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The EIP Group Pension Scheme: Detemination notice

Standard Procedure - Determination Notice under section 96(2)(d) of the Pensions Act 2004 ("the Act")

The Pensions Regulator case ref: C8600597

Introduction

  1. The Determinations Panel (the Panel), on behalf of the Pensions Regulator (the Regulator), met on 29 September 2016 to decide whether to exercise a reserved regulatory function in relation to the issues in a Warning Notice dated 14 June 2016.  The matter was referred to the Panel on 19 September 2016 following a period for representations and responses.

Matters to be determined

  1. In the Warning Notice the Panel was asked to determine whether to make an order under s.3(1) of the Pensions Act 1995 (PA 1995) to prohibit:

(i)  John Stephen Lupton (Mr Lupton), Leslie Mason (Mr Mason) and/or Paul Francis Phillips (Mr Phillips) (and together, the Trustees) from acting as trustees of trust schemes in general, on the basis that they are not fit and proper persons to be trustees of trust schemes; or

(ii) any or all of the Trustees from acting as trustees of the EIP Group Pension Scheme (the Scheme).

Decision

  1. The power to prohibit a trustee under s.3(1) PA 1995 is a reserved function under paragraph 4 of Schedule 2 to the Act and can therefore only be exercised by the Panel.  

  2. The Panel determined to prohibit Mr Lupton, Mr Mason and Mr Phillips, from acting as trustees of trust schemes in general. The reasons for the Panel’s decision are set out below.

Directly Affected Parties

  1. The Panel considers the following parties as being directly affected by this determination:

    • Mr  Lupton
    • Mr Mason
    • Mr Phillips
    • Dalriada Trustees Limited (Dalriada) – independent trustee of the Scheme;
    • Willoughby Rose Ltd (Co. Number 06926071) (Willoughby Two), the principal employer to the Scheme

Details of the scheme and employer

  1. The Scheme is a defined benefit occupational pension scheme.  It was established by an interim deed on 1 October 1985.  The Scheme is now governed by the definitive trust deed dated 4 September 1990 which was executed by EIP Group plc as the then principal employer and by EIP Pension Trustee Limited as the then trustee of the Scheme (the Deed). 

  2. The Scheme is now closed to the accrual of further benefits, with the last active member leaving the Scheme in around 1999. The Scheme has 1936 members, said to comprise no active members, 655 deferred members and 1271 pensioners.

  3. At the date of the Deed, there were 58 participating employers of the Scheme in addition to EIP Group plc. On 16 October 1997, Geebro Limited became the principal employer of the Scheme. On 22 May 2003 Willoughby Rose Limited (company number 3615609) (Willoughby One) became the principal employer, but ceased to be so on 7 April 2009, when it was dissolved. A new company, Willoughby Two, was established on 6 June 2009 and became the principal employer on that date.

  4. In or about April 2008, the Scheme was in surplus when valued on a buy-out basis. The Scheme is now in deficit on a buy-out basis, with the latest actuarial valuation as at 6 April 2011 estimating the deficit on this basis at £1.5 million. The Panel understands that a more up to date valuation has not yet been finalised.  From information provided to the Panel dating from 2012, it appears that most of the members’ benefits had at that time been secured with providers. In 2012 there were stated to be 131 deferred members and 52 pensioners whose benefits had not been so secured.

The Trustees

  1. The trustees of the Scheme immediately prior to Dalriada’s appointment on 30 January 2012 were (or appeared to be) Mr Phillips, Mr Lupton and Mr Mason. Prior to that, Professional Independent Pension Trustees Limited (PIPTL) had been appointed as the independent trustee of the Scheme.  Although it is not entirely clear, it appears that PIPTL’s appointment lasted from 2002 until 2010 when it was replaced by Mr Mason.  There is some uncertainty as regards the date of Mr Mason’s appointment but it appears to have been effective from 8 March 2010. (The Regulator’s records indicate that it was not until 29 December 2010 but the material seen by the Panel suggests that Mr Mason was acting as a trustee from 8 March 2010). 

Mr Phillips

  1. Mr Phillips was a trustee of the Scheme from 1993, becoming Chairman of the trustees on 9 January 2007.

  2. On 7 February 2007, Mr Phillips was subject to a disqualification order as a result of his conduct in another company of which he was a director. This disqualification commenced on 28 February 2007 for a period of 3 years and 6 months.  Whilst made under company directors’ disqualification legislation, it had the effect of automatically disqualifying Mr Phillips from being a trustee of any pensions scheme including the Scheme pursuant to s.29 PA 1995. Any such disqualification also has the effect of removing the disqualified person as a trustee of all schemes and purporting to act as a trustee during such disqualification period is a criminal offence (s.30 PA 1995).  Following the disqualification, Mr Phillips continued to act as trustee including purporting to be a member-nominated trustee from 24 December 2010, and continuing to purport to act as Chairman of the trustees until Dalriada’s appointment. The Panel understands that at no time following the automatic disqualification was Mr Phillips reappointed as a trustee of the Scheme.

  3. Mr Phillips has been a director of Willoughby Two since 24 August 2011. Mr Phillips has owned a 50% shareholding in Willoughby Two since either February 2012 (as asserted by him) or 2013 (according to Companies House records.) 

  4. Mr Phillips was also a director of Willoughby One from 10 March 2000 and remained so until its dissolution on 7 April 2009, notwithstanding his disqualification from acting as a company director with effect from 28 February 2007.

  5. Mr Phillips was at all material times also a one-third shareholder in Chiltern Investment Holdings Limited (Chiltern).

Mr Lupton

  1. Mr Lupton was a trustee of the Scheme from October 2000.  He was also the sole registered shareholder of Willoughby Two from the date of its incorporation until either February 2012 or 2013 (when he sold/transferred 50% to Mr Phillips) and has been a director of it since 6 June 2009. Mr Lupton was also previously a director of Willoughby One. Mr Lupton was at all material times a director and 99% shareholder of Premier Display Solutions Limited (“PDS”).  

