Cheney and Sons Limited Pensions and Life Insurance Scheme: Final Notice

Compulsory Review - Final Notice under Section 99(4) of the Pensions Act 2004

The Pensions Regulator case ref: C136816682

Introduction

By a Special Procedure Request dated 3 June 2019 (the Request) the Case Team of the Pensions Regulator (TPR) asked the Determinations Panel (the Panel) to make an order for the appointment of a proposed trustee, namely Dalriada Trustees Limited (the Proposed Trustee, Dalriada) to the Scheme under section 7(3)(a), 7(3)(c) and 7(3)(d) of the Pensions Act 1995 (PA 95). The Panel was also asked to make consequential orders under sections 8 and 9 of PA 95 including that the Proposed Trustee should exercise powers to the exclusion of the existing trustee of the Scheme.
The Request was made under the “Special Procedure” provided for by section 98 of Pensions Act 2004 (PA 04). The Special Procedure permits the Panel to make a determination without the issue of a warning notice or representations from the Directly Affected Parties, albeit that that determination must subsequently be reviewed once the Directly Affected Parties have had an opportunity to make representations.
The Special Procedure may be used pursuant to section 97(2) of PA 04 where TPR considers that it may be necessary to exercise a regulatory function listed in subsection (5) immediately because there is, or TPR considers it likely that if a warning notice were to be given there would be, an immediate risk to either the interests of members under an occupational or personal pension scheme, or the assets of such a scheme.
The Request asked the Panel to make an order to appoint the Proposed Trustee to the Scheme if it was satisfied that it was reasonable to do so in order:

i. to secure that the trustees as a whole have, or exercise, the necessary knowledge and skill for the proper administration of the Scheme under section 7(3)(a) of PA 95 (the Knowledge Ground);

ii. to secure the proper use or application of the assets of the Scheme under section 7(3)(c) of PA 95 (the Assets Ground); and/or

iii. otherwise to protect the interests of the generality of the members of the Scheme under section 7(3)(d) (the Members’ Interests Ground).

(together, the Grounds).
The Request sought consequential orders for:

i. the powers or duties of any trustee so appointed be to the exclusion of the current trustees under section 8(4) of PA 95;

ii. any fees and expenses of a trustee so appointed be paid from the Scheme’s resources under section 8(1) of PA 95; and

iii. for a vesting order under section 9 of PA 95.

(together, the Consequential Orders).
The Request also asked the Panel to treat this matter as one where Section 97 of PA 04 applied and thus the use of the Special Procedure was appropriate.

The initial determination and the Compulsory review

The Panel met on 6 June 2019 to consider the Request. The Panel determined that the use of the Special Procedure was appropriate and that an independent trustee, Dalriada, should be appointed to the Scheme with exclusive powers and the Consequential Orders made (the Initial Determination). A Determination Notice was issued on 13 June 2019 giving the Panel’s reasons for the Initial Determination (the DN).
At the Initial Determination, the Panel considered that there was an immediate risk to the interests of members of the Scheme and the assets of the Scheme, pursuant to section 97(2)(a) of PA 04. Accordingly, TPR dispensed with the giving of a warning notice and an opportunity to make representations, as provided for in section 97(2)(b) of PA 04.
It also considered that the function of appointing an independent trustee should be exercised immediately on the basis that this was necessary because were it not done, there would be an immediate risk to the interests of members of the Scheme and/or the Scheme’s assets.
The Panel reached this view for the following reasons:

i. The fact that Scottish Widows would, in the very near future, be likely to have to disinvest £300,000 – 87% of the Scheme’s assets - from the Scheme and transfer them on the instruction of Imperial Pension Trustees Limited (the Trustee) into a profoundly concerning investment (the Proposed Investment) posed a considerable risk to the assets of the Scheme and to the interests of the members of the Scheme.

ii. The above risks were compounded by the fact that £294,000 of the Proposed Investment would be transferred to a personal bank account.

iii. The Trustee indicated that it wished to make the Proposed Investment as soon as possible. Its answers to TPR’s inquiries suggested no sign that the Trustee understood the risks that this posed to the members. Accordingly, it seemed to the Panel that the only way of safeguarding the assets of the Scheme and the members’ interests was to appoint an independent trustee immediately under the Special Procedure.

iv. The Panel did not consider that the giving of a warning notice would of itself create an immediate risk to the assets of the Scheme or the interests of the members. Given that TPR had been in correspondence with the Trustee, the Trustee was already on alert to TPR’s involvement and would therefore not be ‘tipped off’ by a warning notice.
The Panel also determined that all of the Grounds were made out in respect of the Scheme, for the reasons given in summary below.

The Assets Ground

The Panel considered, on the information and evidence before it, that section 7(3)(c) was satisfied and the appointment would be reasonable to secure the proper use or application of the assets of the Scheme.
Specifically, the Panel relied on the following matters:

i. When considered in the round, it was clear that the Proposed Investment (in a number of Class B common shares (the Shares) in Norgrow Canada (Norgrow)) was wholly unsuitable for the Scheme for a number of reasons, as the Case Team had stated in the Request. In particular, the fact that the investment was a foreign and unregulated investment suggested it was high risk. Moreover, any legal dispute would be likely to be subject to the laws of Manitoba (a province in Canada) rather than England and Wales.

ii. The investment of almost all the Scheme’s assets in the Shares in Norgrow was a clear breach of the Trustee’s common law and statutory duties to have regard to the need for diversification. This exacerbated the risk that the Scheme assets were subject to. This was coupled with a failure to obtain written advice under section 36 of PA 95.

