Outcome of High Court case could have big implications for pensions industry

The law governing pension trustees revolves around the principle that they must act at all times in the best interests of the scheme and all of its members. Over the last three weeks, the High Court has been hearing a case that is likely to shed a lot more light on what this means and which will have implications for the pensions industry as a whole.

A group of 100 members of the defined benefit scheme operated by Shannon-based multinational Element Six, sued its trustees for breach of duty arising out of the group’s decision to close its pension scheme in 2011.

In common with many such funds, the Element Six plan ran into trouble over the last decade. In 2008, the company agreed to tackle the deficit by making an annual contribution of €10.75 million from 2009 to 2020.

However, by late 2011, it appeared that such a sum would no longer be adequate and the group told the trustees that it wanted to wind up the scheme altogether. It offered a final payment of €23.1 million for the defined benefit fund.

Alongside that it pledged a further €14 million, some of which would be used to top up low-paid pensioners, while €8 million would go into a defined contribution fund for the benefit of those members of the original scheme who were still working for the group.

Unexpected hardship
From the trustees' perspective, the alternative was to demand formally that the company fully fund the scheme's deficit – a figure ranging anywhere from €129 million to €240 million, depending on what measure was used.

However, the group’s Luxembourg-based parent warned that, if they did this, it would put the entire Irish business into liquidation.

In a vote on the company offer in November 2011, the six trustees were evenly split. Their chairman, Danny Coady, resolved this by using his casting vote in favour of the company's proposal.

As a result, benefits from the plan were severely cut, imposing unexpected hardship on a large number of people, more than 100 of whom sued the trustees for breach of duty.

Much of the case hinged on the trustees’ failure to make the contribution demand. The plaintiffs argue that they did not do this because they were conflicted.

This applied particularly to the company appointees, Coady, Siobhan Duffy, and Dermot Tuite. All held senior management roles in the organisation, while the latter two were also directors of various group entities.

They faced the loss of their jobs if the Irish business were liquidated. As they were ongoing employees, they stood to benefit from the money that the company offered to pay into the defined contribution fund.

On top of this, Coady and Tuite owed duties to both the pension scheme on the one hand, and to a number of Element Six companies of which they were directors on the other.

The plaintiffs' lawyers also point out that as a director of Element Six Abrasives Treasury Ltd, Coady voted in favour of paying a $19 million dividend to its parent Shannon Diamond Holdings, where both he and Tuite sat on the board in 2010.

They did this, the plaintiffs argued, at a time when the pension scheme had a deficit of more than €100 million.

Clashing interests
When the crisis struck the following year and an accountant's report questioned whether the company should have made that payment, they failed to disclose their involvement to the other trustees or their advisers.

The plaintiffs maintained that the only way of dealing with these clashing interests was to go to the High Court for direction on how the trustees should deal with them.

Both men argued that they acted honestly at all times while all trustees were adamant that they were only motivated by what they believed to be members’ best interests.

They explained that, as the company was no longer prepared to support the scheme, they had few realistic options.

The plaintiffs' expert, Vernon Holgate, disagreed. He said the conflict prevented them from making the contribution demand, considerably weakening their bargaining position, to the detriment of members' interests.

However, defence witness Alan Broxson, of the Irish Pensions Trust, told the court that while an independent person might have taken a different approach, they would probably have reached the same decision.

He indicated that a certain amount of conflict is inevitable where you have trustees appointed by a company or from within the workforce.

The way to deal with that, is for them to wear “their trustee hats” when they are making key decisions and put other considerations aside.

Broxson said he believes that the Element Six trustees got the best deal that they could have reasonably thought was available, irrespective of what hindsight might indicate.

A key reason for their agreeing to the company’s offer was the uncertainty surrounding what would have happened had the group placed its Irish businesses in liquidation.

While there was debate about the sincerity of the closure threat, it still posed the question as to what that would have meant for the pension scheme.

That question was central because there was evidence that the scheme would have fared better in a liquidation.

However, the trustees said the variables involved were such that it was not in the members’ best interests to go this route and it was preferable to accept a firm offer.

The issue boiled down to whether or not the scheme would have ranked as a preferential creditor, entitling it to be paid ahead of unsecured creditors, but after those whose debts were secured.

If so, what would it have recovered, particularly if the parent company was not prepared to support the liquidation and cover its Irish subsidiaries’ liabilities?

The trustees argued that it might not have qualified as a preferential claim, or that, at best, only the €10.75 million due at the end of 2011 under the funding proposal would be treated in this way.

Preferential debt
Any remaining shortfall would be unsecured, leaving little chance that it would be recovered.

However, insolvency specialist Jim Luby, of McStay Luby, said his understanding was that the pension deficit would have been a preferential debt.

The plaintiffs argued that the multinational group's finance director, Jonathan Aiken, did not dispute that the debt would have been preferential.

At the same time, they said, had the trustees made the demand, that would have created a liability for the entire deficit.

The issue is central because there is an argument that the scheme would ultimately have received more money had Element Six gone into liquidation.

Brian McEnery of Horwath Bastow Charleton (now of BDO) told the trustees in a report they commissioned in November 2011 that the scheme could have recovered up to €18 million more than the company’s €23.1 million offer.

That was a best-case scenario. In a worst case, as an unsecured creditor, it would have received just $12.8 million (€9.35 million) from the company, far less than the offer that the trustees accepted.

McEnery's report pointed at a number of cash transfers from the Irish companies to their Luxembourg parent that he suggested a liquidator could have had reversed, increasing the amount available to creditors, including the pension plan.

In particular, he homed in on the $19 million dividend, a $68 million return on capital and a $54 million payment for intellectual property.

Whether or not some or all of that cash could have been recovered is one of the issues that Justice Charleton will have to weigh up in coming weeks before delivering his judgment, which is likely be in February.

Not only will those directly involved read that ruling very carefully, the entire pensions industry will be paying it close attention.