Out-Law Analysis | 07 Dec 2022 | 11:21 am | 3 min. read
The possibility of US-style class actions hitting the UK pensions scene has long been talked about, but this phenomenon has yet to materialise.
Legal, market and social developments may yet change that. In the US, there is now a long line of successful class actions claiming breach of employer fiduciary duties in relation to so-called 401k plans. A 401k plan is broadly analogous to a workplace defined contribution scheme in the UK.
Employers have various fiduciary duties in relation to 401k plans that boil down to a handful of unsurprising and familiar principles: for example, a duty to exercise prudence in selecting investments; a continuing duty to monitor and remove imprudent trust investments; and a general requirement for care, skill, prudence and diligence.
In short, in the US, looking after other people’s money is, as here, something that must be taken very seriously. Claims have arisen from a variety of alleged breach of these fiduciary duties such as failure to monitor administration costs; poor recording keeping; delivery of sub-optimal investment; and permitting excessive member-borne fees. Most commonly, successful claims relate to alleged unduly expensive investment choices. This essentially comes down to the concept of value.
UK workplace pensions may well be different, but not so different as to rule out claims on similar grounds as have arisen in the US. Auto-enrolment and market consolidation are together creating DC workplace schemes of the scale of 401k plans under fire in the US. Before too long we will hit a point of no return where DC savings are the primary source of income in retirement.
From a member perspective, this is very different to the guaranteed, of sorts, pensions paid from DB schemes. Pensions are already highly litigious in the UK, and claims management companies are now looking at DC workplace pensions.
One important difference between US and UK disputes is the wider procedural landscape. It has traditionally been much easier to run a class action in the US where claims are almost always initiated on an opt-out basis, as opposed to an opt-in basis. This means that all prospective class members are treated as being part of the claim unless and until they opt out or leave. The opt-out rate for consumer class actions is very small though — usually less than 2 per cent of the class.
We do not have the same regime in this country save for competition claims. In the pensions arena therefore, claimants would need to opt in for a mass claim to take off. This means that it is harder to get off the ground, but there are possibilities. One possibility is through use of a formal procedure called a group litigation order, where claims have common or related issues of fact or law. Each claimant files a separate claim but decisions are generally binding on every claimant in the group. This procedure is not used very frequently, and it is unattractive for individual litigants given the need to pay an upfront court fee.
Courts may also adopt an approach of case-managing multiple cases together without making a formal group litigation order, but this has the same disadvantage for claimants of having to bring — and pay court fees for — individual claims. Alternatively, in some circumstances multiple joint claims can be pursued where parties instruct the same lawyers and issue one claim encompassing all of their claims. However, a recent judgment in a case where there was an attempt to join 3,500 individuals into one claim has cast doubt on how readily the court will accept multiple claims being dealt with together as a single claim.
Finally, pension members sometimes collaborate when pursuing similar complaints through the Pensions Ombudsman. There are examples of this where members have been victims of large-scale pension scams. These are existing possibilities — although, controversially, the UK claimant community is pushing for relaxation of the procedural rules, so we might see others open up in future.
Pensions Ombudsman complaints do not have to involve lawyers, so need not, in theory, require any funding as such. However, properly coordinated class actions (or pseudo class actions) are likely to be expensive. In this respect, the current legal regime in the UK makes it challenging for individual members of pension schemes to get class actions up and running. Inevitably, a court claim is going to need funding, and it needs someone to coordinate it. This is where claims management companies may step in if they sniff a decent return on their investment.
A case pursued this year by two individuals against the Universities Superannuation Scheme has shown the scope for crowdfunding, particularly in relation to issues that members feel strongly about, such as, say, climate risk and investments. The UK market therefore faces a combination of passionate members, enabled by social media and experiencing a cost-of-living crisis, and law firms or claims management companies on the prowl for work. This might just be enough to prompt US style class actions over this side of the pond.
A version of this article was first published in Pensions Expert.