Pension fund members and trustees should monitor a court case playing out in London.

Effectively a test case on investment strategies and contract arrangements between pension fund trustees and the fund managers they appoint, the £4 billion sterling (€6.4 billion) Unilever pension fund is suing Merrill Lynch Investment Managers (MLIM) for allegedly negligently investing £1 billion of the fund, and is seeking £130 million in damages.

The case is based on a contract agreed five years ago when Mercury Asset Management (later taken over by MLIM) undertook to beat an agreed benchmark index by 1 per cent and that performance should not fall more than 3 per cent below the benchmark in any one year (the downside risk tolerance). When the fund underperformed the benchmark by 10.5 per cent, MLIM was fired in March 1998.

Industry sources are concerned that if MLIM loses, fund managers will start to operate under the threat of costly legal actions by investors.