Mr Mason

  1. The Regulator’s records indicate that Mr Mason was a trustee from 29 December 2010.  Based on the evidence before it, the Panel concluded that Mr Mason was, in fact, appointed from around 8 March 2010 replacing PIPTL. Mr Mason was at all material times a director of Chiltern and a director of J & S Component Engineering Limited (J&S).

Dalriada

  1. Dalriada is an independent professional trustee company which was appointed as trustee of the Scheme by order of the Panel on 30 January 2012.

Background to regulatory action

  1. On 27 January 2012, the Regulator’s case team used the special procedure to ask the Panel to appoint an independent trustee to the Scheme. On 30 January 2012, Dalriada was appointed as trustee with full powers to the exclusion of all other trustees of the Scheme.  

  2. The Panel based its decision in these proceedings (the Dalriada appointment proceedings) on concerns about the Trustees’ ability to recognise and manage conflicts of interest and the possibility that the Trustees might have profited from their positions. The Panel considered that the appointment of Dalriada was required to ensure that the Scheme’s investments could be independently reviewed so that any conflict of interest on the part of the Trustees could be identified and, if appropriate, remedied.  

  3. Following a compulsory review of that decision, and representations being made by the Trustees and Dalriada, a Final Notice was issued by the Panel dated 9 May 2012. The Panel confirmed the appointment of Dalriada with exclusive powers.

  4. The Regulator now seeks the prohibition of the Trustees, principally on the following grounds:

    i. The Trustees invested the assets of the Scheme inappropriately with such investments being unsuitable, insufficiently diverse and insufficiently secure.  In making the investments, the Trustees were conflicted and failed to manage properly such conflicts and acted in serious and persistent breach of trust and pensions law;

    ii. The Trustees profited from the investments made on behalf of the Scheme including receiving payments from entities which had received Scheme assets;

    iii. The Trustees have been in receipt of excessive fees, the payment of which was in breach of trust and preferred the Trustees’ personal interests to those of the members. The Trustees have also paid excessive fees to the Scheme’s administrators;

    iv. The Trustees’ actions breaching pensions legislation;

  5. In the case of Mr Phillips, the Regulator further relies on the fact that he acted as a trustee even though disqualified from doing so.

  6. As regards the grounds identified, the Regulator contends that the Trustees each demonstrated a lack of honesty and/or integrity and/or competence and capability such that each of the Trustees should be prohibited from acting as a trustee. It is argued that the failures were so serious that the prohibition should extend to trust schemes in general.

The Law

  1. Section 3 of the 1995 Act states as follows:-

    “Prohibition orders

    (1)The Authority may by order prohibit a person from being a trustee of-

    (a) a particular trust scheme, 

    (b) a particular description of trust schemes, or 

    (c) trust schemes in general, 

    if they are satisfied that he is not a fit and proper person to be a trustee of the scheme or schemes to which the order relates.

    (2) Where a prohibition order is made under subsection (1) against a person in respect of one or more schemes of which he is a trustee, the order has the effect of removing him.
    ...
    (6) The Authority must prepare and publish a statement of the policies they intend to adopt in relation to the exercise of their powers under this section.”

  2. The Regulator has published a statement on prohibition orders (the Prohibition Statement) dated July 2016.  This states that the Regulator will consider (amongst other matters) a trustee’s honesty, integrity, competence and capability when considering whether a trustee is a “fit and proper person.”  

  3. Section 36 of PA 1995 sets out the statutory duties of trustees with regard to choosing investments.  This provides that trustees must exercise their discretion in accordance with the following regulations:-

    “Occupational Pension Schemes (Investment) Regulations 2005

    4. Investment by trustees

    (1)The trustees of a trust scheme must exercise their powers of investment, and any fund manager to whom any discretion has been delegated under section 34 of the 1995 Act (power of investment and delegation) must exercise the discretion, in accordance with the following provisions of this regulation.

    (2)The assets must be invested-

    (a) in the best interests of members and beneficiaries; and

    (b) in the case of a potential conflict of interest, in the sole interest of members and beneficiaries.

    (3) The powers of investment, or the discretion, must be exercised in a manner calculated to ensure the security, quality, liquidity and profitability of the portfolio as a whole.

    ...

    (5) The assets of the scheme must consist predominantly of investments admitted to trading on regulated markets.

    (6) Investment in assets which are not admitted to trading on such markets must in any event be kept to a prudent level.

    (7) The assets of the scheme must be properly diversified in such a way as to avoid excessive reliance on any particular asset, issuer or group of undertakings and so as to avoid accumulations of risk in the portfolio as a whole. Investments in assets issued by the same issuer or by issuers belonging to the same group must not expose the scheme to excessive risk concentration.”

The Regulator’s Grounds for Prohibition

  1. The Regulator relies on a number of grounds for seeking prohibition, as follows.  (Reference below is made to Mr Phillips being a trustee of the Scheme, albeit that he was automatically disqualified with effect from 28 February 2007.)

I. The Scheme’s investments

(i) The Loans to Premier Display Solutions Ltd (PDS)

  1. PDS was incorporated on 5 May 2009. At all material times Mr Lupton owned 99% of the shareholding in PDS (with his wife owning the other 1%).  Mr Lupton and [X] were at all material times the directors of PDS.

  2. One month after PDS was incorporated, the then trustees of the Scheme, being Mr Lupton, Mr Phillips and PIPTL, entered into a loan agreement with PDS for £64,000 (the First PDS Loan).  

  3. Before they entered into the First PDS Loan, legal advice was provided to the then trustees of the Scheme by Sackers solicitors regarding whether an unsecured loan of £50,000 could be made to a company connected with Mr Lupton. While Sackers advised that the trustees of the Scheme had the power to make an unsecured £50,000 investment, the advice suggested that the trustees should obtain independent written investment advice so as to have a “robust commercial justification” for the loan. 

