The clarification came as part of a lengthy judgment by the High Court on claims of fraudulent conspiracy and breach of duty brought by KeyMed, a subsidiary of the Olympus Group, against two former directors of the company. Although the point only accounted for a small part of the judgment, it is an interesting one as there had not previously been any case law authority on whether a trustee of a pension scheme owes any fiduciary or equitable duty to a sponsoring employer.
Pensions litigation expert Ben Fairhead of Pinsent Masons, the law firm behind Out-Law.com, said: "It is interesting to see that the argument was run that the trustees owed a fiduciary duty to the employer sponsoring the pension scheme although it was actually one of a number of allegations pursued by KeyMed and ultimately seems to have been given fairly short shrift by the judge. This makes sense given the need to ensure loyalty of a trustee to the beneficiaries of the scheme – as the case makes clear, a fiduciary can only serve one master."
"The door is very much left open to considering other interests - such as those of an employer - provided the primary duty owed by a trustee to its beneficiaries is respected," he said.
The High Court rejected KeyMed's claim that two former directors, Paul Hillman and Michael Woodford, had conspired to increase their own pensions at KeyMed's expense. Hillman and Woodford were also the trustees of, as well as members of, the scheme; a situation which, although it created conflicts of both interest and duty, was described by the court as "not an uncommon situation in the pensions field".
Hillman and Woodford left the Olympus Group in acrimonious circumstances, after Woodford 'blew the whistle' on an accounting scandal at the Olympus Corporation shortly after being promoted to Olympus chief executive. Woodford later brought a claim of unfair dismissal on the grounds of racial discrimination and whistleblowing against the company, although this was settled out of court.
KeyMed's allegations against Hillman and Woodford centred on the decision, in 2005, to create a second pension scheme, the 'Executive Scheme', for the company's higher-ranking employees, which included both men. Their claims were based on breach of duties owed by Hillman and Woodford as directors of KeyMed; breach of duties owed by them as trustees of the 'staff' and 'executive' pension schemes to KeyMed as sponsoring employer; and conspiracy.
Among Hillman and Woodford's acts alleged to be in breach of duty and in furtherance of their conspiracy to enrich themselves at the expense of the company was the "extremely conservative" investment strategy that they adopted in relation to the Executive Scheme. KeyMed's case was that, as trustees of the scheme, Hillman and Woodford owed a fiduciary duty to KeyMed as sponsoring employer to maximise investment returns and therefore potentially reduce KeyMed's liability to make up any future benefit shortfall.
However, Mr Justice Smith quickly dismissed this line of argument. A fiduciary "should only serve one master", therefore a trustee can only owe fiduciary duties to the beneficiaries of the trust. Anything else would lead to "a conflict of interest fundamental to the manner in which the trustee of a scheme carries out his or her duties", he said.
The judge said that this did not prevent the trustees from "having regard" to the employer's interests, "provided the trustees have regard to their primary purpose, and do not subordinate it to other interests". "Of course, if the employer's interests conflict with those of the beneficiaries, the trustee's course is clear," he said.
Later in the judgment, the judge ruled that while the pension scheme funding and investment strategies were conservative, they were not "unduly" so and the trustees were not in breach of duty. In the judge's view, "the mere fact that a conservative investment and funding strategy is being followed in no way justified an inference or impropriety or breach of duty towards the scheme".
The judge also dismissed the claims against Hillman and Woodford based on breaches of their duties as directors of Keymed.
"The threshold is high to establish fraud in a case like this," said pensions litigation expert Ben Fairhead. "The case was found to be limited purely to allegations involving dishonesty, and the judge highlighted the need for good documentary records, particularly with events going back more than ten years - not unusual in a pensions context. In this case that appears to have disadvantaged the employer claimant."