Will UK pension savers resort to litigation?
Pardon the Interruption
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As with many things that put risk on the individual, defined contribution has its roots in the US. The UK chose to align itself with that model, but do UK employers and pension providers know what came next across the pond?
Since the 1970s, US corporate pension plans mostly take the shape of so-called 401k plans, and Americans are reportedly fond of discussing how much they hold in these.
DC savers charged like retail investors
However, despite being part of multi-million, even multi-billion dollar pension funds, savers in such plans were typically treated as retail investors when it came to fees, and would be charged the same percentages as an individual investing $500. This, one US attorney argued, was against the law that protects retirement savers and should be treated as such.
In the absence of US regulators taking action – or even an interest – the only way to improve outcomes would be litigation, said Jerry Schlichter, senior partner in law firm Schlichter Bogard & Denton, speaking at a webinar organised by campaign group the Transparency Task Force on Tuesday.
Schlichter went on to recount how his firm fought and won the first ever successful class actions about excessive 401k investment fees in the US, reaching millions of dollars in settlements after years of court battles with global companies like ABB, Boeing, Kraft Foods and others, as well as improving pension plan fees.
No incentive to look after employee money
About 15 years ago, the civil rights lawyer said he began to get more and more requests from people about their pensions. Looking into it, he said that despite the Employee Retirement Income Security Act 1974, in the 30-year history of 401ks there had never been a case brought for excessive fees, neither by individuals nor by the regulator, the Federal Department of Labor, which according to Schlichter failed to enforce the law.
“So what we had in this country is a very opaque, non-transparent arrangement where we have employee money, with no financial incentive by the employer, and no litigation and no regulation – none,” said Schlichter.
He said he and his partners put their livelihoods on the line as they took large sums of credit to fight, on a contingent fee basis, cases of a type that had never been won before.
“What happened was, we filed these cases from coast to coast, and multiple federal judges dismissed the cases early on, saying it’s up to the participant to make the choice on investments, ‘No case’,” he said.
Tragic consequences
The first trial eventually came in 2010 against Swiss engineering firm ABB and plan manager Fidelity. According to Schlichter, these firms spent around $45m for a one-month hearing, illustrating their determination to stop this type of litigation, which had the potential to set a precedent. The case only ended last year after two appeals, 12.5 years after being first filed, resulting in a $55m settlement.
Tragically, the feeling of being treated unfairly by large corporations might have proved too much for one of the claimants in this case. On the third day of the trial, he killed three and injured five in a mass shooting in the ABB plant in St Louis where he was working – no motive was found, other than that he was part of the pension fees class action.
Overall, Schlichter and his firm have obtained settlements in 401k excessive fee cases of more than $300m, involving Lockheed Martin, Boeing, Oracle, Massachusetts Institute of Technology and many others.
Litigation around mass tort is also “a developing area in Canada”, said Paul Bates of law firm Paul Bates Barrister. “We launched 10-12 cases in Canada earlier about charges and closet indexing,” he said, adding that “our judges are reluctant to case manage and tend to further [the interests of] big firms, but not always”.
‘Litigation has a major role where regulators abandon their role’
Litigation comes into play where regulators fail to fulfil their role, said Schlichter.
“Federal judges pointed out that we educated the Department of Labor, the regulator, to do their job,” he said. “Litigation has a major role in particular where regulators abandon the role they are required by law to perform.”
TTF founder Andy Agathangelou sees litigation as a tool that needs to be used more in the UK to achieve fairer outcomes. “What's actually driving reform of the system is litigation. I’m enthusiastic about it,” he said.