  4. The then trustees of the Scheme were also advised by Mattioli Woods pension consultants (Mattioli Woods).  In an email of 11 May 2009, Mattioli Woods indicated that certain “hurdles” had to be overcome regarding the potential loan.  This included the issues of (i) whether the loan would be treated as being to a connected party (in which case tax penalties would apply) and (ii) “issues of impartiality/prudence and which trustees can be involved in the decision making process”.  Mattioli Woods went on to provide details to Mr Phillips on what a connected person was within the relevant statutory provisions and asked Mr Phillips to “confirm directors and shareholders (including confirmation of % holding) for both [Willoughby Two] and New-co.” Mattioli Woods went on to advise that, even if the transaction is not “classed as connected ... there is still nevertheless a connection and... it is likely that only PIPTL would be qualified to make a decision ie with both John and you ‘stepping back’ due to your vested interest”.  Mr Phillips replied on the same day to say that, “I have no interest in Newco and I am sure that Willoughby [Two] is also not connected.  I agree that neither John [n]or I should be involved in the decision making process”.  It is not clear to the Panel what Mr Phillips’ interest was at that time.

  5. The loan agreement was signed by Mr Phillips on behalf of the Scheme and Mr Lupton on behalf of PDS.  The trustee meeting minutes dated 16 June 2009 suggest that Mr Phillips, together with PIPTL, took the decision to enter into the agreement. 

  6. The agreement included the following terms:

    i. The capital sum loaned was to be repaid in three instalments on 30 September 2009, 31 December 2009 and 31 March 2010;

    ii. £14,000 of the loan amount was to be used to settle an outstanding lease agreement relating to a PDS asset called “Danstoker Boiler” (“the Boiler”).  Following this the Scheme was to take a first legal charge over the Boiler;

    iii. PDS was to pay to the Scheme monthly interest in arrears at a rate of 8% until the date on which the first legal charge was granted and subsequently at the rate of 6%.
  1. None of the three instalments of capital that were due to be repaid on 30 September 2009, 31 December 2009 and 31 March 2010 were made, despite all becoming due and then overdue.  Moreover, the first legal charge over the Boiler was never granted.  Only one interest payment, in the sum of £327.11 for the month of June 2009, was made to the Scheme by PDS on 13 July 2009.

  2. In or around May 2010, a further loan was made by the Scheme to PDS of £55,000 (the Second PDS Loan). The Second PDS Loan agreement was signed by Mr Lupton and Mr Phillips for the trustees of the Scheme and by Mr Lupton for PDS. Mr Mason has acknowledged that he was a trustee at this time and was involved in the discussions relating to the Second PDS Loan.

  3. The terms of the Second PDS Loan included:

    i. The capital sum from the First and Second PDS Loans and the unpaid interest to be repaid in six instalments of £20,265, at six-monthly intervals, commencing 12 months after drawdown;

    ii. PDS was to use around £9,000 of the Second Loan to settle an outstanding lease for the Danstoker boiler, with the Scheme then taking a first legal charge over the Danstoker boiler;

    iii. Interest would be payable monthly in arrears at 6%.

  4. The Panel has not seen any evidence that the Scheme obtained any appropriate investment advice in relation to either the First or Second PDS Loan. The Regulator suggests that it would be difficult for an investment adviser to have been able to advise that the loans to PDS, as a new company were in the sole or best interests of the members. This would be even greater with regard to the Second PDS Loan given that PDS was in default in meeting almost all of the terms of the First PDS Loan at the time the Second PDS Loan was made.  The Regulator argues that the loans cannot be regarded as investments that would have been made by a reasonably prudent man of business. It maintains that the loans were made in a situation of conflict and in breach of trust and pensions law and particularly the Investment Regulations, specifically Regulation 4(2).

  5. On 16 July 2009, Mr Phillips made a payment to the bank account of PDS for £10,000.  Mr Phillips has stated that this payment was a “private matter between Mr Lupton and myself and repaid in full.”

  6. PDS was dissolved on 23 August 2011.  The Scheme accounts for the year ending 5 April 2011 indicate that the First and Second PDS Loans were not repaid listing an amount of £130,474 as a “permanent investment loss.” The Regulator states that PDS was dissolved because Mr Lupton (as director of PDS) failed to comply with Companies House filing obligations.     

  7. There is no evidence that attempts were made to pursue the monies owed to the Scheme. The Regulator submits that if the Trustees had complied with their duties, they would have taken steps to have the debt pursued in accordance with insolvency legislation.

(ii) Crownsbury

  1. Crownsbury Limited (Crownsbury) was incorporated on 30 March 2001. In 2011, Companies House recorded that Crownsbury was a business and management consultancy company but that it had not traded/was dormant for the previous five years.  

  2. The Trustees made a number of payments from the assets of the Scheme to Crownsbury, pursuant to a written agreement dated 2 September 2010 (the Crownsbury Agreement). The Crownsbury Agreement was signed by Mr Phillips, Mr Lupton and Mr Mason on behalf of the Scheme. By that agreement, the Trustees agreed to advance money to Crownsbury in tranches of up to £1 million for the apparent purpose of making investments and Crownsbury agreed to make payments of 6.5% per annum on the amounts advanced to it and to return the capital sums advanced within a period of 5 years from the date of the agreement. The Trustees further agreed to pay a fee of 7.5% in respect of each sum advanced by the Trustees to Crownsbury pursuant to the agreement and Crownsbury agreed that it would only invest funds advanced to it by the Trustees in investments agreed by PLM Associates LLP (PLM).  

  3. PLM was a limited liability partnership of which the Trustees were the three directors.  It did not trade and was not authorised to provide investment advice pursuant to the Financial Services and Markets Act 2000 (s.19).

