Why Pensions Rarely Sue Their Consultants, Managers

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The UK’s British Coal Staff Superannuation Scheme has filed a lawsuit against consultant Towers Watson for investment losses stemming from allegedly “negligent investment consulting advice”.

These types of lawsuits – a pension fund suing their consultant or investment manager – are rare. Christian Toms, a lawyer who worked with a Dutch pension fund that sued its investment firm (Goldman Sachs) in 2012, explains why these situations are so rare.

From the Tally:

Why are these kinds of legal actions, where pension funds sue their investment consultants or fund managers, so rare?

Pension funds tend to look at legal actions in a different way to hedge funds or investment banks. They are very cautious about spending a lot of their members’ money pursuing something that’s not a ‘safe bet’. For this reason, the cases we see tend already to have a lot of meat to them – a clear failure to invest in a particular way that was promised, or a complex investment that was not right for the client.

Does the argument that investment is always risky, and investors should be aware they can lose their money, make these cases inherently harder to bring?

One of the big issues is this ‘hindsight’ argument. The focus of a legal case always has to be on what was going on at the time. Did the investment manager do enough due diligence on the investment? Did they properly understand the risks, and what the clients’ risk profile was? Would a reasonable manager have done what the investment firm did in this case?

This is particularly relevant for pension funds as they are not necessarily the most aggressive investors in the world, and if they end up in a riskier structure or a more complex investment than was necessary, that could give you grounds for an argument.

Toms also talks about the possibility that we could see more of these lawsuits:

Fiduciary management is a growth area in the industry. Could this lead to more disputes of this kind?

We are seeing this more and more. Consultants are taking on more asset management responsibilities. But even if they aren’t, there may still be grounds – a duty of care in relation to the advice given, perhaps. Was the advice appropriate?

In the Towers Watson/British Coal case, if they were specifically asked to implement a currency hedging strategy, it may be a question of what was appropriate. What was the need at the time and what did they do? Was what they did what a reasonable manager would do?

Generally, with pension funds, I’d say it would do all of them a benefit to more closely scrutinize their investment firms when something has gone wrong, rather than just saying ‘oh well, that’s life, it’s unfortunate, let’s fire the asset manager and move on’.

Read the full interview here.

 

Photo by Joe Gratz via Flickr CC License

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