Now Sainsbury's may sue Merrill

SAINSBURY'S is considering legal action against Merrill Lynch over the management of its pension fund, highlighting the potentially disastrous can of worms the Unilever case may have opened for the fund management industry.

The supermarkets giant gave its warning only minutes after Unilever and Merrill told the High Court they had struck a settlement in their legal battle over the performance of the household product giant's pension fund in 1997 and 1998.

It is believed that Merrill has agreed to pay Unilever at least £70m compensation for the poor performance of the fund managed by Mercury Asset Management, now owned by Merrill.

Both parties are likely to pay their own legal costs, estimated to be as high as £10m between them. 'This latest development could be very significant for us,' a Sainsbury's spokeswoman said. 'We will be considering our position carefully when further information on the settlement becomes available.'

AstraZeneca, whose fund was also managed by Merrill, said it was monitoring the situation and considering its options, while Surrey County Council was also believed to be looking at its position.

But a Merrill spokesman said the group was not expecting other firms to take action against it following the settlement. He said: 'This was a unique relationship and a unique contract.'

Merrill and Unilever refused to comment on the details of their deal. But it is believed Merrill initiated peace talks at the weekend following growing concerns in its New York office about the potential ramifications of the case.

The fund management industry has been eager for Merrill to reach an out-of-court settlement to avoid the legal precedent associated with a Unilever victory. But it is understood the settlement could still work against the industry, particularly Merrill, the City's biggest pension fund manager at the time.

Alistair Lennard, the 27-year-old Mercury fund manager dubbed a 'wild card' by Unilever's counsel, ran several other portfolios for pension funds.

The settlement is an embarrassing end to the spectacular career of Carol Galley, the star fund manager who helped build Mercury into a fund management giant. Galley admitted to the court that the performance of Unilever's fund was poor. But she said this was largely the result of the extraordinary stock market conditions that prevailed at the time.

The fund management industry was concerned that today's move may lead to managers adopting more conservative investment strategies in future.

Justin Urquhart Stewart, at 7 Investment, said: 'I think the whole exercise so far has had a marked effect on pension funds.' Fund managers were likely to be more cautious when outlining the level of growth they thought they could deliver. He added that managers may also adopt a more conservative investment strategy, bringing in lower returns, because they were unprepared to take a high level of risk.

The National Association of Pension Funds said the case was likely to lead to a change in the relationship between pension trustees and fund managers, with greater scrutiny on both sides in the setting of benchmarks for investor performance.

But one analyst, who did not want to be named, said he did not think the move would lead to large numbers of trustees taking fund managers to court.

He said: 'I think it's another element in a range of factors pension fund managers have got to consider, as well as regulation and Government requirements. It is possible that others with a direct interest may look at the outcome of this case and consider their own options, but beyond that in terms of other pensions and fund managers we won't see a rash of claims.'

Unilever's counsel Jonathan Sumption QC said Lennard's portfolio was heavily weighted towards UK industrial stocks, which suffered as the value of sterling rose. It also contained no bank shares, which soared, depriving the fund of an opportunity to make huge profits.