  4. Pursuant to the Crownsbury Agreement, the Trustees made the following payments to Crownsbury out of the assets of the Scheme:

    i. On 3 September 2010, a payment of £75,000 was made to Crownsbury as an “investment fund arrangement fee” but 6 months before the payment of the sums of £750,000 and £3,000 referred to below;

    ii. In or about February 2011, a payment of £750,000 and a further payment of £3,000 was made from the Scheme’s bank account to the solicitors HLW Keeble Hawson LLP.  Writing to Dalriada following their appointment, HLW Keeble Hawson stated that of this £753,000:-

    (a) £732,223.38 was lent to Crownsbury. The money was advanced as an unsecured loan to Crownsbury to enable it to acquire Automate Wheelcovers Limited (Automate).  Mr Phillips and Mr Mason were appointed as directors of Automate on 21 March 2011. The Trustees/Scheme did not receive any equity (or other) interest in Automate and obtained only the benefit of Crownsbury’s repayment obligations set out in the Crownsbury Agreement. Around this time the Scheme was granted a charge over Automate as security for the loan. The Regulator states that there is no evidence that any valuation of Automate was carried out or that any advice was taken by the Trustees about whether this was adequate security.  

    (b) £11,766.62 (of the £753,000) was then paid by Crownsbury to Chiltern Limited (Chiltern). Chiltern had been dormant from at least 2009 and was dissolved on 12 July 2011.  The director of Chiltern was Mr Mason and Mr Phillips owned 33% of the shares.  

    (c) Finally, £9,000 was paid to HLW Keeble Hawson LLP, solicitors acting for the Trustees, for their costs incurred in acting for Crownsbury in its purchase of Automate.

    iii. On 23 June 2011, a payment of £100,000 was made from the Scheme to Crownsbury. The minutes of the Scheme’s investment subcommittee indicate that this was to be paid by Crownsbury to Professional Social Media Ltd (“PSM”), which was a start-up company.  In return for the payment to PSM, Crownsbury acquired 15% of the equity capital of PSM but no shares were issued to or acquired by the Trustees/Scheme.

    iv. On 6 October 2011, a payment of £100,000 was made from the Scheme to Crownsbury. The minutes of the Scheme’s investment subcommittee dated 30 September 2011 state that this sum was to be paid by Crownsbury to Constant Energy Ltd in return for 50% of the equity in Constant. Again, no shares were issued to or acquired by the Trustees/Scheme.

  5. On 23 June 2010, before execution of the Crownsbury Agreement, the Trustees made a payment of £75,000 from the assets of the Scheme to J&S by way of a loan.  An administrator was appointed to J&S on 24 September 2010 and the company was dissolved on 14 December 2011. At some point after the loan was made but before 26 October 2010, the debt was assigned to Crownsbury.

  6. As regards the Crownsbury Agreement, the Regulator submits that the Trustees failed to take proper written legal or investment advice before entering into the Crownsbury Agreement and before making each of the payments. The Regulator further submits that the relationship with PLM was improper as the Trustees purported to obtain investment advice from a non-trading company run by themselves.  In particular the Regulator highlights that the payments were made to Crownsbury even though it was registered as a management consultancy company which had not traded since at least 2007.

  7. The Panel was told that the Regulator understands that, as at January 2016, Crownsbury is in default on the loan and there are outstanding interest payments. 

(iii) Vega Swiss Asset Management

  1. On 17 January 2012, the Trustees invested €3,785,205 million in a Credit Link Obligation with Vega Swiss Asset Management (Vega), paying Vega a 2% arrangement fee and a 2% set up fee totalling £160,000.  Further fees of more than £944,000 were expected to be payable to 2017.  The Regulator understands that the Vega investment was subsequently surrendered by the issuer with a resultant loss to the Scheme of approximately €800,000.  

  2. As regards the Vega investment, the Regulator submits that there is no evidence that the Trustees sought any proper investment and/or legal advice prior to making this investment and paying the £160,000 fee (or any subsequent fees).  Moreover, in view of the extremely high fees proposed (£944,000) the Regulator submits that this was not an investment which would have been made by a reasonably prudent man of business and that the Trustees demonstrated a lack of trustee knowledge and understanding.

(iv) Temple Mortgage Fund

  1. The Trustees invested approximately $3.5 million from the assets of the Scheme in the Temple Mortgage Fund (Temple), an entity based in the Turks & Caicos Islands providing finance to people buying holiday homes.  A number of payments to the Temple Fund were made between 1 September 2009 and 1 November 2010.  

  2. The Regulator submits that the investments with Temple did not comply with the Investment Regulations, particularly Regulation 4(3) which requires investment discretion to be exercised so as to ensure the security, quality, liquidity and profitability of the portfolio as a whole, and Investment Regulation 4(5) which requires a significant proportion of the Scheme’s assets to be invested in regulated markets. Finally, the Regulator suggests that this investment was not made in the best interests of the members, and therefore that it breached Investment Regulation 4(2).

  3. The Panel has not seen evidence of the current value of the remaining Temple investments.  The Regulator states that Dalriada has sought repayment but has been told that any payments are subject to liquidity and the Scheme is in a “queue of other investors”.  The Regulator says that the impact on members of the Scheme is significant.

II. Profiting from Scheme Investments

  1. The Regulator submits that a number of payments have been made to the Trustees from companies to which Scheme funds were provided directly or indirectly  and that, by accepting these payments, the Trustees appear to have acted with a view to making a profit from the Scheme.

  2. The payments relied on include the following:
Date Amount From To
23.12.09 – 14.10.10 £22,674.83 PDS Mr Lupton
06.09.10 – 25.01.11 £18,400 Crownsbury Mr Lupton
04.05.11 – 01.11.11 £26,864.03 Automate Mr Lupton
06.09.10 £14,400 Crownsbury Mr Phillips
30.03.12 – 11.09.12 £9,450 Automate Mr Phillips
29.06.10 – 08.07.10 £1,250 J & S Mr Phillips
06.09.10 £14,400 Crownsbury Mr Mason
28.04.11 – 17.10.12 £55,224.20 Automate Mr Mason
29.06.10 – 03.08.10 £3,750 J & S Mr Mason
  1. The Regulator states that, in accepting these payments the Trustees failed to manage adequately, or at all, their conflicts of interest.  By way of example, the Regulator refers to Mr Lupton having received payments from PDS when the loans from the Scheme were in default.