iii. An insurance policy on which the Trustee sought to rely seemed to the Panel to offer very little protection to the Trustee. Firstly, there was no evidence that the insurance policy had been properly assigned to the Trustee from its previous owner. Secondly, the insurance policy did not insulate the policy holder from all types of loss, but merely in respect of unpaid invoices. It was therefore not accurate to describe the insurance policy as offering significant protection against the investment in the Shares. Thirdly, the insurance policy was assigned to an agent of the Trustee called Wessex Administration Limited (Wessex), rather than the Trustee. Unless it was proposed to further assign the Policy to the Trustee, it could not be said that the Trustee would be offered any protection at all by the Policy once Wessex had transferred the Shares into the name of the Trustee.

iv. The fact that £294,000 was to be sent to a personal UK bank account rather than to a corporate account of Norgrow in Canada was suspicious. The Panel was concerned that the Proposed Investment bore some of the hallmarks of fraud (particularly as regards payments overseas and to personal bank accounts). Accordingly, the assets of the Scheme were at risk under the stewardship of the Trustee.

The Knowledge Ground

The Panel considered that the actions and responses of the Trustee to TPR’s inquiries raised serious questions about the knowledge and skill of the Trustee, such that section 7(3)(a) of PA 95 was satisfied and the appointment would be reasonable to secure that the trustees as a whole have, or exercise, the necessary knowledge and skill for the proper administration of the Scheme.
Specifically, the Panel relied on the following matters:

i. The purported investment was possibly fraudulent, but even if it were not, it showed that the Trustee plainly did not have the requisite knowledge or skill to properly administer the Scheme. The previously noted breaches of the Trustee’s investment duties were an indicator of this.

ii. The Panel noted that the Trustee seemed to have had difficulty in locating Scheme documents. The Trustee had stated that it had only recently become involved in the Scheme, but that was incorrect. The current shareholders of the Trustee acquired the shareholding and the sole director was appointed in December 2018, but the Trustee (being a corporate body) had been in office since 2007. Accordingly, the current owners and director of the Trustee did not have a legitimate excuse for not being in possession of Scheme documentation. This was an indicator that the Trustee did not have the requisite knowledge or skill to administer the Scheme.

iii. The Panel also noted the irregularity of the fact that Mr Roger Mewis, a shareholder in the Trustee, had taken a more active role in engaging with TPR and speaking on behalf of the Trustee than Mr Robert Hawkins, the director of the Trustee. It is the directors of a corporate trustee who are expected to act on behalf of the Trustee of the Scheme, not its shareholders.

Members’ Interests Ground

The Panel also considered that the Members’ Interests Ground was made out on the information and evidence before it pursuant to section 7(3)(d) of PA 95 and that the appointment would be reasonable to otherwise protect the interests of the generality of the members of the Scheme.
Specifically, the Panel relied on the following matters:

i. It was clear to the Panel that the Trustee posed a significant risk to the members’ interests. Either the Trustee was acting in a possibly fraudulent manner and misappropriating assets, or it manifestly lacked the knowledge and skill to act as a pension scheme trustee. An independent trustee needed to be appointed to protect the interests of the members of the Scheme.

ii. All of the evidence above taken together reinforced the Panel’s view that, above all, the members’ interests risked being irremediably prejudiced unless an independent trustee were appointed immediately to administer the Scheme and to investigate more fully the proposed investment, and whether the Scheme was in fact in wind-up (which is addressed in further detail below).

Compulsory review

Pursuant to section 99(1) of PA 04, in any case where the Special Procedure applies, TPR must review the determination to exercise the regulatory function. In advance of that review, those who appear to TPR to be directly affected by the exercise of the regulatory function in question must have an opportunity to make representations in relation to the determination (section 98(2)(c) of PA 04).
In this case the Panel considered the following persons to be directly affected by the exercise of the regulatory function in question:

i. The existing trustee of the Scheme, the Trustee; and

ii. Dalriada as the independent trustee.
In correspondence with Panel Support, both Imperial and Wessex made it known that they believed Wessex to be a party directly affected by the determination to appoint an independent trustee with exclusive powers, and that therefore Wessex was entitled to make representations pursuant to section 98(2)(c) of PA 04.
The Panel, in a letter to all parties and Wessex dated 4 July 2019, stated that it did not agree that Wessex was a directly affected party under section 98 of PA 04. While Wessex may have been indirectly affected by the regulatory action being taken, it was not directly affected. The Panel explained that any points which Wessex wished to make could be made as part of the representations of the Trustee.
The Panel further reviewed this decision at the Compulsory Review and remained of the same view.
The Panel did not consider that Wessex was directly affected. Wessex was an agent of the Trustee, at all material times. However, the decision to appoint a trustee to the Scheme and give it exclusive powers does not affect Wessex “directly”. Rather it affects the Trustee, and affects Wessex only through its association with Imperial.
The Court of Appeal considered the phrase “directly affected” person in PA 04 in the case of Trustees of the Lehman Brothers Pension Scheme v the Pensions Regulator [2013] Pens L.R. 255. It held that the Trustees of the Lehman Brothers Pension Scheme were “directly affected” by a determination whether to issue a financial support direction under section 43 PA 04 in respect of that scheme. The Court of Appeal applied a statement from the House of Lords in R (o/a Muldoon) v Liverpool CC [1996] 1 WLR 1103, which said that the expression “directly affected” person when dealing with the standing of an applicant for judicial review in the then Rules of the Supreme Court meant ‘a person is directly affected connotes that he is affected without the intervention of any intermediate agency’ (per Lord Keith at 1105E, with whom the other members of the House agreed).
The Court of Appeal in the Lehman case held that the phrase did not include “persons with derivative interests which are already adequately represented by the holder of some other more direct interest”. It described such persons as “derivative interest-holders”.
In the Panel’s view, Wessex’s interests are already adequately represented by the Trustee, as the holder of a more direct interest. Wessex is only affected by the decision to appoint Dalriada as an agent of the Trustee (which is able to represent Wessex’s interest in that capacity).
Wessex is thus not a person “directly affected” by the Determination.
The Panel directed that all Directly Affected Parties who wished to make representations at the Compulsory Review hearing should serve such representations by midday on 27 June 2019. The Panel also specified that any parties who wished to request an oral hearing should do so by the same date.
In a letter of 4 July 2019 to the Directly Affected Parties, the Panel granted an extension of time for service of representations to midday on 8 July 2019. The deadline for requesting an oral hearing was also moved to the same time. The Case Team was consequentially given until midday on 22 July 2019 to reply to the representations.
The Panel received the following written representations (the Representations):

