Mr Andrew Kyprianou and Mr Colin Werb - Determination notice

Standard Procedure Determination Notice under section 96(2)(d) of the Pensions Act 2004 and section 4(1)(a) of the Pensions Act 1995

Mr Andrew Kyprianou and Mr Colin Werb

The Pensions Regulator case ref: C154321168

By a request dated 18 September 2020 (the Request) the case team (the Case Team) of The Pensions Regulator (TPR) asked the Determinations Panel (the Panel) of TPR, to consider the issues in a warning notice (the Warning Notice) dated 6 August 2020.

Matters to be Determined

The Warning Notice asked the Panel to make an order under section 4(1)(a) of the Pensions Act 1995 (PA 95) to suspend Andrew Kyprianou (Mr Kyprianou) and Colin Werb (Mr Werb), together the "Current Trustees", from the Eastman Machine Company Limited Superannuation Scheme (the Scheme) pending consideration being given to the making of orders prohibiting the Current Trustees pursuant to section 3(1) PA 95. The Warning Notice also asked that, if the Current Trustees were suspended, an independent trustee should be appointed to the Scheme. The Panel’s determination in relation to the request to appoint an independent trustee is set out in a separate determination notice.

The Decision

The Panel determined that each of the Current Trustees should be suspended from acting as trustees of the Scheme for a period of 12 months (from and including 11 December 2020 until and including 10 December 2021). The terms of the orders suspending the Current Trustees are recited at the conclusion of this notice (Determination Notice). This Determination Notice gives the Panel’s reasons for those orders.
Where the Panel reaches findings of fact, it does so on the balance of probabilities.

Directly Affected Parties

In any case in which the standard procedure applies the Case Team must provide a warning notice to such persons as appear directly affected by the regulatory action under consideration (see section 96(2)(a) of the Pensions Act 2004 (PA 04)). Under section 96(2)(d) PA 04 the Panel must provide a determination notice to such persons as appear to be directly affected by it.
In this case, the Warning Notice was provided to Mr Kyprianou, Mr Werb and Pi Consulting (Trustee Services) Limited. The Warning Notice explains, with respect to the Current Trustees:
1. Mr Kyprianou is considered by the Case Team to be directly affected by the regulatory action sought against him. He does not appear to be directly affected by the exercise of the regulatory action sought against Mr Werb; and
2. Mr Werb is considered by the Case Team to be directly affected by the regulatory action sought against him. He does not appear to be directly affected by the exercise of the regulatory action sought against Mr Kyprianou.
The Warning Notice was provided to Pi Consulting (Trustee Services) Limited because the Case Team considered it to be directly affected in respect of the related, but separate, request to appoint an independent trustee to the Scheme. As stated at paragraph 2 above, this is the subject of a separate determination notice.
The Panel agreed with the conclusions reached by the Case Team in respect of the persons directly affected by the regulatory actions under consideration and accordingly considered:
1. Mr Kyprianou to be the only person directly affected by the determination to suspend him as trustee under section 4(1)(a) PA 95.
2. Mr Werb to be the only person directly affected by the determination to suspend him as trustee under section 4(1)(a) PA 95.
Although the Panel has, for convenience, issued one Determination Notice in respect of Mr Kyprianou and Mr Werb, the Panel has reached a separate determination in respect of each of them.

The Scheme

The Scheme is a defined benefit occupational pension scheme. It is closed to new members. According to the latest actuarial valuation, the Scheme’s fund size is approximately £1.667 million.
The Scheme’s trustees at the time the Warning Notice was referred to the Panel were Mr Kyprianou and Mr Werb.
According to the Scheme’s trust deed and rules, Mr Kyprianou became a trustee of the Scheme on 17 June 2013 and Mr Werb became a trustee of the Scheme on 18 March 1980.

The Employer

The Scheme’s principal employer is Eastman Staples Limited (company registration no 00175032 — the Employer).
The Current Trustees are both directors of the Employer. Mr Kyprianou was appointed a director on 23 November 2011 and is also a shareholder and person with significant control in the Employer.

