USS directors sued over climate inaction and breaches of duty

Dr Neil Davies, senior research fellow at the Bristol Medical School, and Dr Ewan McGaughey, senior lecturer at King’s College London, issued legal proceedings on Sunday against the USS directors, as well as against USS chief executive Bill Galvin.

They argue that the USS directors acted in breach of their duties in conducting “a flawed valuation and predicting a so-called ‘deficit’, when there is now a multibillion surplus”, as well as proposing cuts that will disproportionately impact women, minorities and young people; and “super-inflating” operating costs “from £40.6m to £160m between 2008 and 2020”.

As Pensions Expert reported previously, the UCU is in the process of determining whether to undertake strike action following a breakdown in relations with employers over USS’s controversial 2020 valuation, the results of which threatened “ruinous” contribution rate hikes.

We call upon the directors of USS to do the right thing: do a credible, evidence-based valuation, drop the discriminatory proposals, cut operating costs, and divest fossil fuels now

Dr Neil Davies, Bristol Medical School, and Dr Ewan McGaughey, Kings College London

Negotiations lasted several months, culminating with Universities UK tabling an alternative reform proposal, which included a 20-year moratorium on scheme exits and pledges of greater covenant support.

The USS trustee accepted these proposals, which came at the price of a major governance review and a pledge to explore alternative scheme designs aimed at making USS sustainable in the long term.

While the employers’ proposals were sufficient to ward off the threat of contribution rate increases ranging from 30.7 per cent to 56.2 per cent of payroll, UCU was left unhappy with a solution that it said amounts to a significant cut to member benefits, while having its own alternative proposals ignored.

McGaughey told Pensions Expert that the legal action is being supported by a large number of UCU branches, including — but not limited to — KCL, Bristol, University College London, Cardiff, Oxford, Imperial, Sheffield, the Royal College of Arts, Goldsmiths, York, and Edinburgh.

The branches have circulated emails to their members of staff, who have in turn provided endorsements, donations and pledges — a crowd-funding appeal has so far amassed £55,000 from 1,561 donations.

“We want to reach a positive outcome, because everyone’s retirement savings should be used for good and in their best interests,” McGaughey said. 

“This means sustainable social security, prudently managed, with democratic governance, for a living planet. We’re confident that these are the values that the vast majority of people at work in universities support, and we call upon the directors of USS to do their job, and change.”

A USS spokesperson told Pensions Expert: “It would not be appropriate for us to comment on legal proceedings.”

The ‘substantive claims’

McGaughey and Davis have filed a “multiple derivative claim” at the High Court, arguing that they had no choice but to do so because there is no other mechanism by which to hold the USS directors accountable.

In a statement, they explained: “In 2018, the board of USS Ltd changed the company’s constitution to remove the right of employers (via UUK) and employees (via UCU) to remove directors appointed by UUK and UCU.

“There has never been any mechanism to remove the board-appointed (‘independent’) directors. This means that, without the court allowing the derivative proceedings by representative beneficiaries of the fund, there is no realistic prospect of directors ever being held to account.”

They argued that, in conducting the 2020 valuation, the directors failed to take account of “relevant considerations”, such as the timing of the valuation — at the “low point of the Covid-19 stock market crash” — and the fact that the methodology “assumed there would be 0 per cent growth in assets for 30 years above [consumer price index] inflation,” they said. 

“There has been, in reality, around 30 per cent growth in assets above inflation in the 18 months since the valuation date (March 31 2020). However, the USS directors forced proposals to cut the pension based on these projections, when there is in fact likely to be a multibillion surplus.

“There are serious concerns about the board’s and executives’ commitment to the USS defined benefit scheme,” they continued.

“Bill Galvin said at a board meeting in 2019 that ‘DB pensions in the UK have failed’.”

Though USS chief executive Galvin is not himself a USS director, he is included in the legal action on the grounds that McGaughey and Davis believe him to be a “shadow director” whose instructions “the board is accustomed to follow”.

The second claim is that the cuts proposed by USS in response to its 2020 valuation will disproportionately affect women, young people and minorities, while the third is that the directors have “super-inflated” the scheme’s operating costs.

“In 2008, the scheme’s total operating costs were £40.6m a year, inflating to £160m a year, while large deficits were being predicted and as cuts in benefits for the pension members were forced through,” they claimed. 

“The greatest components of these excess costs related to investment expenses, such as the 1,318 per cent increase in internal asset manager costs between 2008 and 2020.”

McGaughey and Davis contend that this constitutes “a breach of duty to act in the interests of the company and its beneficiaries”.

Climate inaction questioned

The USS directors’ alleged inaction on climate change forms part of the legal action, with McGaughey and Davis arguing that USS’s “failure” to divest from fossil fuels will cause “significant financial detriment to the fund and the planet, against the interests of the company and scheme members”.

“Fossil fuels have been the worst-performing asset class every year since 2017, and their continued use is incompatible with the UK’s international obligations to end climate damage, including under the Paris Agreement 2015,” they said.

They accused the directors of ignoring members, “who have by a large majority stated they want to divest”.

“At stake is the right to security in old age, basic principles of accountability in UK company law, and the sustainability of UK higher education, and our planet,” they said.

“We are confident that each of these claims is well-founded. We call upon the directors of USS to do the right thing: do a credible, evidence-based valuation, drop [the] discriminatory proposals, cut operating costs, and divest fossil fuels now.”