The Yateley Industries for the Disabled Ltd Pension and Assurance Scheme - Special procedure

Special Procedure under Section 98(2)(a) of the Pensions Act 2004 (the Act)

The Pensions Regulator case ref: C23099076

Introduction

The Determinations Panel (the Panel), on behalf of the Pensions Regulator (the Regulator), met on 29 August 2013 to consider the issues in the Request to exercise Regulatory Functions in respect of the Scheme (the Special Procedure Request) dated 28 August 2013. The Panel was asked to consider the appointment of an independent trustee with exclusive powers and related orders. In doing so, the Panel considered whether the use of the Special Procedure pursuant to Section 97 of the Act (the Special Procedure) was appropriate.
In summary, the Panel determined that the use of the Special Procedure was appropriate and that an independent trustee, Dalriada Trustees Limited, be appointed for the reasons set out below.

Matters to be determined

Pursuant to Section 97(2) of the Act the Panel was asked to use the Special Procedure, and therefore dispense with the giving of a warning notice, because there was, or the Regulator considered it likely that if a warning notice were to be given there would be, an immediate risk to:

i. the interests of the members of the Scheme; or

ii. the assets of the Scheme.
The Panel was asked to make an order under Section 7(3)(a), 7(3)(c) and 7(3)(d) of the Pensions Act 1995 to appoint a 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 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); or

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

and for the powers or duties of any trustee so appointed to be to the exclusion of other trustees, and for any fees and expenses of a trustee so appointed to be paid out of the Scheme’s resources and that an amount equal to the amount paid out of the resources of the Scheme be treated for all purposes as a debt due from the sponsoring employer to the trustees of the Scheme.
The Panel was also asked to make a vesting order under Section 9 of the Pensions Act 1995 to vest the Scheme property in any appointed trustee.

Directly affected parties

The following are directly affected by the regulatory action:

i. VerdePlanet Limited ((VerdePlanet) the trustee of the Scheme)

ii. Yateley Industries for the Disabled Limited (the sponsoring employer)

iii. Dalriada Trustees Limited (the independent trustee)

Details of Scheme and the principal employer

The Scheme is a paid up (frozen) scheme with 76 members as at 31 March 2012: 0 Active, 48 Deferred and 28 Pensioner members. The sponsoring employer is Yateley Industries for the Disabled Limited (Yateley). As at 31 March 2010, under the Scheme Specific valuation under Part 3, the Scheme had assets of £2.2 million and the same amount of liabilities. As at the same date the Scheme had a deficit of £1.2 million on a buy-out basis. On 2 August 2013, VerdePlanet advised that the current total value of the Scheme was approximately £1.4 million.

Background to the application

Yateley Industries

Yateley Industries was incorporated in 1948 as a private company limited by guarantee. This means that the company has no shareholders. It has been registered as a charity since 1948.
The company has eight directors, one of whom is Mr Roy Grimwood. The secretary of Yateley Industries is Mr Patrick McLarry, who is also variously described as being the “general manager” and the “chief executive” of the company.
Yateley Industries provides employment and training to disabled individuals at a workshop in Yateley, Hampshire. Its accounts state that employees live on-site in specialist accommodation, owned by the company and that the company is mainly funded by the sale of goods manufactured in the workshop, charitable donations, and local authority / central government grants.
Yateley Industries’ income in the year to 31 March 2012 was £1.029m (2011: £1.034m), of which £1.009m was spent on operations and charitable activity.
According to the Regulator’s records, the Scheme was established in 1974. Yateley Industries has been the Scheme’s sponsoring employer since 22 October 2007.

