In the recent case of KeyMed (Medical and Industrial Equipment) Ltd v Hillman and another, the High Court clarified that trustees owe no fiduciary duties to the sponsoring employer.
The claim was brought by KeyMed against two of its former directors, Mr Woodford and Mr Hillman, who were trustees of the company’s occupational staff scheme and of an executive scheme which had been established for their benefit. KeyMed alleged that they had abused their position as directors and dishonestly breached the fiduciary duties they owed to the company in their capacity as trustees of both schemes by conspiring to maximise their own pension entitlements contrary to KeyMed’s interests. The many allegations included a claim that the directors had ensured that the schemes followed unduly conservative funding and investment strategies which led to KeyMed paying larger pension contributions than it would have done if a less conservative funding strategy was adopted. KeyMed also alleged that the directors had acted to their own advantage in setting up the executive scheme in the first place, amending the survivor benefit rules for their benefit and disapplying an HMRC limit on increasing pensions in payment.
The High Court dismissed all of KeyMed’s claims, finding that the directors had acted honestly. The High Court ruled that trustees do not owe fiduciary duties to both the beneficiaries and the sponsoring employer. The primary duty of trustees is to promote the purpose for which the trust was created by acting in the best interests of the beneficiaries. Although the trustees may take the employer’s interests into account, this can only be done to the extent that those interests do not conflict with their primary duty. In the event of any conflict, the employer’s interests will therefore be subordinate to those of the beneficiaries. The High Court concluded that the directors’ decisions had been properly made, and that their personal interests had always been declared to KeyMed’s Board and to the executive scheme. The funding and investment strategies pursued by the schemes were entirely reasonable, and had even been endorsed by the company. In addition, the fact that the directors had operated the same strategy for both schemes was inconsistent with the existence of a conspiracy.
Whilst the High Court stressed in its judgment that it would be profoundly undesirable to subject trustees to divided loyalty, in accordance with Merchant Navy Ratings, the judgment made it clear that Trustees ‘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’, yet this entitlement does not amount to a fiduciary duty. This ruling provides clarity for Trustees and will offer guidance for how they should make their decisions in circumstances such as when a member raises a complaint. I should note in a footnote of the High Court’s judgment it was stated that a duty to the employer may arise under ‘special circumstances’, although what constitutes ‘special circumstances’ was not made clear.
Whilst this judgment provides clarity for trustees which will help them in reviewing their behaviours and investment strategies, trustees should be careful not to adversely affect a sponsoring employer severely as this would not be in the members’ interests. By way of example the High Court looked at a common scheme rule which ensured the employer’s contributions to the pension scheme were at a level necessary to provide the benefits under the scheme to the members. However, the High Court said in such circumstances the trustees are actually only balancing different and competing interests of the members of the scheme. The trustees can seek high contributions now, risking the employer’s solvency or the trustees can seek lower contributions which may lead to a deficiency in the scheme, neither outcome are in the members’ interests.
In a statement issued after the publication of the High Court ruling a spokeswoman for KeyMed stated they ‘are disappointed by the outcome of the proceedings and are considering the legal options available’, however as the 21 day deadline to appeal has passed, it appears this judgment has brought an end to the KeyMed saga.