The Factual Background

The Warning Notice explains that the Case Team began investigating a series of payments made by the Current Trustees to the Employer following a breach of law report made by the Scheme Actuary to TPR in October 2013. These payments include the following with which the Case Team is noted to be concerned in the Warning Notice are:
1. a payment made in 2017 for £96,000 from the Scheme to the Employer (the 2017 Payment); and
2. a payment made in 2018 for £140,000 from the Scheme to the Employer (the 2018 Payment),
  
  (together the Payments).

The Warning Notice sets out the following background in relation to the Payments which the Case Team characterises as loans made to the Employer.
On 25 July 2012 the Scheme actuary wrote to Philip Houghton (Mr Houghton), who was a trustee of the Scheme alongside Mr Werb and also the secretary of the Employer at the time, copied to Mr Werb concerning a historic loan made by the Scheme to the Employer. The Case Team states that this historic loan is not a feature of these proceedings. This advice stated:

…I have looked up the rules covering employer loans this morning and they are not allowed…

The loan must be repaid immediately to avoid remaining in breach of these regulations. The Pensions Regulator’s guidance includes the authorisation of a loan to the employer as an example of a ‘red light’ breach of the law, which means that it must be reported straight away [to TPR] …”

On 14 January 2013 the Scheme actuary reiterated this advice in the presence of both Mr Werb and Mr Kyprianou at a trustee meeting. (The Panel notes Mr Kyprianou was not yet appointed as trustee of the Scheme during this meeting but is listed as a representative of the Employer in the minutes). The minutes of the meeting read as follows:

“… [the Scheme actuary] stated that the scheme was not allowed to make a loan to AK [Andrew Kyprianou]. The £75,000 should therefore be repaid or a legal agreement made showing the scheme’s ownership of a proportion of the building. The Aviva policy has made a return of 7% over the last three years. AK outlined his plan to invest a substantial part of the scheme’s funds in property to produce a better return than has been achieved recently. [Scheme actuary] has subsequently advised that this proposal would not be an acceptable risk unless a larger number of properties were involved…”

On 11 April 2018 the Scheme actuary emailed Mr Werb stating:

“Hello Colin,

Phil has sent through the information below for the FRS 102 pensions accounting figures. I am surprised that this shows a “loan to company” of £96,000 [the 2017 Payment] — as you know, from previous experience, loans are prohibited by the investment regulations. If this is indeed a loan to the company then I will be required to report this to the Pensions Regulator as a breach of the law…”

On 12 April 2018 Mr Werb responded to the Scheme actuary stating:

“…Thankyou for your email dated yesterday.

We did drawdown £96,000 as an investment in to the company as we were not happy with the interest returns from Aviva.

To date 50% of the loan has been repaid in to the fund at an interest bearing rate of 5%.

As I said earlier the repayment will continue by monthly direct debit until the fund has received payment in full.

Our ultimate goal is to ensure security for the deferred pensioners as well as those currently drawing pension and to reduce the deficit …

We acknowledge your comment to report us for breach of regulation…”

Mr Kyprianou was copied in on this response.

On 26 October 2018 the Scheme actuary emailed Mr Werb stating:

“… The draft accounts attached to [Mr Houghton’s] email below show that a further loan of £140,000 [the 2018 Payment] was paid to the company on 23/3/18. As you know, as Scheme Actuary I am required to report any breach of the law to the Pensions Regulator, and my report is attached to this email…”

Under the heading “Related Party Disclosures” in the draft 2017-18 accounts, referred to in the Scheme actuary’s email set out immediately above state amongst other matters:

“In 2012-13 a loan was made to A Kyprianou, the 100% shareholder of the employer company, of £75,000. This had been reduced to £39,250 by July 2018.

A further loan of £96,000 was made in 2016 to 17 to Eastman Staples Ltd. This is to be repaid over 18 months to January 2019 with interest of 5%. This had been reduced to £26,915 by July 31 2018.

A further loan of £140,000 was made in 2017 to 18 to Eastman Staples Ltd. This is to be repaid over 15 months to June 2019 with interest of 5%. This had been reduced to £101,422 by July 2018.”