i. from Dalriada on 27 June 2019 containing the results of Dalriada’s initial due diligence into the Scheme since appointment, including records of its attempted contact with various persons connected to the Scheme. Dalriada, whilst remaining neutral, expressed its support for the confirmation of the Order made at the Initial Determination.

ii. from the Trustee on 4 July 2019. The Trustee sought to reverse the determination and Order which the Panel had made.

iii. from the Case Team dated 22 July 2019. These representations constituted the Case Team’s Response to the representations made by the Trustee and by Dalriada. The Case Team developed the concerns it had initially raised in the Request, on the basis of further evidence which had come to light. The Case Team sought to uphold the Order made at the Initial Determination.

iv. from the Trustee dated 26 July 2019. These representations were submitted (with the Panel’s permission) in reply to the Case Team’s Response.
The Panel received no other representations.
In the days leading up to the Compulsory Review, the Panel received several requests from the Trustee for proceedings to be stayed so that the Trustee could obtain and review further disclosure from the Case Team, which it alleged should have already been disclosed.
In short, the Trustee was asking for disclosure of all documentation held by the Case Team concerning the investigation into the Trustee, and a copy of all correspondence between the Case Team and third parties concerning the investigation.
In a letter dated 15 July 2019 from the Case Team to Mr Hawkins of the Trustee, the Case Team set out that it had complied with its disclosure duty under paragraphs 9(ii) and 15 of the published Case Team Procedure to disclose all documents that might reasonably be considered to support, or undermine, the case for Dalriada’s appointment. The Case Team stated that the further categories of documents sought by the Trustee were either legally privileged or irrelevant, apart from one document which it did disclose.
The Panel subsequently decided and communicated in a letter dated 23 July 2019 that it would not be requesting any further disclosure from the Case Team or be granting a stay.
At the Compulsory Review, the Panel confirmed this decision for the following reasons:

i. The Panel had been assured by the Case Team that it had complied with its disclosure obligations. There was nothing in the Representations received to suggest that there was any previously undisclosed documentation relevant to the Compulsory Review.

ii. Further, the scope of documents requested was very wide, and the Trustee had given no real explanation for seeking such wide ranging disclosure, apart from a bare assertion that the Case Team was “hiding” pertinent documentation.

iii. In any event, it seemed to the Panel that the Trustee had failed to make a credible case that there were likely to be undisclosed documents relevant to the issues that it had to determine. The Panel was satisfied that it had received a requisite amount of evidence to enable it to reach a fair determination at the Compulsory Review stage.

iv. Accordingly, remaining mindful of the fact that under section 99 of PA 04 the Compulsory Review must be held “as soon as reasonably practicable”, and satisfied that it was not necessary to do so on grounds of fairness, the Panel declined to grant a stay of proceedings.
The Panel met to conduct the Compulsory Review on 29 July 2019. No oral hearing was requested by the parties, nor one held. In the course of the review, the Panel carefully considered all the Representations provided to it.
Pursuant to section 99(3) of PA 04, the Panel’s powers on a Compulsory Review include power to:

“(a) confirm, vary or revoke the determination,

(b) confirm, vary or revoke any order, notice or direction made, issued or given as a result of the determination,

(c) substitute a different determination, order, notice or direction,

(d) deal with the matters arising on the review as if they had arisen on the original determination.”
Pursuant to section 100 of PA 04, when determining whether to exercise a regulatory function on a review under section 99 of PA 04, the Panel is to have regard to the interests of directly affected parties and of the generality of members of the relevant schemes. The Panel had regard to those matters as well as the main objectives of TPR in exercising its functions, as set out in section 5 of PA 04. These include protecting the benefits under occupational pension schemes of, or in respect of, members of those schemes and promoting, and improving the understanding of, the good administration of work-based pension schemes.
As a result of its review, the Panel decided to confirm the decision to appoint Dalriada as an independent trustee of the Scheme. The remainder of this Final Notice sets out:

i. the factual background, as it appears to the Panel having regard to the Representations as well as the material in the Request, including any material changes in the information before the Panel as a result of the Representations;

ii. the applicable law;

iii. the reasons for confirming the Initial Determination.

