In 2009, the Royal Bank of Scotland admitted that it had incurred billions of dollars in losses in relation to its subprime exposures and acquisition of Dutch bank ABN Amro.
This disclosure was secured through a lawsuit brought by institutional investors, which alleged that the prospectus linked to a £12bn rights offering by RBS in 2008 contained “numerous material misrepresentations and omissions”. The investors achieved a £800m settlement.
Pension schemes have a track record in using their shareholder rights on a collective basis to bring about change. Shareholder activism is a case study in which otherwise reticent schemes collaborate to improve their chances of success, while reducing cost along the way.
If there is a way for them to access that redress they should try to do so
Andy Aganthangelou, Transparency Task Force
The resources required to undertake litigation may be daunting for some trustees. But they can expect to be held to account by members in the future over a failure to explore this potentially lucrative option, experts say.
Publicity is helping schemes to engage
Other legal victories secured by institutional investors include a pending €1.4bn (£1.2bn) settlement from Belgian financial services company Fortis, now known as Ageas.
Allegations against Fortis included the circulation of misleading information about its solvency.
Simon Cullingworth, director of litigation analytics at consultancy Punter Southall Analytics, acknowledged that “in the financial services industry, the claims are now becoming much more publicised”.
He said many schemes remain unaware of their collective legal clout, and called for “a menu of options that pension funds can look at, to make the decision” over whether to engage in a class-action lawsuit.
While litigation may seem expensive, schemes have the option of support from litigation funders, who provide financial assistance to would-be litigants that might otherwise be priced out of a lawsuit.
“If the trustees at my pension scheme were not looking at this sort of stuff, I suppose I’d be quite concerned,” said Cullingworth.
Trustees could soon be expected to litigate
Andy Agathangelou, founder of campaign group the Transparency Task Force, questioned why schemes would not take action against investee companies suspected of wrongdoing.
“First and foremost, the opportunity is to collect redress that the pension scheme is legally entitled to. Depending on the size of the scheme that could be a considerable amount of money,” he said.
“It’s an absolute no brainer, as far as I can see, that if there is a way for them to access that redress they should try to do so,” he added.
What is a litigation funder?
Trustees with qualms over the cost of pursuing legal action should consider involving a litigation funder. These are third parties who offer to provide full or partial financial support for legal costs. If the case is won, the litigation funder receives a share of the proceeds from the lawsuit.
The regulator’s 21st Century Trusteeship initiative, which aspires to improve governance standards at occupational schemes, illustrates the UK’s growing scrutiny over trustees.
“The simple reality is that in years to come pension scheme members, particularly in DC schemes, who become disappointed with their outcomes may look around at who to blame,” Agathangelou said. “It would be quite logical for them to think to themselves, ‘Did the trustees of my pension scheme do as well as they could... were the fees more expensive than they should have been? Were they failing to get redress?’”
Schemes need to club together
David Weeks, co-chair of the Association of Member Nominated Trustees, recognised a reluctance among trustees to consider litigation.
He said schemes need a clearer picture of the downsides of carrying out a class-action lawsuit, particularly in the event of failure.
“I think the big worry is that you’re sort of stepping onto an escalator, and you don’t know how far the escalator’s going up, and you don’t know what the price tag’s going to be,” he said.
This reticence from trustees is not limited to formal litigation. Catherine Howarth, chief executive at responsible investment campaign group ShareAction, said boards are “still really quite shy” when it comes to shareholder activism.
Collaboration is helpful, according to Howarth, but schemes require personnel who specialise in activism to ensure managers are defending their interests.
Trustees with fid man less likely to check quality of service
Trustees employing fiduciary managers are less engaged in assessing the quality of their provider than those with a traditional investment consultancy relationship, the latest report from the Competition and Markets Authority has found.
“Very few pension funds employ someone to really make sure that their asset managers are on the ball about this,” she said.
Weeks agreed that schemes stand a greater chance of legal success with pooled resources.
He encouraged greater trustee attention towards class-action lawsuits. “Maybe it’s an idea whose time has come,” he said.
