In a complaint brought by an independent trustee (Lawrence Graham Trust Corporation) against the trustees of the Greenup and Thompson Ltd Pension Scheme, the Deputy Pensions Ombudsman (DPO) found the trustees to be personally liable for a loan made to an employer that was in breach of trust and unlawful under section 40 of the Pensions Act 1995 (the Act).

Section 40 of the Act and accompanying regulations provide that none of an occupational pension scheme’s resources may be invested in any employer-related loan. Breach of this section is a criminal offence.

In this case the trustees of the scheme had made an unsecured loan to the employer for the purpose of purchasing another company. The employer was in financial difficulties and eventually commenced winding up. The Pensions Regulator (TPR) had become involved in investigating the loan and had confirmed it was a breach of section 40.

The DPO determined that in making the loan the trustees had breached the “prudent man” test, i.e. they had failed “to take care as an ordinary prudent man would if he were minded to [make investment] for the benefit of other people for whom he felt morally bound to provide”. The DPO viewed making such a high risk decision without security as “hazardous”.

In light of the knowledge the member nominated trustees possessed they were also in breach of duty.

The DPO determined that the trustees should not be able to rely on an exoneration clause within the scheme rules as section 33 of the Act – which provides that liability for breach of an obligation to take care in the exercise of an investment function cannot be excluded – renders the clause void.

The DPO further held that section 33 of the Act meant that the trustees could not make use of an indemnity from the assets of the scheme “as it would be entirely contrary to the clear purpose of section 33 of the Act for the trustees to be able to indemnify themselves out of the very fund whose assets had been imprudently invested”.

The trustees were ordered to jointly and severally pay the outstanding loan together with simple interest.