The Scheme and relevant facts

The Panel finds the following facts from the information stated in the Request and the evidence supporting it, all of which has been provided to the Directly Affected Parties in this matter.
The Scheme is an occupational, defined benefit scheme. The Scheme is closed to new members and potentially in wind-up (as discussed below). The Scheme had approximately 10 deferred members and 16 pensioner members as at 5 April 2017. The size of the Scheme’s fund was £343,387 as of 28 May 2019.
Prior to the Initial Determination, the sole trustee of the Scheme was the Trustee, the sole director of which is Mr Robert Hawkins. According to TPR systems, the Trustee (initially named WWH Pensions Trustee Limited (WWH)) was appointed sole trustee of the Scheme on 23 January 2007.
In December 2018 WWH was acquired by Mr Roger Mewis and his brother, Mr Vaughan Mewis. The Trustee changed its name from WWH to its current name on 24 January 2019. Mr Hawkins was appointed as the sole director of the Trustee on 14 December 2018. 45. The Scheme’s sponsoring employer (which the Panel understands was called Classic Cheney Press Limited) entered liquidation in late 2003 and was dissolved on 31 March 2009.

The Case Team’s investigation

On 26 April 2019, TPR received a report (the Report) from the Scheme Actuary of Mercer. The Report highlighted a number of concerns. So far as is relevant to the case made by the Case Team, the main concern raised by the Report relates to an instruction given by the Trustee to the Scheme’s administrator (Mercer) to disinvest £300,000 which was held by Scottish Widows in order to participate in an unregulated share subscription being offered by Norgrow, a Canadian company specialising in commodities produce. £300,000 equates to approximately 87% of the Scheme’s assets.
The Case Team understood that:

i. The Trustee proposed to transfer £294,000 to a Barclays Bank personal bank account held jointly in the names of a Mr and Mrs Rosenthal. Mr Henri Rosenthal is the Managing, and sole, Member of Norgrow, registered in the province of Manitoba;

ii. The £294,000 was stated to be used to acquire Shares in Norgrow. The Shares were to be held by an agent of the Trustee namely Wessex, which is owned by Mr Roger Mewis and Mr Vaughan Mewis. The Trustee is also owned by Messrs Mewis and Mewis;

iii. The maturity date for any investment return in the Shares was stated by the Trustee to be one year and it was unclear what return the Trustee had been promised;

iv. The balance of the £300,000 that the Trustee proposed to disinvest (ie £6,000) was to be used to acquire an interest in an insurance policy offered by Export Development Canada (EDC and the Policy) that the Trustee stated would protect its investment in the Shares.
The Report prompted the Case Team to contact the Trustee in order to better understand the nature of the proposed investment in the Shares and the wind-up arrangements for the Scheme. Whilst neither the Case Team nor the Panel had seen the documentation governing the Scheme at the time of the Request, winding-up rules in pension schemes generally provide that winding-up begins on certain trigger events such as the insolvency of the principal employer. Accordingly, the Case Team considered it very likely that the Scheme was in wind-up and had been since 2003 when the employer entered liquidation.
In response to an inquiry from the Case Team Mr Roger Mewis, in an email dated 14 May 2019, stated:

i. In respect of wind-up: “The Cheney Scheme is in crisis because unless something is fundamentally achieved in generating revenue, the scheme’s potential life span is short. The trustee’s objective is the generation of sustained funding and this is not being realised by the existing Scottish Widows investment.”

ii. In respect of the investment in the Shares: “All necessary due diligence for the proposed trustee investment was carried out, including but not limited to seeking legal advice from two independent firms of solicitors, a pensions’ consultant, and the overview by an IFA. The sum involved has been insured by an insurance company wholly owned by the Canadian Government. The investment company has signed a statutory declaration covering the points raised by legal advice.”
On 15 May 2019 the Case Team requested copies of the due diligence documentation that Mr Roger Mewis had referred to in his email of 14 May 2019. Mr Roger Mewis replied that same day enclosing various documents (summarised immediately below). He also stated, with respect to the advice received by the Trustee, that:

“The advice received was verbal and advised the trustee the necessary enquiries and questions to be made in order to fulfil due diligence requirements and the protection of the capital.”

The ‘due diligence’ documents accompanying Mr Roger Mewis’ email

A statutory declaration:

i. The declaration is signed by Mr Rosenthal as a representative of Norgrow (and not the Trustee), and declared before Mr XXXXX XXXX, solicitor, on 1 February 2019. It states that Mr Rosenthal has prepared it to “comply fully with the due diligence requirements of the UK Pensions Regulations” and that it is a declaration of “fact”^[1] rather than law;

ii. The declaration states that “Parties to the Subscription Agreement submit to the exclusive jurisdiction of the Manitoba courts”;

iii. The declaration does not elaborate further as to why the Shares comply with the (unspecified) “UK Pensions Regulations”. In any event it does not explain Mr Rosenthal’s credentials in this regard;

iv. Paragraph 5 of the declaration states that “The investment program [ie the Shares] is insurance wrapped through the Canadian Government’s arm for international trade known as Export Development Canada (EDC). EDC is a 100% sovereign entity and offers Canadian companies protection against loss of investment and earnings for commercial trade under their Select Credit Insurance scheme. Each investment is assigned a proportion of the overall insurance cover which is provided to Norgrow Canada as part of the company’s trade activities.”
Certificate of Status: This document certifies that Norgrow is registered with the Manitoba Companies Office. The certificate is expressed to expire on 31 August 2019 (ie prior to the duration of the investment in Norgrow which the Case Team understood to be one year). On 17 May 2019 the Case Team spoke to Mr Roger Mewis and Mr Hawkins. The Case Team’s attendance note of the conversation illustrates that the Trustee was at this point assuming that this date would be extended.
An Assignment: The assignment is dated 22 March 2019 (the “Assignment”) and assigns an apportioned value (namely £300,000) of the Policy to Wessex. The Case Team understood that the assignment was intended to assign Norgrow’s rights under the Policy to Wessex but subject to an indemnification limit of £300,000. The Assignment is expressly stated to be subject to laws of the province of Manitoba.
Investment Overview: This document is a single page letter from Mr XXXXX XXXXX, dated 26 March 2019, who is an Independent Financial Adviser at New Leaf Distribution Limited (which trades as Sterling Financial Management). Mr XXXXX’s letter:

