Whilst extraordinary on its facts, this decision of the Pensions Ombudsman’s Pensions Dishonesty Unit highlights the importance of key principles of responsible trusteeship, as well as the need for vigilance against pension liberation schemes and unauthorised payments.

Summary

On 21 September 2023, the Pensions Ombudsman (the “Ombudsman”) upheld two complaints against the Trustee of the Focus Group Administration Pension Scheme (the “Scheme”) after Simon Williams, a FIDE Chess Grandmaster, committed a series of egregious breaches of trust and acts of maladministration, including orchestrating a “pension liberation scheme”. In this fraudulent manoeuvre, Mr Williams facilitated an illegal payment, allowing a member to prematurely access his pension funds before the age of 55. These unauthorised arrangements, commonly known as “pension liberation schemes” have long been condemned by The Pensions Regulator ("TPR”) through its Scorpion Campaign. Mr Williams’ wrongdoing was uncovered by the Pensions Dishonesty Unit (“PDU”), and he was ordered to repay over £730,000 back into the Scheme.

Context: the PDU

The Ombudsman recently established the dedicated PDU to investigate allegations of serious breaches of trust, misappropriation of pension funds and dishonest or fraudulent behaviour by pension scheme trustees. This was implemented as a result of the noticeable increase in cases over the years relating to trustee dishonesty and wrongdoing, such as the Norton Motorcycles, Henry Davison and Grosvenor pension schemes. These types of high-profile dishonesty cases tend to result in substantial losses for individual pension scheme members, many of whom would struggle without their lifetime savings.

The Ombudsman reports that it is working with independent trustees to ensure they are aware of their powers and role in enforcement, thus enabling a determination to be issued in respect of all members of the particular scheme and not just those that have made a complaint. The PDU aims to hold the wrongdoers responsible for the unlawful gains, and where successful, pension scheme losses would then be met by the perpetrators of dishonest behaviour rather than the taxpayer or all pension schemes on a wider basis. The PDU liaises with the Pensions Regulator and the Fraud Compensation Fund as these cases are typically complex, and the investigation team is staffed by experienced members of the Ombudsman’s casework and legal departments.

The facts in the Focus Administration complaint

The Scheme (which was an occupational pension scheme) was established in 2013 and Mr Williams was the sole Trustee of the Scheme.

The Scheme’s “alternative investments” all failed or became worthless during the Scheme’s administration. These investments included the following:

  • a 250-year lease in an office unit (“3TC House”) which was unregistered, severely damaging the value of the property;
  • ordinary shares in a property investment company, Tennyson Property Investments Limited (“Tennyson”);
  • a Loan Agreement between the Scheme and Mederco Huddersfield Limited (“Mederco” and the “Mederco Loan Agreement”);
  • a Loan Agreement between the Scheme and Capital Bridging Finance Solutions (“CBFS” and the “CBFS Loan Agreement”);
  • shares in Fleet Street Liverpool Limited (“Fleet”); and
  • a Loan Agreement to Bright Limited (“Bright” and the “Bright Loan Agreement”).

Punter Southall was appointed as independent trustee because TPR had concerns about Mr Williams and the way the Scheme was being run. Although Punter Southall is named as a respondent, no adverse findings were made against them. On the facts of the case, it appears that the independent trustee acted on a pro bono basis managing the Scheme for many months in support of its members.

What were the Applicants’ complaints?

Mr M and Mr Y were members of the Scheme and had suffered substantial loss because of the disastrous performance of the Scheme’s investments. Mr M complained that he had lost nearly 50% of his pension despite his understanding that the Scheme would protect his funds. He had accepted the sale of the Scheme’s leasehold interest in 3TC House, at a loss, to facilitate transferring out of the Scheme. However, he remained unable to transfer. He also requested to be allowed to transfer his £46,970 investment in Tennyson. Additionally, Mr Y argued he did not want to invest in Mederco. He sought to transfer out but was told he could not and Mederco went into administration. As a result, Mr Y lost his entire pension.

What did the Trustee and Administrator argue?

