselves;
- amending the scheme's rules to remove (i) tax restrictions and (ii) a provision reducing benefits for young spouses; and
- adopting conservative investment and funding strategies.
What were the issues identified by the judge?
The judge had to decide whether:
- the directors had exercised their powers as trustees for an improper purpose by removing the tax restrictions without in good faith taking into account Keymed's interests (the Tax Issue);
- when amending the scheme's rules dealing with the payment of spouses' benefits, the directors had exercised the scheme's amendment power for an improper purpose and without regard to their duty as directors of the company to promote its success (the Spouses' Benefits Issue);
- the directors had acted in breach of duty by adopting conservative investment and funding strategies for the scheme (the Investment Issue); and
- the directors had breached their duties to report misconduct in relation to the scheme (the Reporting Issue).
What findings did the Court make in respect of these issues?
The PIP Issue
The Court found that the directors had properly declared their interests to Keymed's board. There was no evidence of any dishonesty or improper conduct. The new scheme had been created to reduce the risk of PPF limits negatively impacting the old scheme's members and not for the directors' personal advantage.
The Spouses' Benefits Issue
The Court decided that scheme's amendment power had not been exercised for an improper purpose. The relevant deed had been executed by Keymed with full knowledge and understanding of its effects, and aware that the directors would be potentially entitled to an enhancement of their existing benefits under the scheme.
The Investment Issue
The Court found that the investment and funding strategy which had been adopted was not outside the range of strategies that could reasonably be adopted. The adoption of a conservative investment and funding strategy and Keymed's payment of additional contributions into the scheme when it was cash rich did not impose undue strain on the company given its long term funding obligations (indeed, it might be in its interests).
Moreover, those strategies had been acquiesced in, if not endorsed, by Keymed itself, as demonstrated by the fact the strategy continued after the directors had left the company. Professional advisers involved at the time had also been comfortable with the strategy.
The Reporting Issue
As there had been no misconduct, no duty to report ever arose.
What did the Judge say about a trustee's duties to the scheme's employer?
Probably the most significant aspect of the Judgment is the conclusion that just because a trustee is entitled to take account of the employer's interests in seeking to fulfil the purpose of the scheme, should it consider it appropriate to do so, did not mean the trustee owes a fiduciary duty to the employer. Indeed, such a duty would (the Judge said) be "profoundly undesirable", as it would strike at the heart of the principle that no fiduciary should serve two masters.
Drawing upon what the Court has said in Re Merchant Navy Ratings Pension Fund; Merchant Navy Ratings Pension Trustees Ltd v Stena Line Ltd ( EWHC 448 (Ch) (MNRPF)), the judge stated that:
- Asplin J in MNRPF decided that, provided it promotes the purpose of the pension scheme and does not seek to subordinate that purpose to other interests, the trustee may take into account the employer's interests.
- Having regard to the interests of the employer should not be allowed to override the trustee' duties to other beneficiaries. If the employer's interests conflict with those of the scheme's beneficiaries, then the employer's interests must be subordinated to those other interests. In fact, the judge found that in most cases there would be no conflict between the interests of the employer and those of the members concerning the funding of the scheme.
- Even when it is appropriate for the trustee to take into account the employer's interests, the trustee does not have to give them overriding regard. Even where a particular decision would be neutral for members, a trustee only needs to give effect to the employer's interests if the trustee considers it appropriate to do so.
Conflicts of interest can usually be managed. Whilst there might be a potential conflict of interest where individuals sit on the boards of both a scheme's employer and trustee, it may be possible depending on the facts of the case to handle such a conflict.
What does this mean for trustees?
There has long been a school of thought that an employer is a beneficiary under a pension scheme if it is entitled to any surplus which remains once benefits have been paid out. That question is not explicitly addressed in Keymed and there are suggestions in the Judgment that the judge did not consider that an employer is a scheme beneficiary.
However, the Judgment is clear that a pension scheme trustee does not owe the employer a fiduciary duty when the trustee is considering whether and how to exercise its powers. This is likely to give trustees comfort.
Although the judge stated clearly that trustees may take the interests of employers into account, the Judgment does not consider whether, in certain circumstances, trustees might be obliged to take into account those interests. In a footnote he simply noted that so such "special circumstances" were pleaded.
In that context, it is important to remember that, in considering whether and how to exercise its powers, trustees are under a duty to take into account all relevant factors (as well as exclude from their considerations irrelevant factors). Accordingly, it will still be open to employers to call into question trustees' decisions by alleging that the trustees failed to take sufficient account of their interests in reaching those decisions providing they could show that such interests were relevant to the trustees' decision.
Trustees will note the Court's decision that they should not allow employers' interests to outweigh those of members and other scheme beneficiaries. However, in the context of potential complaints from members, trustees will be reassured by the judge's conclusion that it would not be improper for the trustee to take into account the employer's interests even if the protection of those interests is a matter of indifference to the scheme's beneficiaries.
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