i. Does not assess the underlying contractual documentation (that the Case Team understood to be the subscription agreement) since Mr XXXXX (quite properly) recognised that he is not qualified on matters of Manitoban law;

ii. Does not state whether the Shares are suitable for an occupational pension scheme but rather concludes that, because of the Policy, the investment “passes all aspects of reasonableness”.
A Trustee Resolution: A resolution of the Trustee, dated 9 February 2019, resolved at items 2 and 3:

“That the Statutory Declaration made by Mr Henri Rosenthal, Managing Member of Norgrow Canada act as the required due diligence and form (sic) part of the documentation to be sent to a firm of solicitors specialising in commercial contracts. That the Scheme Administrator, or its nominated representative, is authorised to enter into discussions with firms of solicitors to determine which firm of solicitors is best suited for the investment strategy. Such recommendations are to be presented to the Trustee for determination.”

Further developments

The Case Team obtained a copy of the Policy which appeared to be subject to the laws of the province of Manitoba. Clause 1 of the Policy provided that (broadly speaking) in the event of non-payment of Norgrow’s invoices Norgrow will be indemnified for up to 90% of the value of the unpaid invoices. In addition clause 30 of the Policy provides that “The Insured [Norgrow] cannot assign this Policy or any interest in it, without the prior written consent of EDC”. The Case Team had seen no evidence that EDC consented to the Assignment prior to its execution (and no such evidence was included with Mr Roger Mewis’ email).
On 17 May 2019 the Case Team spoke to Mr Roger Mewis and Mr Hawkins. The Case Team’s attendance note of the conversation provides as follows:

i. Mr Roger Mewis stated that “The role of [the Trustee] is to generate income to sustain the Scheme”;

ii. In an unattributed comment the attendance note provides that “[the Trustee] state no decision has been made regarding wind up or not. [The Trustee] have seen a trust deed but no Scheme documents or agreements.”;

iii. Again in an unattributed comment the attendance note provides that “[The Trustee does] not consider that the cost of legally reviewing the Manitoban contract, approx. £25k, is justified.”
Following the call on 17 May 2019 the Trustee wrote to the Case Team on 18 May 2019 in order to address certain matters that had been raised on the previous day’s call:

i. The Trustee’s letter stated that on being appointed “The first objective was to generate income to stop the depletion of Scheme funds so that the funds could be stabilised while the trustees reviewed the situation, sought advice and made their determination.”;

ii. The letter went on to state that “the [Trustee had] undertaken the necessary due diligence, exercised their discretion, minimised the risk and fulfilled their primary objective of protecting the Scheme funds”.

The Case Team’s concerns at the time of the initial Determination

The Case Team had a number of concerns which primarily fell under two submissions made to the Panel:

i. The Shares, and the Policy, represented a wholly unsuitable investment for an occupational pension scheme (particularly one in wind-up). The Trustee had therefore breached its duties when exercising its powers of investment, had not taken investment advice within the meaning of section 36 PA 95 and had failed to display appropriate levels of knowledge and skill;

ii. The Trustee was in breach of its duty by failing to wind up the Scheme. This failure appears to have been caused by (i) a misunderstanding as to the role of a trustee once a scheme is in wind-up and (ii) a conflict of interest caused by wishing to continue to earn remuneration for providing professional trustee services to the Scheme.
The Case Team submitted that the Shares and the Policy were not prudent investments for the following reasons:

i. The Shares would be a risky and imprudent investment since they were being acquired as part of an unregulated subscription agreement offered by a company in a foreign jurisdiction. As such they represented an esoteric and unorthodox investment for an occupational pension scheme;

ii. It was unclear (and irregular) as to why the Trustee was requesting the majority of the Funds (namely £294,000) to be sent to a UK-based Barclays Bank account belonging to Mr and Mrs Rosenthal rather than to be sent to Norgrow’s business account in Canada. It was also of concern that Norgrow did not appear to have any internet presence which might serve to indicate that it was offering appropriate investment opportunities;

iii. The Trustee was required, pursuant to both the common law and the Occupational Pension Schemes (Investment) Regulations 2005 (the “Investment Regulations”), to have regard to the need for diversification when exercising its power of investment. It was axiomatic that by investing 87% of the Scheme’s assets in the Shares (should the transaction go ahead) the Trustee had failed to have regard to the need for diversification;

iv. The Shares, the Policy and the Assignment were governed by the laws of Manitoba. Consequently, in the event of a legal dispute the Trustee would have to attempt to enforce its rights in an offshore jurisdiction. This compounded the investment risk;

v. The Trustee had placed a significant emphasis on the ability of the Policy to mitigate any investment risk posed by the Shares. This emphasis was misplaced for the following reasons:

a. The Assignment may not have been valid since, in accordance with clause 30 of the Policy, EDC had to give its prior written consent. There was no evidence that this consent had been given. If the Assignment was invalid then the Trustee would have no rights under the Policy at all;