As the Trustee, Mr Williams argued members knew the Scheme offered a narrow range of alternative investments. He said he would not have made those investments had the members not requested them, so they were responsible for their loss. Mr Williams contended he had carried out the necessary due diligence and the members knew the risks. Mr Williams explained that he was passive and largely followed the advice of a fellow chess player, Mr Gary Quillan, who introduced him to an “opportunity” to supplement his income as a chess player. Mr Williams alleged that he relied on Mr Quillan, who primarily designed the Scheme and the transactional structures. It is noteworthy that Mr Quillan was disqualified from acting as a director in September 2019 due to his involvement in a pension liberation scheme. Mr Williams admitted having acted “naively” but not dishonestly. He argued that he should be exonerated and indemnified under the Scheme rules and Scheme application documents.

In addition, Mr Williams argued that he faced procedural unfairness. This is because the Ombudsman held an oral hearing with the statutory 21 days’ notice period and declined his request for an extension of time to prepare and seek advice. Despite Mr Williams’ absence at the oral hearing, it appears that he did not suffer any discernible disadvantage. It is evident he had sufficient time to submit detailed arguments, all of which appear to have been carefully considered by the Ombudsman.

What was the Ombudsman’s determination?

Selecting Diverse Investments

The Ombudsman examined the Trustee’s responsibilities regarding the selection of investments. Mr Williams contended that the investments were specifically requested by the members, so the onus was on them to seek professional investment advice. Mr Williams said he had carried out the necessary due diligence in ensuring the investments were allowable within the Scheme and were acquired at fair market values. Each property investment came with a valuation report from a chartered surveyor, and loans were backed by personal guarantees. However, the Ombudsman found that Mr Williams could still not furnish evidence of receiving advice from a qualified financial advisor and that this is his responsibility as the Scheme’s Trustee pursuant to Section 36(3) and (4) of the Pensions Act 1995. In particular, the property valuations were commissioned by and addressed to third parties so Mr Williams could not rely on them as part of his independent due diligence. The Ombudsman also stated that the members hardly had any discretion with regards to the selection of the investments as the application forms offered to them had been prepopulated. Consequently, the Ombudsman ruled that Mr Williams had breached the requirement to obtain and consider proper written advice.

Trustees of pension schemes must also have regard to the need for diversification. Investigations revealed the Scheme had assets of approximately £860,000. Of this a large majority in the sum of £711,402 was loaned to three companies:

  1. £240,000 under the Mederco Loan Agreement;
  2. £381,892 under the CBFS Loan Agreement; and
  3. £89,150 under the Bright Loan Agreement.

A further £101,235.11 appears to have been used to purchase a leasehold interest in 3TC House, and the rest to purchase shares in Tennyson and Fleet. The Ombudsman noted that the sums loaned to Bright were intended to then be loaned to Mederco. CBFS also subsequently made several loans to Tennyson, a shareholder in Mederco and a secured creditor. The investments were therefore concentrated in a very small number of already high-risk companies. No regulated advice was taken to manage this risk or any diversification into regulated or lower risk investments. The investments chosen by the Trustee were high risk, narrow, illiquid and undiversified and so the Ombudsman found the Trustee failed to have regard to the need to diversify investments.

In addition, the Ombudsman highlighted two key obligations of the Trustee, both of which Mr Williams failed to fulfil. First, the duty to act with the care and diligence of an ordinary prudent person investing for the benefit of others, necessitating seeking expert advice when necessary. Mr Williams said one company became insolvent which resulted in a chain reaction causing the other businesses to collapse. Mr Williams claimed this was unforeseeable. However, the Ombudsman found this did not excuse his lack of proper care. It was apparent from the Companies House’s records that the businesses would become insolvent as they were excessively reliant on external financing. Second, the obligation to act in the best interests of the members was disregarded, as Mr Williams failed to identify the Scheme’s proper purpose and make investments that align with that purpose. The fact that the investments were so interconnected with one another and that the failure of one meant the failure of others points to the high-risk and undiversified nature of the investments.