  2. The Regulator further suggests that the Trustees invested Scheme assets so as to facilitate obtaining a profit and, in doing so, were not acting in the best interests of the Scheme and its members but were preferring their own interests.

III. Fees failures

Trustee fees

  1. The Deed provides at clause 10.1.1 that:

    “Any Trustee being a professional person or corporation acting as trustee or as part of a business may charge and be paid all usual professional and other charges from time to time for acting as such including for acts which a trustee could have done personally”.

  2. Neither Mr Phillips nor Mr Lupton were paid fees from the commencement of their trusteeships (in 1993 and 2000 respectively).

  3. On 21 May 2003, Mr Phillips prepared a note on the fees that the then trustees proposed to charge.  This note suggested a daily charge rate which would lead to a retainer for himself and Mr Lupton of £6,000 with the exact payment to be “adjusted to reflect the exact time spent on Trustee duties”.  Sackers solicitors attended a trustee meeting on 19 June 2003.  Sackers minutes of the meeting state:

    “[X] advised that the Trustees could lawfully agree to the proposal and it was decided that the Trustees would be paid in accordance with the proposal ie a retainer of £6,000 for each individual, which would be adjusted in accordance with the exact number of days worked”.

  4. Between 2003/04 and 2010/11, the Trustees drew sums of between £9,000 and £15,000 per trustee per year although no invoices were provided.  Such payments were in addition to expenses that were claimed by and paid to the Trustees. Payments to Mr Phillips included the period from February 2007 onwards whilst Mr Phillips was the subject of a disqualification order.

  5. The Regulator submits that as none of the Trustees is or was a professional trustee, none of the Trustees were entitled to charge professional charges.  It further argues that the payments were made from the Scheme by Mr Phillips without independent verification or appraisal and that the payments made were manifestly excessive and/or unnecessary.

Administration fees

  1. The Regulator is critical of the fees paid by the Scheme to Charterhouse, the Scheme administrators, which the Regulator suggests are excessive in amount.  The Regulator submits that the Trustees have paid Charterhouse fees amounting to £262,234 for the year ending 5 April 2011 and £217,218 for the year ending 5 April 2010 although this is challenged by Mr Phillips.

IV. Other breaches of pensions legislation

  1. In its Warning Notice, the Regulator relies on other breaches of pensions legislation as follows:-

    (i) A breach of s.29 and s.30 PA 1995 as regards Mr Phillips for acting as a trustee whilst disqualified;

    (ii) A breach of s.255 of the Act which requires the activities of a scheme to be limited to retirement-benefit activities.  The Regulator submits that the Scheme was used as a funding mechanism for funding investments and/or as a means of securing payments to the Trustees;

    (iii) A breach of s.36 PA 1995 requiring trustees to obtain and consider proper investment advice.  The Regulator submits that there is no evidence that any appropriate advice was obtained by the Trustees.  

    (iv) A breach of s.47 PA 1995 requiring that a fund manager be appointed. 

Representations

  1. Representations in response to the Warning Notice were received from Mr Phillips and Mr Lupton on 24 August 2016 and 11 July 2016 respectively. The Panel has seen no representations in response to the Warning Notice from Mr Mason or Dalriada.  Each of the trustees had previously responded to the original regulatory action to appoint Dalriada and in December 2014 – January 2015 when they were contacted in relation to the Regulator’s investigation to consider prohibition.

  2. Mr Lupton has stated that he would not oppose a prohibition order against him and has referred to his earlier representations made to the Panel ahead of the Compulsory Review in February 2012. 

  3. Mr Phillips has confirmed that he no longer wishes to act as a trustee to any pension scheme and would be willing to sign a document to this effect. There is, however, no mechanism within the legislation to allow individuals to be prohibited voluntarily. 

  4. Mr Mason has not resigned as trustee of the Scheme, albeit Dalriada has exclusive powers.

  5. The representations received both formally in response to the Dalriada appointment proceedings and the Warning Notice and informally in response to the correspondence in November 2014 challenged a number of the allegations raised by the Regulator, albeit with sometimes limited evidence in support. The Panel has considered the responses received and where these are relevant to the issues raised in the Warning Notice the arguments raised are referred to in the Panel’s reasons below. 

Decision

  1. The Panel agreed that an order be made under s.3 PA 1995 prohibiting each of the Trustees from acting as trustees of trust schemes in general.  The Panel determined that an order be made in the following terms:-

“Order under section 3 of the Pensions Act 1995

The Pensions Regulator hereby orders as follows:-

The following individuals are prohibited from acting as trustees of trust schemes in general:

Paul Francis Phillips
Leslie Mason
John Stephen Lupton.

This order has the effect of removing the above-named individuals from all or any schemes of which they are a trustee. 

By section 6 of the Pensions Act 1995, any person who purports to act as a trustee of a trust scheme whilst prohibited under section 3 is guilty of an offence and liable

(a) on summary conviction to a fine not exceeding the statutory maximum, and 

(b) on conviction on indictment to a fine or imprisonment or both.”

Reasons for Decision  

  1. In making its decision the Panel had regard to the objectives of the Regulator as set out in Section 5 of the Act and to the matters listed in Section 100 of the Act.

  2. The Panel also had regard to all the representations submitted in relation to these proceedings and the Dalriada appointment proceedings.