b. The Policy (on the assumption that it was enforceable) only indemnified losses that Norgrow sustains in respect of 90% of the value of unpaid invoices that qualified under the terms of the Policy. Accordingly, it did not cover all business losses that Norgrow might sustain (for example a downturn in its business) and therefore did not insulate the Trustee from all types of loss.
In addition to the above the Trustee appeared not to have taken investment advice pursuant to section 36 PA 95 for the following reasons:

i. Mr XXXXXX expressly did not provide any advice in relation to what he refers to as the “contract made under Manitoba Law”. The Case Team inferred that the “contract” that Mr XXXXXX was referring to was the subscription agreement ie the document that creates and regulates the investment in Norgrow. As recorded in the attendance note of the call with the Case Team, the Trustee determined not to take legal advice on the “Manitoban contract” since the cost of doing so was not “justified”;

ii. Since the contractual arrangements governing the investment in the Shares (that the Case Team presumed is the subscription agreement and other relevant contracts) formed part of the “investment” it followed that the Trustee had not obtained advice on the investment as a whole but rather only on part of it. It therefore followed that by failing to obtain comprehensive advice on the investment the Trustee failed to obtain advice within the meaning of section 36 PA 95;

iii. Finally, Mr Roger Mewis’ email to the Case Team, enclosing the due diligence documentation, referred to the fact that the advice received by the Trustee was “verbal”. Investment advice within the meaning of section 36 must be given, or subsequently confirmed, in writing. Although Mr Mewis’ email was ambiguous as to what the “verbal” advice was, he plainly thought that it related to the question of whether the investment ought to be made (otherwise he would not have referred to it in his email). The Case Team therefore inferred that the advice related to the suitability of the investment and because it was oral (and not subsequently confirmed in writing) it was not compliant with section 36 PA 95.
At the time of the Initial Determination, the Panel carefully considered the Case Team’s concerns in the light of the evidence presented to it. The Panel also took into account the Trustee’s defence in correspondence of the suitability and propriety of the investment. The Panel concluded that the Case Team’s concerns were clearly justified.
As stated above, the Panel received submissions from the Case Team that stated that the Trustee was in breach of duty for failing to wind up the Scheme. However, whilst it may be likely that the Scheme is in wind-up because of the insolvency of the principal employer, the Panel had seen no definitive evidence that this was the case at the time of the Initial Determination. Accordingly, the Panel attached limited weight to the submissions on wind-up at that stage, pending possible further evidence at the Compulsory Review stage.

Summary of representations

The Representations received since the Initial Determination have developed matters considerably, albeit the Panel has noted that Dalriada’s investigations into the Scheme are still at an early stage.
The Representations of Dalriada, the Trustee and the Case Team were all carefully and thoroughly considered at the Compulsory Review hearing.
Dalriada’s representations made the following notable points:

i. Various and significant invoices in excess of £49,000 have been levied against the Scheme both in respect of general Scheme matters and matters relating specifically to the proposed investment. Dalriada noted that the shareholders of the companies which levied the invoices included Mr Hawkins and both Mewis brothers, although no invoices had been submitted by the Trustee. Mr Hawkins and Mr Roger Mewis have repeatedly demanded immediate payment of all invoices, but have thus far been unable to justify adequately the invoices raised.

ii. Dalriada has written to the Trustee and administrators of the Scheme seeking information and Scheme documentation in order to better understand the workings of the Scheme. Dalriada has been supplied with only limited Scheme documentation membership data by the Trustee and Mercer, and basic information such as address data is missing for deferred members. Dalriada has not been provided with copies of any signed Annual Report and Accounts.

iii. Despite the Scheme’s principal employer entering liquidation in 2003 and being dissolved in 2009, the Trustee has been unable to provide any documentation or explanation as to what consideration has been given to the possibility of the Scheme entering the Financial Assistance Scheme.

iv. Dalriada has not been provided with any formal minutes of trustee meetings, or been provided with documentary evidence to illustrate that the Trustee undertook any pensions learning or formal training.

v. Dalriada has enquired into the advisors of the Scheme. Mr Hawkins has stated to Dalriada in correspondence dated 15 June 2019 that “No legal advice was provided directly to the Scheme”. Further, a pensions consultant to the Scheme, Mr XXXXXX XXXXXX, has apparently provided no advice to the Scheme, yet has raised invoices. Accordingly, it is unclear on what basis these invoices have been raised. Mr XXXXXX, the IFA whom the Trustee says gave it regulated investment advice, has told Dalriada that he has not provided regulated advice to the Scheme and that he was never appointed as an investment advisor to the Scheme.

vi. Dalriada has made numerous requests for both calls and meetings with the Trustee. To date, no invitation has been accepted and it has been made clear that a meeting will only be attended once all invoices are settled in full and in advance. This is in spite of the fact that the Trustee itself has not raised any invoices.
The Trustee’s representations made the following notable points:

i. The Trustee stated that it was appointed once the Scheme was in wind-up to make investment to help sustain the Scheme, because poor annuity rates made a buy-out of the Scheme’s liabilities undesirable.

ii. The proposed investment was an opportunity to achieve this objective. However, that investment opportunity was thwarted by the intervention of the Scheme Actuary and his report to TPR.

iii. It is the nub of the Trustee’s case that the Scheme Actuary was part of a conspiracy alongside Mercer (his employer) and TPR to prevent the investment being made and to remove the Trustee from office. The alleged genesis of this conspiracy was that it would be detrimental to Mercer’s commercial interests if the investment funds were disinvested and invested elsewhere. TPR’s motive is alleged to be a desire to cause harm to the Trustee’s reputation and to prevent itself from having to answer “embarrassing and awkward questions” about the way its investigation was carried out.