Administration of the Scheme

The Ombudsman also found multiple conflicts of interests. For instance, Mr Williams, on behalf of the Scheme purchased a leasehold interest in 3TC House. However, Mr Williams had a business connection with the property, having registered two of his businesses at this address. Furthermore, the directors of Imperium, the owner of the property, invested substantial sums in two businesses of which Mr Williams was the sole director and shareholder. Mr Williams was also the sole director of SKW that was a shareholder of Imperium and Imperium was a creditor of SKW. The Scheme’s assets were composed entirely of investments in which the directors of companies held an economic interest and in turn those directors invested in or made loans to companies of which Mr Williams was a director and in which he held an economic interest. Mr Williams provided no evidence that these conflicts of interest were managed appropriately so the Ombudsman found this was a clear breach of Mr Williams’ duties to keep proper records and breach of his fiduciary obligations towards the members of the Scheme.

Pension Liberation

In the case of Mr M, the Ombudsman was concerned with a payment Mr M received before his retirement age which appeared to have been linked to his pension. Pension Max had provided a brochure to Mr M promising an instant 20% “capital gain” on Mr M’s transfer value to the Scheme. Around the time Mr M transferred, Mr M appears to purchase a 40% interest in 3TC House (which is precisely equivalent to his 20% transfer value to the Scheme) and then promptly sell it to the Scheme at an inflated value. This resulted in an uplifted sum which was presented as capital gain and disbursed to Mr M. Mr Williams failed to provide an explanation as to why he considered it feasible for the property to be worth a lower and a higher amount simultaneously. The Ombudsman found this transaction was a contrived means to facilitate an unauthorised payment to Mr M out of his pension benefits before his retirement age. The Rules do not permit this and so Mr Williams acted in breach of trust by facilitating such a payment.

After further consideration of Mr Williams failures described in the above paragraphs and Mr Williams’ evidence in relation to those, the Ombudsman concluded Mr William did not have a genuine belief that the investments were in the best interests of the members of the Scheme. It follows that Mr Williams had acted dishonestly and, in the case of the unauthorised payment to Mr M, fraudulently. The Ombudsman therefore found that, in accordance with Section 33 of the Pensions Act 1995, Mr Williams’ liability for breach of his obligation to take care and exercise skill in the performance of his investment duties could not be excluded. As a result, Mr Williams could not rely on the exoneration and/or indemnification clauses in the Scheme’s Rules of the investment application documents.

Dishonest Assistance

Although Mr Williams was held personally liable for the breaches of trust, maladministration and fraudulent misapplication of funds, he had acted partly through a corporate trust body, Focus Administration Limited ("Focus”) of which he was the sole shareholder and director. Since Mr Williams was unable to provide a satisfactory reason why he had incorporated and appointed Focus on 26 August 2016, the Ombudsman was satisfied that Focus was in fact a sham to mask Mr Williams’ dishonesty and shield him from liability. It was clear on the evidence that Mr Williams had caused Focus to commit the breaches of trust as Mr Williams had executed the Bright Loan Agreement and the CBFS Loan Agreement in 2018.

The Repayment Order

In the circumstances, Mr Williams was ordered to pay the sum of £738,768.60 within 28 days, representing the total amount of funds transferred to the Scheme, minus the sum already paid to members and the sum recovered from the various disastrous investments. The Ombudsman also applied an interest rate of 8% per annum to the sum from the date of the determination to the date of payment.

Wider Application / Key Takeaways

Whilst this case was extraordinary on its facts as it involved multiple severe breaches of duties, maladministration and dishonesty, there are critical lessons that every trustee of a pension scheme should heed. No matter the size of the scheme, the need to have regard to the diversification of investments is imperative to mitigate against financial risks. Furthermore, maintaining meticulous records and seeking professional advice where necessary are vital aspects of responsible trusteeship.

This case also emphasises the need for vigilance against pension liberation schemes and unauthorised payments. In fact, under the Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021 (the “Regulations”), trustees are required to take 'transfer check requirements' before a transfer can take place to minimise the risks of scams occurring.