  3. Finally, the Panel had regard to the Regulator’s published statement on its policies regarding prohibition and specifically the criteria the Regulator takes into account when considering whether trustees are “fit and proper persons”.   The Panel took note of the non-exhaustive list of factors listed in the statement including any misuse of trust funds, any breaches of trust or pensions law, and where a trustee’s professional charges constitute a breach of trust.

  4. The Panel considered that there had been a number of breaches of duty/ failures by each of the Trustees as set out below. In so far as affects the Scheme generally, the Panel found as follows.

The PDS loans

  1. The Panel concluded that the PDS loans had been entered into when at least one of the Trustees (Mr Lupton) and probably also Mr Phillips had a conflict of interest.  In light of this evident conflict, it was the Panel’s view that a robust commercial justification for the loan was required and that appropriate investment advice should have been obtained.  In its report of 11 April 2012, Dalriada advised that it had not been able to find any evidence to show that appropriate investment advice was taken by the Trustees in respect of the loans to PDS nor had the Panel seen any evidence that such advice was obtained.

  2. The Panel concluded that no appropriate investment advice was taken by the Trustees for either the First or Second PDS Loan.  The Panel further concluded that it would have been difficult for any investment adviser to conclude that the loans were commercially justifiable.  This was particularly the case with regard to the Second PDS Loan given that PDS was in default in meeting almost all of the terms of the First PDS Loan, including repayment, at the time the Second PDS Loan was entered into.  Given concerns over its solvency, an investment adviser might have been expected to advise that the very high credit risk should be reflected in a very high return for a lender.

  3. The Panel was not persuaded that “favourable rates of interest” were sufficient to justify the First PDS Loan and certainly not the Second PDS Loan. 

The Crownsbury Agreement

  1. In the Panel’s view, the terms of the Crownsbury Agreement were unclear. In some respects the advances made appeared to have the characteristics of a loan, with a fixed return and a repayment date, whilst the agreement also suggested an investment, with an express reference to “investments of EIP funds” and a fee being payable by the Scheme for “each tranche of investment into Crownsbury.” 

  2. The Panel concluded that, in any event, the Crownsbury arrangement was not one that a competent trustee acting with due regard to professional advisers and the statutory duties of pension fund trustees could have entered into. The agreement itself was unclear, Crownsbury had no apparent expertise or experience and the investment was expensive and high risk with little reward to the Scheme. Given the benefits that the arrangement gave to the Trustees as individuals, in the form of payments from companies receiving funds from Crownsbury, there was an additional need for the Crownsbury agreement to be commercially justifiable and for investment advice to have been obtained. At the very least, the Crownsbury Agreement demonstrated that the Trustees acted under a conflict of interest and at worst, it suggested a lack of integrity on the part of the Trustees given that the benefit to the Trustees was clear, whilst the benefit for the Scheme was not.   

  3. As regards investment advice in relation to the agreement, the Panel noted that Mr Phillips and Mr Mason had both advised Dalriada that investment advice was required/taken only when Crownsbury drew down funds for any investment. The Panel was not persuaded that investment advice had been obtained, including in relation to the Automate investment where it had been suggested that advice was obtained from a company called Townends.  The Panel concluded that this “advice” was simply an appraisal of the profitability of Automate and its ability to pay a return to Crownsbury. Similarly the Panel was not persuaded that the advice received from Rawlinsons (chartered accountants and tax advisers) amounted to appropriate investment advice.  

  4. The Panel noted that Dalriada had found no evidence of investment advice in respect of the other investments made in Crownsbury although some business analysis advice was obtained.

  5. In light of this, the Panel concluded that insufficient investment advice was obtained by the Trustees.

The Vega Investment

  1. In his representations, Mr Phillips argued that the Trustees did not invest in Vega but rather Vega invested Scheme funds in its capacity as an FCA registered fund manager. Mr Phillips stated that it was for this reason that the fees were incurred as Vega was providing a professional service to the Scheme and had simply replaced another underperforming fund manager.

  2. Whilst the Panel noted the explanation provided by Mr Phillips, in the Panel’s view, there was a strong case that the Trustees should have taken advice on the Vega “investment” which appeared to be a risky strategy with extremely high fees. In its report of 11 April 2012, Dalriada advised that it had found no evidence of investment advice in respect of the investments made in Vega and had received no documentation in response to a request to the Trustees for copies of the investment advice. The Panel therefore concluded that no, or inadequate, investment advice was obtained.

The Temple investment

  1. The Panel did not consider that the material before it in relation to the Temple investment was sufficient for it to make any findings. The Panel noted that the first investment in Temple was in 2003/4 (pre-dating Mr Mason’s involvement in the Scheme) and that, according to Mr Phillips’ representations, had grown considerably by 2009.  The Panel also recognised that Mattioli Woods had provided a report in August 2003 “to help the trustees decide whether to invest in the Temple Mortgage Fund”.  Whilst the Panel noted that considerable further sums were invested in 2009/10, without apparently any additional investment advice being taken, the Panel was not persuaded that it could make any findings in relation to these investments.  It was also not clear to the Panel which of the Trustees were party to the decision to enter into the Temple investments some of which were made in September 2009 and therefore pre-dated Mr Mason’s appointment as a trustee.

Charterhouse fees

  1. In the Panel’s view it was not possible to determine whether the level of administration fees paid to Charterhouse were inappropriate based on the material provided.  It appeared to the Panel that the fees paid were considerably less than that suggested by the Regulator.  

  2. Again the Panel noted that the arrangement with Charterhouse was made in September 2009 and therefore pre-dated Mr Mason’s involvement with the Scheme.

Fees paid to Trustees

  1. As regards the fees paid to the Trustees, the Panel did not have sufficient information to establish whether the level of fees paid was such as to amount to a breach of duty on the part of the Trustees.  It was not, however, necessary for the Panel to decide this given its other findings. The Panel noted, however, that legal advice had been sought by the Scheme which had approved the payment of fees prior to their having been paid from 2003/4 in spite of the Trustees not being “professional trustees”.  The Panel was not, therefore, convinced that payment of fees to the Trustees in itself was necessarily a breach of the Deed or that the Trustees lacked honesty, integrity, competence or capability in relation to the fees charged.

