HUNDREDS of thousands of Scots' pension pots have been hit by a landmark US court ruling that has closed a key route for councils to claim compensation from financiers in the wake of the global banking meltdown.
Councils and companies that run UK pension funds have effectively been prevented from suing firms in US courts if investment shares were not bought in the US from companies headquartered there.
Edinburgh and Glasgow city councils' pension funds, which have both benefited through class action lawsuits in the US, are now to be restricted. It could mean the loss of huge claims that the funds' operators were able to claw back as a result of others' alleged bad decisions or negligence.
Scotland's largest pension schemes are already facing a cash black hole after losing tens of millions in the economic downturn and banking collapse and a series of unreliable investments. Strathclyde Pension Fund, Scotland's biggest with 180,000 members across 12 councils and administered by Glasgow City Council, and Lothian Pension Fund, with 71,000 members, will no longer be able to claim if shares in the companies being sued were not bought in the US.
The key difference between a class action in the US and similar types of litigation elsewhere is the loser does not have to pay the other side's expenses in a class action.
Litigation actions in many other countries carry a far greater risk of costs to those pursuing the claims if they fail.
Edinburgh is currently claiming compensation for shares of companies it invested in, including BP, whose shares plummeted after two oil spills, in Alaska and the Gulf of Mexico.
Strathclyde Pension Fund has made £2.6 million from settlements, understood to relate to lawsuits over reduced share values due to the actions of companies over the past three years. Lothian Pension Fund has earned £1.5m in compensation over the same period.
Closing the door to such claims exacerbates wider problems facing pension provision at a time of public sector unrest over proposed reforms.
A spokesman for Glasgow City Council confirmed it is also in class action litigation with BP, but said details were not immediately available as the legal action is outsourced.
Settlements it has received as part of the £2.6m include a £250,000 payout from a lawsuit in 2009 against financiers Merrill Lynch.
Lothian Pension Fund has won a share in a £60m settlement – expected to be about £2m – after acting as lead plaintiff in a case against Lehman Brothers, but this is unconfirmed as cases against the firm's underwriters and auditors are continuing.
A case against BP was lodged in 2008 over the Prudhoe Bay oil spill in Alaska in 2006 which caused an estimated loss to the fund's shareholding of £250,000.
As part of the settlement, the legal team has sought to improve environmental management in the company.
The Lothian Pension Fund is also involved in a case against the pharmaceutical company Sanofi-Aventis that was filed in 2007 over alleged misleading statements made by the company in relation to trials of a new drug.
One pensions expert said: "It is
unclear what will happen with such [class action] compensation claims at this stage. In the US there is no risk because it is a no-win, no-fee system for class actions, but there is a far higher risk in litigation in many countries outside the US, such as the UK, where you have to pay the other side's expenses if you lose."
Geik Drever, head of investment and pensions at Edinburgh City Council, said: "Recent developments in the US could limit the scope for future compensation claims for the fund. Options to consider pursuing compensation in other jurisdictions will be considered on a case-by-case basis."
Lynn Brown, executive director of financial services at Glasgow City Council, said: "It is usually possible for investors to take a relatively passive role and still collect the proceeds of any settlement without having been a named or active party to the litigation. This is not the case in other jurisdictions where the culture is much less developed."
Strathclyde Pension Fund is worth £10.5 billion and has a deficit of £300m, which it said will break even in 10 years. Lothian is sitting at £3.85bn, with a deficit of £180m.
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