VerdePlanet

VerdePlanet was incorporated on 15 July 2009. Its registered address is Yateley Industries, Mill Lane, Yateley, Hampshire (the same address as Yateley Industries). The sole shareholders and directors of VerdePlanet are Patrick McLarry and Roy Grimwood – both being part of the senior management of Yateley Industries.
VerdePlanet was appointed as trustee of the Scheme on 1 April 2011, replacing the previous trustee AWD Chase Devere. The decision to appoint VerdePlanet appears to have been influenced by Yateley Industries’ concerns in relation to the performance of AWD Chase Devere. These concerns are set out in a letter to the Regulator dated 28 June 2013, but are not considered in this Application.
According to the Regulator’s records, the Scheme is the only occupational pension scheme in relation to which VerdePlanet acts (or has ever acted) as trustee. Those records also suggest that neither Mr McLarry nor Mr Grimwood act (or have ever acted) as trustee of any occupational pension scheme in a personal capacity. The Regulator has therefore queried why VerdePlanet, with Mr McLarry and Mr Grimwood as directors, was considered to have the necessary knowledge and skill for the proper administration of the Scheme.

Investment history

During the period of its appointment, VerdePlanet has exercised its power of investment (and disinvestment) as trustee in relation to Scheme assets. A substantial proportion of the assets of the Scheme have been invested in what appear to be relatively high risk, illiquid assets.
The Regulator currently has limited information about the Scheme’s assets and is largely reliant upon the Scheme accounts as at 31 March 2012 (the Scheme Accounts). (It is not clear to the Panel whether these accounts are still in draft, although they appear to have been approved by the Trustee on 18 June 2013.)
The Scheme Accounts show net assets of the Scheme as being £1,484,855. As at 31 March 2011, 97.4% of the Scheme’s assets were invested in insurance policies, understood to have been held with Legal & General. However in the year to 31 March 2012, £1,003,642 was disinvested and the holding reduced to £633,851 (42% of Scheme assets).
The Scheme Accounts indicate that some of the proceeds from the disinvestment have been invested in a number of investments which the Regulator has stated are unusual. These investments appear to account for approximately half of the proceeds of the sale of insurance policies. The remaining funds have been partially used as a ‘refund of contributions’ to Yateley Industries and to pay members’ benefits, around £100,000. The present position in relation to the remaining funds, estimated at around £300,000, is unknown.
Summarised briefly, the unusual investments identified by the Regulator are as follows. (It appears from a letter dated 2 August 2013 that VerdePlanet has not taken independent financial advice on the investments made).

Phoenix Helicopter Academy Limited (PHAL)

PHAL operates a helicopter flying school and acts as a charter provider. PHAL is not a listed company and has three shareholders. It is therefore assumed that its shares are not frequently traded.
PHAL’s abbreviated accounts for 2011 and 2012 show retained earnings of £2,753 at 30 June 2011 and retained losses of (£16,747) at 30 June 2012. For the same period, tangible assets have increased from nil to £72,412 although it is not clear from the accounts what these assets are.
The Scheme Accounts state that during the year to 31 March 2012 VerdePlanet invested £50,000 of Scheme funds in acquiring 500 ‘B’ ordinary shares of £1 each in PHAL. PHAL’s annual return as at 14 April 2013 reflects this shareholding, and PHAL’s 2012 accounts suggest that the shares were acquired on 9 December 2011.
The Scheme Accounts also note that Mr McLarry was appointed as a non-executive director of PHAL “to monitor the progress of the investment”. PHAL’s annual return as at 14 April 2013 reflects this appointment, which the Regulator understands was made on 31 July 2012.
There appears to have been a further significant investment by VerdePlanet of Scheme funds in PHAL. A charge was registered at Companies House by Mr Grimwood in relation to the granting of security by PHAL to VerdePlanet, as trustee of the Scheme.
The Third Amendment to the Deed (which the Panel understands is available from Companies House) indicates that the Scheme’s investment is on the following terms

i. VerdePlanet (as trustee of the Scheme) has invested £278,000 in PHAL. It is not clear whether this includes the initial £50,000 equity investment, or is in addition to it;

ii. the investment will be for an initial duration of three years (which may be extended on the agreement of the directors of PHAL (which includes Mr McLarry) and VerdePlanet) and a 5% annual dividend (£13,900) is to be paid for that initial period;