iv. The Trustee makes a number of points about the law regarding pension scheme investments, such as the need for diversification not being obligatory, and section 36 of PA 95 not requiring advice to be confirmed in writing.

v. The rest of the Trustee’s representations criticise the way in which the Case Team has presented its case and run its investigation. The Panel has considered these points and finds no relevance in them to the Panel’s determination.

vi. The Trustee’s response to the Case Team’s representations does not raise anything that has not already been addressed elsewhere. Importantly, the Trustee’s representations do not challenge directly the basis on which the Panel made its decision at the Initial Determination stage.
The Case Team’s Response to the Directly Affected Parties’ representations, made the following points:

i. The Case Team reiterated that on the basis of the parties’ representations, it remained reasonable to appoint Dalriada as an independent Trustee of the Scheme, mainly because of serious concerns that persisted about the Trustee’s conduct;

ii. The Case Team drew further attention to the seemingly conflicted nature of the relationship between Mr Hawkins and the Mewis brothers, who sought to derive a profit from the Scheme through privately owned vehicles;

iii. The Case Team pointed out that the Trustee still did not appear to understand the numerous concerns relating to the proposed investment;

iv. The Case Team reiterated various concerns relating to the inappropriateness of the proposed investment and the failure to wind up the Scheme.

The Law

Section 7(3) PA 95 allows TPR to appoint a trustee of a pension scheme. It provides that:

“(3) The Authority may also by order appoint a trustee of a trust scheme where they are satisfied that it is reasonable to do so in order—

(a) to secure that the trustees as a whole have, or exercise, the necessary knowledge and skill for the proper administration of the scheme,

(b) to secure that the number of trustees is sufficient for the proper administration of the scheme,

(c) to secure the proper use or application of the assets of the scheme, or;

(d) otherwise to protect the interests of the generality of the members of the scheme.”
The following elements of pensions law are also relevant:

i. The common law duty to conduct the business of the trust in the same manner that an ordinary prudent man of business would conduct his own business, on behalf of those for whom he felt morally bound to provide (and not merely as if he were acting for himself) (Speight v Gaunt (1883) 22 ChD 739 and Re Whiteley (1886) LR 33 Ch D at 355 per Lindley J). Specifically, a trustee should not invest scheme assets in a manner which exposes the scheme to excessive risk;

ii. The common law duty to manage scheme assets in the best interests of members;

iii. The duty under regulation 7(2) of the Investment Regulations for trustees in exercising their powers of investment to have regard to the need for diversification of investments in so far as appropriate to the circumstances of the scheme.

iv. The statutory duty to obtain and consider “proper advice” in relation to whether a proposed investment is “satisfactory” pursuant to section 36 of PA 95. By section 36(7), trustees shall not be treated as having complied with this duty unless the advice was given or has subsequently been confirmed in writing.

Reasons for confirming the decision

During the course of the Compulsory Review, the Panel noted several concerning points which had been further developed in the Representations.
In respect of the appropriateness and legality of the proposed investment, the Panel noted that:

i. The position as to the nature of the proposed investment was still no clearer. Dalriada had attempted to gain a better understanding of the Norgrow investment but was told by Mr Hawkins of the Trustee that all such information was the subject of a confidentiality agreement between Norgrow and Wessex. The Trustee is in a position to help clarify the Case Team’s investigations and was given an opportunity to allay TPR’s concerns. It has not, however, been forthcoming with any clarification.

ii. The Trustee has failed to properly address the concerns surrounding the Assignment. There is no evidence that EDC has consented to the Assignment. The Trustee has also failed to explain why Wessex is the primary party to all legal documents concerning the investment, rather than the Trustee itself.

iii. More generally, the Trustee’s representations make many bare assertions (including a very serious allegation of conspiracy) but do not provide or rely on any evidence to counter or address substantively the basis on which the Panel reached its decision at the Initial Determination.

iv. Ultimately, as a trustee of an occupational pension scheme, the Trustee should be able to account for and explain its actions in relation to the proposed investment, but it has not done so.
In respect of the arguments concerning the conflicted nature of those who own and/or control the Trustee, the Panel noted that:

i. The position has become more concerning in light of the Representations. Whereas before there was a concern about Messrs Mewis and Hawkins profiting at a time when the Scheme ought to be in wind-up, there was now evidence of nearly £50,000 invoiced to the Scheme by companies controlled by these three individuals with no adequate evidence to justify the invoices.

ii. The evidence and Representations show a total lack of management of conflicts and potential conflicts by the Trustee and those controlling it. In particular, there is no evidence that the obvious conflict created by the invoices issued was adequately dealt with, or addressed at all.
The Panel also noted that there was considerable further argument on the wind-up issue. However, as at the Initial Determination, the Panel did not reach a decision or make any finding on this issue. The evidence remained somewhat uncertain, and the Panel was able to confirm its decision made at the Initial Determination on other grounds.
The Panel then considered whether to confirm its decision to appoint Dalriada as trustee of the Scheme under section 7(3) of PA 95 by reference to each of the Grounds.
The Panel was satisfied that the case set out in the Request was and remained made out on each of the Grounds. The Panel considered that the Representations made the case for the appointment of Dalriada significantly stronger, having regard to both the factual information provided and the information it revealed about the current Trustee’s suitability to act.
All of the reasons given at paragraphs 12 to 17 above remain valid. In reaching the conclusion to confirm the appointment of Dalriada as trustee of the Scheme, the Panel relied on the following overarching points:

i. In respect of the Assets Ground, the Trustee had entirely failed to address the Panel’s concerns about the propriety and appropriateness of the Proposed Investment. The Trustee’s arguments on section 36 of PA 95 and the need to diversify were incorrect and displayed a worrying lack of understanding of pensions law.

