High Court rejects maladministration claims against pension scheme directors

The members – academics Lawrence McGaughey and Neil Davies – had applied to bring a ‘derivative action’ against current and former directors of the Universities Superannuation Scheme (USS), as well as the scheme itself. The USS is the largest private pension scheme in the UK, and holds around £1 billion of investments in fossil fuels.

McGaughey and Davies had brought four claims relating to various aspects of the fund’s administration, one of which, claim four, alleged breach of duties imposed on directors by the 2006 Companies Act (CA 2006). In this type of action against directors, the proper claimant is the company, on the basis that the harm done as a result of the alleged breach of duty has been suffered by the company. However, because the directors are unlikely to commence an action by the company against themselves, the CA allows a ‘derivative’ action to be brought by shareholders on behalf of the company. Permission must be granted by the court to proceed, in order to stop speculative or vexatious claims being brought by shareholders.

However, Mr Justice Leech dismissed the academics’ application for permission to continue all four of their claims, meaning that they cannot now proceed.

Corporate litigation expert Chris Dryland of Pinsent Masons, who specialises in climate change litigation, said: “The climate litigation landscape is developing, and organisations are turning to the duties under the Companies Act to put pressure on directors. In March, ClientEarth announced that it was ‘taking legal action against Shell's board for mismanaging climate risk’, indicating that it would be bringing a derivative claim under section 172 CA 2006 – under which a director must promote the success of the company for the benefit of the members as a whole – and s174, under which a director must exercise reasonable care, skill and diligence when carrying out their functions as a director”.

“Each case will be decided on its own merits, and the fact that in this claim the court refused to grant permission for the claims to proceed doesn’t mean that similar claims will not be successful in the future,” he said.

CA 2006 sets out the general duties which a director owes to a company. Under s171 there is a duty on a director to act within their powers – to act in accordance with the company's constitution, and only exercise powers for the purposes for which they are conferred. S172 CA 2006 creates a duty on a director to promote the success of the company for the benefit of the members as a whole. It also sets out various matters which directors must have regard to when promoting the success of the company, including “the impact of the company's operations on the community and the environment”.

In the fourth of their claims, McGaughey and Davies alleged breaches of s171 and s172 by current and former USS directors. Referring to the USS’ stated ambition to become net zero for carbon by 2050 in light of the scheme’s view of climate change as a financial risk to the returns generated by its assets, they said that the directors had failed to form any or any adequate plan as to how to address that financial risk. At the same time, the scheme’s continued investment in fossil fuels without any or any adequate plan for divestment constituted a breach of the directors' duties under sections 171 and 172 CA 2006.

The academics also claimed that the long-term interests of the scheme could only be met by an immediate plan for disinvestment and the only rational action that the directors could take in line with their s171 and s172 duties was to devise and implement such a plan as soon as possible. Failure to do so was a breach of their statutory or fiduciary duties, they said.

Climate change litigation expert Michael Fenn said: “In relation to claim four the judge found that the claimants had not satisfied that there was a prima facie case that the USS had 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 they had, the claimants hadn’t suggested that this then reflected financial losses which they themselves have suffered. Without this causal connection between the investment in fossil fuels and any changes to their benefits the claimants did not have a sufficient interest or standing to continue claim four”.

“This is the first action that has been brought under sections 171 and 172 CA 2006 in relation to climate change in the UK but follows a trend of claims against pension funds first started in Australia where a claim was brought for failure to disclose and address climate change risks which affected a member’s investment. Because pension funds have a clear investment strategy, and pressure can be put on them by members to divest their investments in fossil fuel companies, they are inevitably a prime target for environment-based breach of duty claims,” he said.

Pensions disputes expert Ben Fairhead of Pinsent Masons said that, beyond its interest as an example of the growing trend in climate change litigation, the case would be of wider interest to the pensions sector, given the “novel” approach taken by the members to mounting a legal challenge against the trustee for maladministration. While the claim was brought by McGaughey and Davies only, the academics claimed to have “wide support” from scheme members, and had crowdfunded their legal fees.

“The door was left slightly ajar for future claims like this given the judge accepted that an alternative breach of trust claim would have been difficult to pursue in relation to some of the claims – although not, as it happens, claim four,” Fairhead said. “Still, the evidential threshold would be very high, requiring a dishonest or deliberate breach of duty or an improper personal benefit. Cases like that are likely to be few in number and would potentially give rise to intervention by The Pensions Regulator.”

“There remain obstacles in getting class actions by members of pension schemes properly off the ground. However, looking ahead, with the advent of crowdfunding, and with better scope now for coordination between members via social media, we are likely to see increasingly creative attempts to work around procedural restrictions. This will be especially so when an issue affecting a particular scheme – like the choice of investments – gains enough interest and traction amongst the membership,” he said.