iii. the investment is secured by a fixed and floating charge over all assets of PHAL.
The £278,000 investment in PHAL represents around 19% of Scheme assets. This assumes that the figure stated in the Deed incorporates the initial £50,000 investment – if this assumption is wrong, then the percentage of Scheme assets invested in PHAL would be higher.
The Regulator noted that Mr McLarry appears to have been a customer of PHAL on a number of occasions during mid to late 2011, coinciding with the investment of Scheme funds by Mr McLarry and Mr Grimwood in PHAL. PHAL’s website includes several references to Mr McLarry’s various activities with the company.

Real property - warehouse

The notes to the Scheme Accounts show (as a ‘post balance sheet event’) that £118,000 of Scheme funds were utilised to purchase a property. The date of the purchase is not clear, however it is presumed to have taken place after 31 March 2012 (given its description as a post balance sheet event) but before 18 June 2013 (on which date the Scheme Accounts were purported to have been approved).
The Scheme Accounts do not provide any details of the property, and the Regulator has been unable to identify the property from the information it currently holds. However in a letter from VerdePlanet (signed by Messrs McLarry and Grimwood) dated 2 August 2013 it is stated that the property is currently being used as a warehouse whilst VerdePlanet gains “the required planning permissions to develop the building for a profitable resale”.
The Scheme Accounts note that the property is held in the name of P J McLarry in trust for the Scheme. Mr McLarry is not a trustee of the Scheme (being instead a director of the company which is the trustee); therefore it appears unusual that title to the property is registered in his name.
The Regulator has no information as to why the property was acquired, whether it was acquired at arms’ length and for fair value. At a price of £118,000 the investment would represent around 8.3% of Scheme assets.
In addition to concerns about the decision to acquire the property and the price at which the property was acquired, the Regulator has further concerns in relation to VerdePlanet’s dealings with the property post-acquisition. These concerns relate to the fact that it is leased to Plane Sailing Sales Limited (“Plane Sailing”) under a 12 year lease agreement at a rental of £6,000 per annum.
The registered address of Plane Sailing is the same as that of Yateley Industries and VerdePlanet. The directors of the trustee have confirmed that Plane Sailing is a company dealing in antiques. The sole director and shareholder of Plane Sailing is Sandra Dudley who is the wife of Mr McLarry.
Ms Dudley acquired the shares in Plane Sailing from Mr McLarry on 19 November 2012, on which date Mr McLarry also resigned as director. It is not clear from the information in hand whether agreement to lease the property to Plane Sailing took place before or after the transfer of shareholding and directorship to Ms Dudley.
Plane Sailing has filed dormant accounts for the years ended 31 March 2011 and 31 March 2012. It has a capital base of £1. The Regulator noted that it is unclear how Plane Sailing can meet the rental cost of the property.

Loan to Plane Sailing

In a letter from VerdePlanet, dated 2 August 2013, Messrs McLarry and Grimwood, advise that the Scheme has made an investment in Plane Sailing in addition to the lease of the property to that company. The letter states that the “outstanding Scheme investment” in Plane Sailing amounts to £62,500 which the directors advise represents 4.5% of the Scheme assets.
The letter does not make the nature of the investment clear. However, the Scheme Accounts note that funds of £59,500 were used as a loan and it has been assumed by the Regulator that the investment in Plane Sailing referred to in the letter is a loan. No information is provided as to the duration or other terms of this loan.
The letter from Messrs McLarry and Grimwood states that a condition of the investment is that Plane Sailing holds stock at all times to a level in excess of the outstanding monies owed to the Scheme and that the stock is “audited annually by the Trustees to ensure compliance and thus secure the Scheme funds”. The Regulator noted that it is unclear as to whether Mr McLarry or Mr Grimwood are qualified to value antiques.

Loan to VerdePlanet

The notes to the Scheme Accounts state that as at 31 March 2012, £49,780 was owed by VerdePlanet to the Scheme. No further information is provided as to the nature or terms of this debt, however the Regulator has assumed that VerdePlanet (as trustee) has loaned Scheme funds to itself.