  2. As regards the individual trustees the Panel found as follows:

Mr Phillips

  1. Whilst Mr Phillips was not, in fact, a trustee after his disqualification as a director in 2007, which automatically removed him as a trustee, he continued to act as though he were a trustee. In the Panel’s view, Mr Phillips’ actions when he continued to hold himself out as a trustee whilst disqualified remained relevant in establishing whether he is a fit and proper person to act as a trustee. The Panel did not distinguish between actions taken when still a trustee and those taken whilst disqualified.  

  2. The Panel concluded that Mr Phillips failed in his duties as a trustee in that:

    i. He failed to manage conflicts of interest regarding the PDS loans in spite of having agreed that he should not be involved. In the Panel’s view, a conflict of interest clearly existed which was demonstrated in part by Mr Phillips having paid £10,000 to PDS in July 2009.  It was not enough for Mr Phillips to simply state that this payment was a “private matter” between himself and Mr Lupton.  The Panel noted Mr Phillips’ statement in his representations that he was not involved in the decision to loan monies to PDS and that he only “signed off the recommendation of Mattioli Woods.”  The Panel had not, however, seen any evidence of such a recommendation in respect of the First or Second PDS loans and noted that the trustee minutes dated 16 June 2009 refer to a “Decision by PP and PIPTL to sanction a loan” to PDS. 

    ii. He failed to take into account the fact that the payment to PDS might be an employer-related loan. In the Panel’s view, the evidence pointed to a lack of integrity on his part insofar as he misled Mattioli Woods as to whether PDS was a “connected” person within the relevant statutory provisions given that Mr Lupton became a director and shareholder of Willoughby Two a few days after the loan was made. 

    iii. He failed to take appropriate investment advice or do any meaningful research on the PDS loans that were made by the Scheme (with his approval). He failed to follow the recommendation that there should be a “robust commercial justification” for the First PDS loan which was a new company with limited financial means. The Panel was not persuaded that “a detailed business plan...put forward by PDS...and the commercial benefit to the Scheme [that] arose from the rate of interest to be paid” was sufficient to amount to “a robust commercial justification”.  Moreover, Mr Phillips demonstrated a lack of competence and capability in making the Second PDS Loan when PDS were in default on the First PDS Loan.  The Panel concluded that an independent adviser would not have recommended the Second PDS Loan, particularly if basic steps had been taken to assess the security on offer. 

    iv. He failed to act in the best interests of the Scheme in failing to pursue the PDS debt which he (with others) allowed to be written off. The Panel noted that, in his representations, Mr Phillips argued that the Trustees had acted in the best interests of the Scheme by not pursuing the debt given the costs and uncertainty that would involve.  The Panel was not, however, persuaded by this argument given that it had seen no evidence that the Trustees considered those factors before deciding to write off the debt.

    v. He failed to obtain appropriate investment advice in relation to the Crownsbury Agreement or the underlying investments. The Panel noted Mr Phillips’ comment that investment advice generally was obtained from Mattioli Woods but noted that they only acted until March 2010. The Crownsbury Agreement was signed on 2 September 2010. 

    vi. He was in a position of a conflict of interest as regards Crownsbury, Automate and J&S in substantially benefitting from the Scheme’s investments. These benefits suggested that the Scheme was used as a means of securing benefits for the Trustees and not solely for retirement benefit activities (in breach of s.255 of the Act).  The Panel was not persuaded by Mr Phillips’ statement that “The payments received by me were for services provided to the respective companies and not sharing in benefit due to the Scheme.”

    vii. He demonstrated a lack of competence and capability in agreeing to the Vega investment without appropriate investment advice which was an investment that involved high risk and high fees. 

    viii. He acted whilst disqualified which is stated in PA 1995 to be a criminal offence.  The Panel noted that in representations for the Dalriada appointment proceedings, Mr Phillips had stated that if he had known that he needed to get permission to act as a trustee of the Scheme following the disqualification, he would have done so (as he had done for another company of which he was a director). Mr Phillips accepted that he had received a telephone call from the Regulator in 2009 when it was pointed out to him that he was acting as a trustee while disqualified.  Mr Phillips’ understanding following this call was that if he needed to take any further action he would hear from the Regulator again.  The Regulator disputed this version of events and referred to its records which stated that Mr Phillips said the disqualification had been “set aside” and that he would send in a letter to that effect. Without reaching a finding on what was actually said in that call, in the Panel’s view, the onus was on Mr Phillips to establish whether he was permitted to act as trustee given his disqualification.  His failure to do so, particularly after 2009, demonstrated a lack of competence, capability and integrity.  

    ix. He accepted fees for acting as a trustee in the amount of over £35,000 to which he was not entitled given his disqualification.

  3. In the Panel’s view, the above failures demonstrated that Mr Phillips is not a fit and proper person to act as a trustee. In most cases the failings demonstrated a lack of competence and capability but in relation to the loans to PDS, the information provided to Mattioli Woods and the monies received from Automate the evidence also suggested a lack of integrity. This is also the case as regards Mr Phillips’ continuing to act whilst disqualified, particularly from July 2009 when he was advised by the Regulator that acting as a trustee whilst disqualified as a director was against the law. 