On 25 March 2019 the Case Team held a telephone call with Mr Kyprianou, then described as the Chair of Trustees. The Case Team’s attendance note of that call records that Mr Kyprianou referred to as “AK” stated, amongst other things, the following:

“…that Harvey and Clamp (scheme actuary) advised the trustees that they were not allowed to withdraw funds from the scheme for a proposed property investment.”

When asked by a member of the Case Team about the £140,000 disinvestment [the 2018 Payment]:

“AK said it went into the company to keep it afloat. Brexit has affected the company quite dramatically. AK said there was no risk to the pension itself, as it is only giving more interest to the scheme. AK explained that whatever way you look at it, they (the pension scheme and the company) are both tied in together. AK continued; if the company goes bust the pension doesn’t, the idea is to close the deficit…”

When a member of the Case Team asked for confirmation from AK that the trustees had never once been advised against the Scheme making loans to the company:

“AK said No, the only advice the trustees had received was in relation to property investments…”

On 25 July 2019 the Current Trustees voluntarily attended interviews under caution at the request of the Case Team. During the interviews, the Current Trustees stated that the Case Team was wrong to characterise the Payments as loans. They explained that the Payments were not loans but represented an investment by the Scheme in a commercial property venture with the Employer.
The Current Trustees stated that the venture concerned the purchase by the Employer of a commercial property (the Property) on 28 March 2018. In consideration for the funds advanced to it, the Employer had granted the Scheme the entire beneficial interest in the Property with a view to redeveloping it so as to enhance its value for the benefit of the Scheme.
During the interview the Current Trustees produced copies of minutes of trustee meetings held on 20 January 2016 and 6 February 2018 (the Minutes) that purportedly recorded the decision by the Current Trustees (in their capacity as trustees) to acquire a beneficial interest in the Property.
The Minutes, dated 20 January 2016 include the following:

“Agenda

Discussion of the Purchase of St Stephens Church by Eastman Machine Company Superannuation Scheme

Discussion
1. St Stephens Church
  On behalf of Eastman Staples Ltd, Andrew Kyprianou has been in discussion with The Church of England regarding the purchase of the Church of Radcliffe St Stephens since 2015 and a bid of £168,000 has been accepted.
  …
2. Pension Scheme Valuation
  As per 2015 accounts, the scheme is currently valued with an £104,000 deficit. This is unlikely to be covered via the Aviva Investment Scheme, which is not performing as expected.
3. Scheme Investment
  It is proposed by Andrew Kyprianou that it will be beneficial for the Scheme to purchase the Church. After discussions with local estate agents and valuers. It is believed that there will be a high demand for office space in the area.
  
  A yield of between 7 to 10% can be achieved if the property is rented, which is significantly higher than the return from the Aviva Scheme.
  
  It is also believed that the capital value of the property will significantly increase once planning has been accepted, and further increase will be obtained once the development is completed. Both trustees agreed that the investment into the Church will turn the pension scheme into surplus in near future which would be highly beneficial to the members of the Scheme.
  
  Both Trustees agree that this is most sensible option to reduce the deficit of the scheme, and to protect the interests of its members.
  
  It is estimated the purchase completion date will be around July 2016. Preparation for planning will begin immediately. It is agreed by the trustees that the Scheme will be responsible for the purchase of the property and all fees associated with the project. It has been agreed that around £100,000 will be advanced before completion, this is to be available when required.”

The second set of minutes, dated 6 February 2018, state where relevant:

“…
1. Completion Date
  We expect that the completion of purchase of St Stephens Church is to be carried out in the next 4 weeks.
2. Funds Required
  Eastman Staples has requested the funds of £140,000 to complete the purchase of Church on behalf of the pension scheme and to cover old outstanding balances. Trustees approve the bank transfer of £140,000 to Eastman Staples Ltd. The purchase price is set at £168,000 which will be required on the completion date.”
A copy of a Declaration of Trust dated 23 March 2018 (the Deed) granting the Scheme a beneficial interest in the Property said to have been purchased by the Employer was also provided to the Case Team. The Deed which identifies “Eastman Staples Limited of 131 Lockwood Road, Huddersfield, HD1 3QW” as the “Trustee” and “Eastman Machine Company Limited Superannuation Scheme of 131 Lockwood Road, Huddersfield, HD1 3QW” as the “Beneficiary”. It provides by way of background that “[t]he Trustee owns the Property” and that the “Trustee wishes to declare a bare trust of the Property in favour of the Beneficiary”. The Property is stated to be “the freehold property Church of Rashcliffe, St Stephen’s, Victoria Road, Huddersfield”. Clause 2 of the Deed provides that “The Trustee irrevocably declares that, from the date of this Deed, they hold the Property on trust for the Beneficiary absolutely.”
To assess the legitimacy of the copies of the Deed and Minutes the Case Team requested further information from a number of persons using its information gathering power under section 72 PA 04. The Case Team states that each of the section 72 requests asked the recipient to provide original copies of the Deed and/or the Minutes. The Panel has not been provided with copies of the section 72 requests nor the responses to them.
The Warning Notice sets out that from the responses received the Case Team noted the following:
1. The firm of solicitors who acted for the Employer on the sale of the Property could find no trace of the Deed on its document management system. Had the firm drafted the Deed the Case Team would have expected it to have retained copies of the Deed;
2. During the interview with the Case Team Mr Werb identified an “accountant” as being the author of the Minutes. The Case Team subsequently submitted an information request to the Employer’s accountant who confirmed he had not drafted the Minutes;
3. The Scheme’s auditor also confirmed that it had not drafted the Minutes;
4. Mr Houghton confirmed that he had no knowledge of the Minutes or the Deed;
5. Neither Mr Werb nor Mr Kyprianou were able to provide original copies of the Minutes or the Deed nor any electronic metadata that could evidence when they were created;
6. The witnesses to the Deed confirmed that the Deed had been signed on 23 March 2018. None of the witnesses produced an original copy of the Deed.
On 16 July 2020 the Case Team laid criminal charges against the Current Trustees for making employer-related investments contrary to section 40(1) PA 95 and for allegedly providing false or misleading information contrary to section 80(1) PA 04 (together the Charges).

The Law

Section 4 PA 95 sets out the Panel’s discretion to suspend a trustee in the following terms:

“(1) The Authority [i.e. the Regulator, acting through the Panel] may by order suspend a trustee of a trust scheme—

(a) Pending consideration being given to the making of an order against him under section 3(1)”
The power to make an order under section 4(1) PA 95 suspending a trustee is a regulatory function listed in section 97(5) PA 04 (see section 97(5)(k)).
Section 3(1) PA 95 sets out the power of the Panel to prohibit a person from being a trustee in the following terms:

“(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.”
Section 36 PA 95 requires trustees to obtain and consider “proper advice” prior to the investment of scheme funds and requires such advice to be evidenced in writing.
Section 40(1) PA 95 states:

“(1) The trustees or managers of an occupational pension scheme must secure that the scheme complies with any prescribed restrictions with respect to the proportion of its resources that may at any time be invested in, or in any description of, employer-related investments”.
Section 40(2) PA 95 defines “employer-related investments” as follows:

(2) In this section — “employer-related investments” means— …

(d) loans to the employer or any such person…
The “prescribed restrictions” referred to in section 40(1) PA 95 are set out in Regulation 12(2A) of The Occupational Pension Schemes (Investment) Regulations 2005 (the Investment Regulations) which provides:

“(2A) Subject to regulations 14, 15, 15A and 16, none of the resources of a scheme may at any time be invested in any employer-related loan.”
Section 40(5) PA 95 creates a criminal offence in the event that a person contravenes section 40(1) PA 95.
Section 80 PA 04 provides (where relevant) that:

“(1) Any person who knowingly or recklessly provides the Regulator with information which is false or misleading in a material particular is guilty of an offence if the information—
(a) is provided in purported compliance with a requirement under—
…
(iii) section 72 (provision of information)”

The Case Team’s Submissions

As set out above in its Warning Notice the Case Team identifies two principal concerns as regards the Payments to the Employer:

(i) Employer-Related Investment Breaches

The Case Team submits that the Payments are properly to be characterised as loans to the Employer, and as such are prohibited by virtue of section 40(2) PA 95 and the underlying Investment Regulations. Notwithstanding the Current Trustees’ assertion that the payments were not loans to the Employer but investments by the Scheme in property, the Case Team maintains that the evidence points to the payments being prohibited loans which was also the view of the Scheme actuary.

