City lawyers predict wave of LDI lawsuits stemming from pension funds crisis

City lawyers are anticipating a wave of litigation over last year’s pension funds crisis, which was triggered by the use of liability driven investment strategies to manage interest rates and inflation.

Lawyers say LDI-related litigation could be directed against advisers who put the strategies in place or the asset managers who ran the funds.

The London Solicitors Litigation Association’s annual study questioned 147 senior lawyers about upcoming trends. Many expect litigation over the use of LDI strategies.

Some pension schemes, mainly in pooled funds, suffered losses when their investment instructions were not followed in a timely manner, their liquidity plans were found to be inadequate or because they were locked out of trading on their LDI funds during the height of the crisis.

Nicholas Heaton, president of the LSLA and partner at law firm Hogan Lovells, said of possible LDI litigation: “I expect there will be claims . . . whether there will be a vast swath of claims is less clear.”

But many believe it will not be easy for schemes to recover meaningful compensation for their LDI losses.

“Asset managers and investment consultants are going to have defences,” said Anna Rogers, senior partner with Arc Pensions Law.

She said one defence may be that “it was up to the trustees to understand” how LDI strategies worked, “and to have known what they were doing. Asset managers who do get sued could then point the finger at trustees, and also investment consultants, for the trustees. This is going to take a long time to play out.”

The study also found that 75 per cent of lawyers expected a rise in US-style class action lawsuits and group litigation in the next two years — especially for breaches of competition law.

The LSLA study found lawyers expected an increase in insolvency claims as well as in US-style class action cases. These are increasingly being lodged before the Competition Appeal Tribunal, which currently has 26 cases before it — including collective claims against companies such as Apple and BT.

The wave of US-style collective actions has been kick-started by a multimillion pound lawsuit brought against Mastercard on behalf of millions of consumers by Walter Merricks, the former financial ombudsman who claims Mastercard infringed EU competition law by imposing unfair fees — known as “interchange fees” — on customers. Mastercard is contesting the lawsuit.

Heaton said he expected “lots of class actions” given the interest in backing such cases from litigation funders — companies that back legal cases in return for a slice of any final compensation.

The LSLA study also found that most law firms had adopted hybrid working. Just 3.4 per cent of lawyers questioned said they worked at firms that were back in the office full-time, with 57 per cent partly working remotely, usually with three days a week in the office.

Law firms have increasingly been stressing flexibility and work life balance in their recruitment to differentiate themselves from competitors that pay higher salaries but may want lawyers to be in the office five days a week. A fierce war for legal talent amid an M&A boom has pushed starting salaries for newly qualified lawyers to record levels.

“Covid broke the mould and now you cannot say you have to be in the office five days a week to run litigation, which is what people might have said three years ago,” Heaton said.