Mr Lupton

  1. The Panel concluded that Mr Lupton failed in his duties as a trustee in that:

    i. He failed to manage conflicts of interest in relation to the PDS Loans and, particularly, the Second PDS Loan. In signing the Second PDS Loan both on behalf of the Scheme and PDS it appeared that Mr Lupton took a decision-making role having been professionally advised not to do so.  Mr Lupton recognised in a letter of 27 February 2012 that “with the benefit of hindsight the decision of the EIP trustees to grant a loan to PDS was inappropriate, given mine and Paul Phillips’ involvement with PDS”.

    ii. Mr Lupton showed a lack of integrity in agreeing the Second PDS Loan.  Given that PDS was in default on the First PDS Loan it is difficult to see how the Second PDS Loan could be said to be in the best interests of members and would appear to have been made to benefit Mr Lupton (in his position at PDS) at the expense of the Scheme.

    iii. In any event, by agreeing to the Second PDS Loan on behalf of the Scheme when PDS was in default on the First PDS Loan he demonstrated a lack of competence and capability to act as a trustee;

    iv. He acted in a position of conflict insofar as he was involved in the decision not to pursue the debt due from PDS, particularly since the dissolution of PDS resulted from his failure to submit returns.

    v. The Panel had seen no evidence that he obtained appropriate investment advice in relation to the Crownsbury Agreement or the underlying investments.  

    vi. He was in a position of a conflict of interest as regards Crownsbury and Automate in benefitting from the Scheme’s investments.  These benefits suggested that the Scheme was used as a means of securing benefits for the Trustees and not solely for retirement benefit activities (in breach of s.255 of the Act).

    vii. He demonstrated a lack of competence and capability in agreeing to the Vega investment which was an investment that involved high risk and high fees, apparently without appropriate investment advice having been taken.

  2. In the Panel’s view, the above failures demonstrated that Mr Lupton lacked the necessary degree of competence and capability to act as a trustee. Insofar as Mr Lupton was involved as a trustee in relation to the PDS Loans, the decision not to pursue the debt and accepting payments from PDS whilst it was in default on the Loans, the Panel concluded that Mr Lupton also lacked the integrity required of a trustee.  Similarly, accepting payments from Automate also suggested a lack of integrity.

Mr Mason

  1. The Panel was persuaded that Mr Mason failed in his duties as a trustee in that:

    i. He failed to obtain appropriate investment advice in relation to the Crownsbury Agreement or the underlying investments.  The Panel noted that Mr Mason had indicated that investment advice was taken from a “Chartered Accountant authorised by ICAEW”.  The Panel assumed this to refer to advice received from Rawlinsons on Automate, PSM and another Crownsbury “investment” all of which were referred to in a report from Dalriada in 2012.  In light, however, of the conclusions reached by Dalriada in 2012, the Panel did not consider that any such advice amounted to appropriate investment advice.  

    ii. He was in a position of a conflict of interest as regards Crownsbury, Automate and J&S in benefitting from the Scheme’s investments.  These benefits suggested that the Scheme was used as a means of securing benefits for the Trustees and not solely for retirement benefit activities (in breach of s.255 of the Act).

    iii. He demonstrated a lack of competence and capability in agreeing to the Vega investment without appropriate investment advice given that this was an investment that involved high risk and high fees.

    iv. He was a trustee at the time of the Second PDS Loan and attended the trustee meeting to discuss it.  Mr Mason failed along with his fellow trustees to take investment advice on behalf of the Scheme in relation to the Second PDS loan and failed to recognise and act upon Mr Lupton’s conflict of interest which increased the need for independent investment advice.

  2. Insofar as he agreed to the Second PDS Loan on behalf of the Scheme when PDS was in default on the First PDS Loan (which according to Mr Phillips he did and which has not been denied) Mr Mason demonstrated a lack of competence and capability.  This was also demonstrated by the failure (with his fellow trustees) to obtain appropriate investment advice in relation to the Scheme investments. Moreover, the benefits Mr Mason received as a result of the Scheme’s investments suggested a lack of integrity.  

  3. Whilst the Panel appreciated that the grounds for a prohibition against Mr Mason were not so extensive as for the other trustees, the Panel concluded that the failures by Mr Mason were so serious as to be sufficient to warrant his prohibition from acting as a trustee generally.

Conclusion

  1. Whilst the Panel accepted the evidence regarding a lack of appropriate investment advice and that some of the Trustee’s investments referred to in the Warning Notice were illiquid and high risk, it did not make any findings on whether the investment portfolio was insufficiently diverse or secure.  In the Panel’s view, there was not enough evidence before it to reach conclusions on the portfolio overall.  

  2. The Panel concluded that the evidence of the numerous and serious failures by the Trustees demonstrated that none of the Trustees is a fit and proper person to act as a trustee.  None of the Trustees had the necessary competence or capability or integrity.  Moreover, there was sufficient material against each of the Trustees individually to warrant their prohibition from acting as trustees of trust schemes in general.

  3. Appendix 1 to this Determination Notice contains important information about the Directly Affected Parties’ rights to refer this decision to the Upper Tribunal.

 

Signed:

Name: Determinations Panel     

Dated:  20 October 2016

Appendix 1

Referral to the Tax and Chancery Chamber of the Upper Tribunal

You have the right to refer the matter to which this Determination Notice relates to the Tax and Chancery Chamber of the Upper Tribunal (“the Tribunal”).  You have 28 days from the date this Determination Notice is sent to you to refer the matter to the Tribunal or such other period as specified in the Tribunal rules or as the Tribunal may allow.  A reference to the Tribunal is made by way of a written notice signed by you and filed with a copy of this Determination Notice.

The Tribunal's address is:

Upper Tribunal
(Tax and Chancery Chamber)
Fifth Floor
Rolls Building
Fetter Lane
London
EC4A 1NL
Tel: 020 7612 9700

The detailed procedures for making a reference to the Tribunal are contained in Section 103 of the Act and the Tribunal Rules.
You should note that the Tribunal rules provide that at the same time as filing a reference notice with the Tribunal, you must send a copy of the reference notice to the Pensions Regulator.  Any copy reference notice should be sent to:

Determinations Panel Support
The Pensions Regulator
Napier House
Trafalgar Place
Brighton
BN1 4DW

Tel: 01273 811852

A copy of the form for making a reference, FTC3 ‘Reference Notice (Financial Services)’ can be found on the GOV.UK website.

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