Requirements in relation to investments

Legislative requirements

As the Scheme has fewer than 99 members, legislation requires VerdePlanet to have regard to the need for diversification of assets (and not the security, liquidity of assets etc) when exercising their investment discretion.
Even with regard to the more limited statutory requirements for smaller schemes, the Regulator submitted that VerdePlanet has failed to exercise its powers of investment to avoid accumulations of risk in the Scheme’s portfolio as a whole, for the following reasons:

i. the investment in PHAL amounts to around 19% of the Scheme’s assets. The members of the Scheme are therefore at risk due to the accumulation of risk in, and reliance on, PHAL particularly given that the company is generally in a weak financial position;
ii. around 8% of the Scheme’s assets have been invested in a single property. The Scheme’s funding position is therefore substantially reliant on the value of that particular property and the success of VerdePlanet’s redevelopment plans.

Conflicts of interest

43. The Regulator submitted that a number of the investment decisions made by VerdePlanet involve a conflict of interest, or a potential conflict of interest, as follows:

i. the loan to Plane Sailing - given the relationship between the trustee and Plane Sailing - gives rise to a conflict of interest. (It is noted, however, that the letter from VerdePlanet makes clear that Mr McLarry “takes no part in any decision concerning [the loan to Plane Sailing]”);

ii. the decision by VerdePlanet to use Scheme funds to loan money to itself represents a clear conflict of interest;

iii. the vesting of the ownership of the property currently being used as a warehouse in the name of Mr McLarry, and the lease to Plane Sailing, a company owned and controlled by Ms Dudley are areas of potential conflict;

iv. the investment in PHAL is a further area where there is a potential conflict. As Mr McLarry has used the services of PHAL on a number of occasions, the Regulator suggested that this relationship may have led Mr McLarry to obtain, or to expect to obtain, some direct or indirect benefit from the investment of Scheme funds.

Selecting appropriate investments

The Regulator submitted that the investment decisions made by VerdePlanet are contrary to legislative and common law requirements to have regard to the need for diversification of assets and to achieve the best return for members of the Scheme for the following reasons:

i. the investment in PHAL concentrates a high proportion of the Scheme’s assets in a single company within a single industry. Both the return, and the capital invested, is therefore reliant on the performance and asset base of a single company in a generally weak financial position. Despite this risk, the investment achieves a return of only 5% pa;

ii. approximately 8% of the Scheme’s assets have been invested in a single property such that the Scheme’s funding position is substantially reliant on a particular property and the success of speculative redevelopment plans;

iii. the loan to Plane Sailing appears to generate a return of 3%. In the Regulator’s view, the Scheme could obtain a greater yield through other investments which would present less risk than a single, apparently dormant, company dealing in antiques;

iv. the loan made by VerdePlanet to itself appears not to be in the best interest of members given that VerdePlanet’s ability to repay is wholly dependent (according to its accounts) on its ability to charge funds from the Scheme itself.

Refund of contributions

Valuation cycle

According to the Regulator’s records, the previous trustees of the Scheme undertook valuations on a triennial basis. The valuation as at 1 April 2006 showed a deficit (on a ‘Part 3’ basis) of £226,000, which had worsened to a deficit of £520,000 at the time of the 1 April 2009 valuation.
As a result of the deficit shown in the 2009 valuation, the trustees were required to put in place a ‘recovery plan’. The agreed recovery plan required deficit repair contributions to be paid by Yateley Industries to the Scheme at the rate of £3,114.27 per month (or £37,371.24 pa), increasing by 3% pa on 1 April each year.
Shortly after its appointment, VerdePlanet chose to obtain an early valuation with an effective date of 31 March 2010. In spite of the valuation one year earlier having shown a significant deficit, the 2010 valuation showed a £3,000 surplus.
As the Scheme was in surplus it was not required to submit the valuation to the Regulator and so the Regulator has no further information about the assumptions used. However the Regulator considered it reasonable to assume that VerdePlanet agreed assumptions which were less prudent than those used in the previous valuation to enable the deficit to appear to have been eliminated.
Without seeing the 2010 valuation and knowing what the new assumptions were, the Regulator has questioned how VerdePlanet acted in the best interests of members of the Scheme by:

i. commissioning an early valuation; and

ii. apparently adopting assumptions which had the effect that the Scheme had no deficit on a ‘Part 3’ basis, so that no contributions were required.