(ii) The Governance Breaches

The Case Team also submits that the loans to the Employer:
1. Were made by the Current Trustees in full knowledge of the fact that they amounted to prohibited employer-related investments. This is because the Current Trustees had been advised by the Scheme Actuary in July 2012 (and occasions thereafter) that “loans” made to the Employer were prohibited;
2. Were highly unsuitable investments for the Scheme to make since they were unsecured and undocumented. Further, that they were made without any investment advice being taken contrary to the requirements of section 36 PA 95 and underlying regulations;
3. Subordinated the interests of the Scheme to those of the Employer since the Current Trustees were directors, and in the case of Mr Kyprianou, a shareholder and person with significant control in the Employer. Accordingly, the decision to advance Scheme assets to the Employer was taken while the Current Trustees were in an acute position of conflict.

The criminal proceedings

The Case Team submits that there is a clear inconsistency as between the contemporaneous evidence that characterises the Payments as loans, and the Minutes and the Deed. Given this, the Case Team believes that there is a realistic prospect of satisfying a criminal court that the Minutes and the Deed are not genuine and that the Payments are prohibited employer-related investments, being loans to the Employer.
Given the factual background set out above and the ongoing criminal proceedings, the Case Team states that consideration is being given to prohibiting each of the Current Trustees and requests suspension of the Current Trustees pending such consideration.
In the event of successful convictions in respect of some or all of the Charges, the Case Team submits that the basis for the prohibition orders would be that the Current Trustees are not fit and proper persons to be trustees of an occupational pension scheme because:
1. they would have been convicted of providing false or misleading information to TPR which would call into question their honesty and/or integrity;
2. they would have been convicted of making ERI loans in circumstances where:
  1. they had been advised that the loans were prohibited but chose to proceed
  2. they were in positions of acute conflict when making those decisions given that they were directors, and in the case of Mr Kyprianou owner, of the Employer thereby failing to put the interests of the Scheme and scheme members first
  3. made investments of Scheme funds without first obtaining appropriate investment advice as required by section 36 PA 95; and
  4. chose not to tell the Scheme actuary until sometime after the Payments had been made
The Case Team submits that the above factors would call into question the Current Trustees’ competence and capability, and possibly their integrity.
The Case Team further submits that, even if the criminal proceedings do not lead to convictions, it may still consider prohibition proceedings referring to the various governance breaches identified above.

Representations

Having not provided representations in response to the Warning Notice by the date specified by the Case Team, the Current Trustees via their legal representatives requested an extension of time in order to do so. This request was granted by the Panel and time allowed to 27 October 2020 for any representations to be submitted. No representations were provided by that date nor have been provided since.

Reasons for Decision

In making its decision the Panel had regard to section 100 of PA 04.
The Panel was satisfied that it was reasonable to suspend each of the Current Trustees for 12 months from and including 11 December 2020 until and including 10 December 2021.
For the purposes of this decision the Panel noted that both Mr Kyprianou and Mr Werb were in post as trustees of the Scheme when the Payments from Scheme assets of £96,000 in 2017 and £140,000 in 2018 were made to the Employer. The Panel concluded that both were parties to the decisions to do so and were recipients of, or at the very least aware of, the advice from the Scheme Actuary that the Payments from Scheme assets made to the Employer were not permitted by law.
The Panel considered that in respect of each of the Current Trustees, Mr Kyprianou and Mr Werb, and in the absence of any representations being made to the Panel contradicting the position put forward by the Case Team in the Warning Notice, there was prima facie evidence that a prohibition order under section 3(1) PA 95 would be appropriate, and that in those circumstances an order ought to be made suspending the Current Trustees from the Scheme under section 4(1)(a) PA 95.
The Panel reached this conclusion because on the evidence summarised above, including the inconsistent accounts given on various occasions by the Current Trustees, each of the concerns raised by the Case Team in the Warning Notice, namely the possible criminal offences, breaches of pensions legislation in relation to employer-related investments and other governance concerns, were serious enough to warrant consideration of prohibition proceedings.
Having regard to the interests of Scheme members, the Panel considered that it was appropriate to suspend each of the Current Trustees whilst consideration is given to prohibiting them particularly in the absence of any other constraints to prevent the Current Trustees from making further loans or payments to the Employer, or otherwise using Scheme assets in the interim.
For these reasons, the Panel concluded that the requirements of section 4(1)(a) PA 95 had been made out in respect of each of the Current Trustees and decided to exercise its discretion to suspend both Mr Kyprianou and Mr Werb from acting as trustees of the Scheme.