ii. The Trustee displayed a clear lack of knowledge and understanding, meaning that the Knowledge Ground was still made out. In particular, the Trustee had failed to manage the conflicts relating to the Scheme and had repeatedly failed to take proper advice on the proposed investment. Further, it appeared that Messrs Hawkins and Mewis had not undertaken any proper due diligence either prior to or once they took control of the Trustee. The Trustee had been the Scheme trustee for many years, and the recent takeover of the Trustee by Messrs Mewis and Hawkins was not an excuse for those individuals to possess so little Scheme information. Further, the heavy involvement of Wessex in the proposed investment suggested that Messrs Mewis and Hawkins did not understand the role of a pension scheme trustee, and the weight of responsibility which came attached to it.

iii. The Members’ Interest Ground also remained clearly made out. It was clear that the interests of members were at risk under the stewardship of the Trustee, and that it was in the best interests of the Scheme for an independent trustee to be appointed. Indeed, the way in which the Trustee refused to assist Dalriada in its understanding of the Scheme was an indicator that the Trustee did not consider the interests of Scheme members as a priority.
Taking all of these points together, it appeared to the Panel that the appointment of Dalriada in respect of the Scheme was reasonable under all of the Grounds.
The Panel also confirmed its decision to make the Consequential Orders in respect of the Scheme.
Sections 7 to 9 PA 95 allow TPR to make various orders and directions which may allow the trustees of a scheme properly to protect members’ benefits. These include directions regarding matters such as the payment of fees and expenses, the powers and duties of the appointed trustee, and whether those powers or duties are to be exercised to the exclusion of other trustees.
The Panel considered it reasonable to provide for Dalriada’s fees and expenses to be paid out of the resources of the Scheme, pursuant to section 8(1)(b) PA 95. The fees and expenses are required to secure the services of a competent professional trustee.
The Panel considered the powers and duties exercisable by Dalriada should be exercised to the exclusion of all other trustees, under section 8(4)(b) PA 95. For the reasons given in this Final Notice, it was reasonable to confirm this order. The concerns about the probity and/or competence of the Trustee militated in favour of appointing an independent trustee with exclusive powers, to allow that trustee to fully (and independently) investigate the Scheme.
Finally, the Panel also considered whether the property of the Scheme should vest in Dalriada as trustee of the Scheme under section 9 PA 95. The Panel decided to confirm this order on the grounds that it was reasonably consequential on the appointment of the Proposed Trustee and its discharge of its functions as an independent trustee in the factual circumstances set out above.

Conclusion

For those reasons, the Panel considered that the appointment of Dalriada and the Consequential Orders should be confirmed in respect of the Scheme. The Panel therefore confirmed the Orders in full, in the below form:

1. Dalriada Trustees Limited (the New Trustee), of Linen Loft, 27-37 Adelaide Street, Belfast, BT2 8FE is hereby appointed as trustee of The Cheney and Sons Limited Pension and Life Insurance Scheme (the Scheme) on and from the date of this order, 6 June 2019.

2. The order at (1) is made because the Pensions Regulator is satisfied that it is reasonable to do so, pursuant to the relevant provisions of the Pensions Act 1995 as set out below, in order:

i to secure that the trustees as a whole have, or exercise, the necessary knowledge and skill for the proper administration of the Scheme pursuant to Section 7(3)(a);

ii to secure the proper use or application of the assets of the Scheme pursuant to Section 7(3)(c);

iii otherwise to protect the interests of the generality of the members of the Scheme pursuant to Section 7(3)(d).

3. The New Trustee’s fees and expenses in respect of the Scheme shall be paid out of the resources of the Scheme pursuant to section 8(1)(b) of the Pensions Act 1995 (as substituted by section 35(2) of the Pensions Act 2004).

4. The powers and duties exercisable by the New Trustee shall until further order be to the exclusion of all other trustees of the Scheme pursuant to Section 8(4)(b) of the Pensions Act 1995.

5. Pursuant to Section 9 of the Pensions Act 1995, it is hereby ordered that all property and assets of the Scheme, heritable, moveable, real and personal, of every description and wherever situated and all rights pertaining to that property be vested in, assigned to and transferred to the New Trustee as trustee of the Scheme.

6. This appointment of the New Trustee may be terminated, or the New Trustee replaced, at the expiration of 28 days’ notice from the Pensions Regulator to the New Trustee, pursuant to Section 7(5)(c) of the Pensions Act 1995 and such power to terminate or replace the appointment shall be exercised by the Pensions Regulator in accordance with its delegation policy.
For the avoidance of doubt, this Final Notice confirms that a Compulsory Review was undertaken as required in accordance with section 99 PA 04.
Appendix 1 to this Determination Notice contains important information about the Directly Affected Parties’ rights to challenge this decision.

Signed:

Chair: Antony Townsend

Date: 5 September 2019

Appendix 1

Referral to the Tax and Chancery Chamber of the Upper Tribunal

You have the right to refer the matter to which this Final Notice relates to the Tax and Chancery Chamber of the Upper Tribunal (the Tribunal). Under Section 99(7) of the Act you have 28 days from the date this Final 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 Final 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 TPR. 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.

Footnote

[1] Given that the declaration is expressed to be one of “fact” it is axiomatic that it cannot amount to any form of investment advice.