Cowan v Scargill (High Court) – 13 April 1984

This case is an important pensions case. It concerned a dispute over the investment of the assets of the Mineworkers’ Pension Scheme (the Scheme). As well as guidelines on the duties of trustees when investing assets, the case is useful for information on general trustee duties and conflicts on interest.

Background

Arthur Scargill, the leader of the National Union of Mineworkers (NUM), joined the Scheme’s trustee board in 1982. Following his appointment, he and the other union trustees declared that, because of a conflict with a policy decision of the NUM, they would not support:

• any overseas investments; or
• any investments which directly competed with coal (such as oil and gas).

The trustees received legal advice that the suitability of investments was to be judged almost exclusively by reference to financial criteria rather than their acceptability for political or moral reasons. But Scargill re-iterated his “total opposition” to the overseas/competing investments, even if a better financial result could be obtained from such investments, because the NUM voted unanimously for this policy.

As the Scheme had five union trustees and five employer trustees, this resulted in deadlock (whilst the chairman was an employer appointed trustee, he had no casting vote). Therefore, the case was bought to resolve this issue – with Cowan chosen to represent the employer trustees and Scargill, the union trustees.

Trustees’ investment duty

Megarry V-C considered the trustees investment duty in detail in this case. He set out the now classic formulation of the trustees’ investment duty as:

“The starting point is the duty of trustees to exercise their powers in the best interests of the present and future beneficiaries of the trust… When the purpose of the trust is to provide financial benefits for the beneficiaries, as is usually the case, the best interests of the beneficiaries are normally their best financial interests.”

Additional points:

• Second, in considering what investments to make trustees must put on one side their own personal interests and views. Trustees may even have to act dishonourably though not illegally – for example, this may include a duty to gazump (see also Buttle v Saunders, 1950).
• Third, the caveat to these two points is that if, for example, all the beneficiaries of the trust are all adults with strict views on moral issues then it might not be to the “benefit” of those beneficiaries to invest in something inimical to those views. But this is unlikely to apply in pensions.
• Fourth, the standard of care required of a trustee is that he “must take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide” (Re Whiteley, 1886). This duty includes the duty to seek advice on matters the trustee does not understand – this is now also a statutory requirement under the Pensions Act 1995, section 36.
• Fifth, the trustees have a duty to consider diversification of investments – already enshrined in legislation at the time of the case (Trustee Act 1961, section 6).
• Finally, these investment rules apply to pension trusts as much as to private trusts. In particular, the large size of pension funds “emphasises the need for diversification, rather than lessening it”.

Decision

The proposed restrictions on investment did not meet the trustees’ investment duties. As the court has authority to resolve the deadlock in the trustee board, Megarry V-C declared that the restriction proposed should not be implemented.

Comment

Cowan v Scargill established pension trustees’ duty to act in the best financial interests of their scheme’s beneficiaries.  It also stated that pension scheme trustees should largely put aside their own moral and ethical principles when investing pension scheme assets.   While that remains the case, it is now clear that ESG principles may impact a company’s long-term sustainability and, if relevant, should therefore be taken into account by trustees as a financial factor when they make investment decisions.

Further discussion on ESG and trustee duties can be seen within our guide Where next for ESG?