Conclusion

For the reasons outlined above the Panel determined that orders be made in the following terms:

“THE PENSIONS REGULATOR HEREBY SUSPENDS:

(1) Andrew Kyprianou as a Trustee of the Eastman Machine Company Limited Superannuation Scheme (the Scheme) pursuant to section 4(1)(a) of the Pensions Act 1995 with effect from and including 11 December 2020 until and including 10 December 2021.

(2) Pursuant to section 4(3) of the Pensions Act 1995 this Order has the effect of prohibiting Andrew Kyprianou during the period of the suspension from exercising any functions as a trustee of the Scheme.

(3) Throughout the duration of Andrew Kyprianou’s suspension as trustee, he is authorised and entitled to execute any instrument the sole purpose of which is to effect his removal or resignation as trustee of the Scheme and any trust scheme pursuant to section 4(6) of the Pensions Act 1995.”

And

“THE PENSIONS REGULATOR HEREBY SUSPENDS:

(1) Colin Werb as a Trustee of the Eastman Machine Company Limited Superannuation Scheme (the Scheme) pursuant to section 4(1)(a) of the Pensions Act 1995 with effect from and including 11 December 2020 until and including 10 December 2021.

(2) Pursuant to section 4(3) of the Pensions Act 1995 this Order has the effect of prohibiting Colin Werb during the period of the suspension from exercising any functions as a trustee of the Scheme.

(3) Throughout the duration of Colin Werb’s suspension as trustee, he is authorised and entitled to execute any instrument the sole purpose of which is to effect his removal or resignation as trustee of the Scheme and any trust scheme pursuant to section 4(6) of the Pensions Act 1995.”
Appendix 1 to this Determination Notice contains important information about the Current Trustees’ rights to refer the respective determinations to suspend them from acting as trustees of the Scheme to the Upper Tribunal.

Signed:

Name: David Latham

Dated: 11 December 2020

Appendix 1

Referral to the Tax and Chancery Chamber of the Upper Tribunal

Paragraphs 3 and 8 of this Determination Notice set out the determinations made by the Panel and who the directly affected parties for each determination are. You have the right to refer any determination you are directly affected by to the Tax and Chancery Chamber of the Upper Tribunal (the Tribunal)^[1].

A reference to the Tribunal is made by way of a written notice signed by you or your representative on your behalf and sent or delivered to the Tribunal with a copy of this Determination Notice. The reference notice must be received by the Tribunal no later than 28 days after this Determination Notice is given to you, unless you obtain an extension from the Tribunal.

The Tribunal’s address is:

Upper Tribunal
(Tax and Chancery Chamber)
Fifth Floor
Rolls Building
Fetter Lane
London
EC4A 1NL

Tel: 020 7612 9730

The detailed procedures for making a reference to the Tribunal are contained in section 103 PA 04 and the Tribunal procedure rules.

You should note that the Tribunal procedure rules provide that at the same time as sending or delivering 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

Email: panelsupport@tpr.gov.uk

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

Footnote for this section

[1] Section 96(3)(b) PA 04 also stipulates that a reference may be made by “any other person who appears to the Tribunal to be directly affected by the determination”.