KeyMed Limited vs Hillman and Woodford (High Court, March 2019)

The High Court has dismissed a case against directors who were trustees of a pension scheme where the company had claimed they had breached their fiduciary duties, maximising their own pension benefits to the company’s detriment.

Facts

KeyMed (Medical and Industrial Equipment) Ltd (“KeyMed”), part of the Olympus group, brought proceedings against two former directors (“the Defendants”), who had been trustees of KeyMed’s general pension scheme (“the Staff Scheme”) and of a separate scheme established for their benefit (“the Executive Scheme”).

KeyMed claimed that the Defendants, in breach of their duties to KeyMed individually, and in conspiracy with one another, caused their interests to be preferred over those of KeyMed in relation to their benefits under their pension arrangements.

The allegations focus on four particular decisions by the Defendants, relating to:

• the establishment of the Executive Scheme
• the alleged removal or disapplication of an Inland Revenue limit from the Executive Scheme, which effectively removed a potential fetter on increases to the Defendants’ pensions once in payment
• the amendment of spousal benefit provisions (reduction for a younger spouse) in the Executive Scheme
• the alleged adoption of unduly conservative funding and investment strategies (a strategy based entirely on investment in gilts and cash) in relation to the Executive Scheme and the Staff Scheme.

In the case of each of the allegations, it was argued that the Defendants had breached their duties as directors. Further, KeyMed also alleged that the Defendants owed duties to it as trustees of the Schemes, in relation to the setting of investment and funding strategies for the Schemes.

Judgment

Marcus Smith J found that the allegations against the Defendants all failed.

In relation to the allegations generally, the High Court found that that there was no dishonest breach of duty. The Defendants’ interests had been properly declared, and decisions had been properly taken. The establishment of the Executive Scheme, and changes to it, had been approved.

Trustees’ fiduciary duties

In particular, the High Court held that no fiduciary duty is owed by trustees to a sponsoring employer, giving the following reasons:

• the duty of a trustee to act in the beneficiaries’ best interests cannot be separated from the proper purpose of the trust itself (Asplin J in Merchant Navy: “to define the trustee’s obligation in terms of acting in the best interests of the beneficiaries is to do nothing more than formulate in different words a trustee’s obligation to promote the purpose for which the trust was created”). The judgment gives an example from the scheme rules: the trustees, after obtaining actuarial advice, determine the necessary employer contributions. The judge stated that it is clear that the trustees’ obligation is to ensure that employer contributions are at the level necessary to provide the benefits under the scheme. Employers’ interests may be relevant when considering this duty – as the trustees “would very likely be concerned not to prejudice the strength” of an employer’s covenant by imposing overstretching payment obligations. However, the trustees “would actually only be balancing different and competing interests of the Members of the Scheme”
• a divided trustee loyalty – owing duties to both the beneficiaries and employer – is “profoundly undesirable”. A fiduciary should serve only one master (North & South Trust Co v Berkley)
• when there is no clear or compelling reason to do so, the law will not create a conflict of interest fundamental to the manner in which the trustee of a scheme carries out his or her duties. Such conflicts may arise, but the law should certainly not go out of its way to create them
• trustees can declare conflicts of interest that arise. However, “it is difficult to see how a trustee could sensibly explain his divided duty to the other trustees and to the company: the trustee would be hamstrung between having to explain to each why the other was being done-down”.

Marcus Smith J did recognise that, provided the trustees have regard to their primary purpose, and do not subordinate it to other interests, they are entitled to have regard to the employer’s interests, even if the protecting of these interests is a matter of indifference to the beneficiaries of the scheme.

However, if the employer’s interests conflict with those of the beneficiaries, the employer’s interests should be subordinate to those of the beneficiaries of the trust. A decision to consider an employer’s interests (as may be proper for the trustees to do) does not create a fiduciary duty to the employer.

Funding and investment strategies

In relation to the funding and investment strategies, the Court found that they were both in KeyMed’s interests, and that KeyMed knew and approved of them. The Defendants had acted honestly and did not breach their duties, dishonestly, or at all.

Smith J noted that “conservative” investment and funding strategies “are generally in the best interests” of DB scheme members, and that employer’s interests may also favour a conservative approach (depending on their appetite for risk).

The investment approach was not inappropriate or “unduly” conservative, and lay inside the range of reasonable approaches that could have been adopted, and indeed, was continued after the Defendants left Olympus.

Comment

There has been little law in this area, but for now, the position following KeyMed is that, while it may be appropriate to consider scheme employers’ interests in some circumstances, trustees do not owe a fiduciary duty to employers.