Refund to Yateley

It appears that, following the completion of the 2010 ‘out of sequence’ actuarial valuation of the Scheme, VerdePlanet made a payment to Yateley as a ‘refund’ of contributions. This is evident from the following:

i. the Scheme Accounts show a payment to Yateley during the year to 31 March 2012 of £97,499. The accounts state: “There was a refund of £97,499 for contributions in respect of the reversal of the previous deficit shown in the actuarial valuation.”

ii. Yateley’s accounts for the year to 31 March 2012 show a ‘refund’ of £42,620. Mr Grimwood’s foreword to those accounts states the following:

“The accounts show a surplus of £52,280. The turn round was entirely due to the efforts of all staff, plus a refund from the pension fund, and for that they should be congratulated…..

“We [meaning Mr Grimwood and Mr McLarry] realised that from 1st April 2010, as the scheme was then in surplus, all monies paid to AWD [presumably by Yateley] during the period 1st April 2010 to 31 March 2011 should be classed as an overpayment. We therefore contacted AWD and, eventually, in June of 2011, received almost £43,000 back into the Trustee account. This money has been given to Yateley….”
The Regulator noted the discrepancy between the amounts shown in the respective documents – with the Scheme Accounts referring to a figure over £50,000 higher. Notwithstanding issues relating to the legality of any refund from the Scheme, it is unclear how VerdePlanet could come to a figure of £97,499. The Scheme Accounts show that in the year to 31 March 2011 (ie the 12 months after the effective date of the 2010 valuation), Yateley made net contributions of £42,982. It would appear to the Regulator, therefore, that if the Scheme Accounts are correct, Messrs McLarry and Grimwood decided to pay to Yateley almost £55,000 more than Yateley had paid in the period since the effective date of the valuation.
As regards the legality of any refund from the Scheme, the Regulator drew the Panel’s attention to legislation imposing strict restrictions on the payment of surpluses to sponsoring employers (section 37 of the Pensions Act 1995 and the Occupational Pension Schemes (Payments to Employer) Regulations 2006 (the Surplus Regulations)).
It is not clear whether any or all of the requirements of Section 37 have been satisfied. Even if they have, the Regulator queried how VerdePlanet could have come to the conclusion that it was in the best interests of members (in their capacity as Trustees of the Scheme) that monies should be repaid to Yateley Industries.
Moreover, the Regulator noted that the fact that the 2010 valuation showed a small surplus on a ‘Part 3’ basis was irrelevant to the question of whether any funds could be paid to Yateley Industries. Section 37 provides that a surplus may only be paid if the relevant actuarial certificate showed that the Scheme had a surplus on a buy-out basis.
The Regulator’s records (input in this case by the Scheme actuary) show that as at 31 March 2010, the Scheme had a buy-out deficit of over £1.2 million. The Regulator therefore submitted that VerdePlanet should not have made any refund to Yateley Industries as there was not a surplus (calculated on the correct basis) which could be refunded.

Decision

The Panel determined that an Order be made in the following terms:

Appointment of an independent trustee

“Dalriada Trustees Limited of 7th Floor, Chambers of Commerce House, 22 Great Victoria Street, Belfast, BT2 7BA is hereby appointed as trustee of the Yateley Industries for the Disabled Ltd Pension and Assurance Scheme (the Scheme) with effect from 29 August 2013.

This order 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); and

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

The powers and duties exercisable by Dalriada Trustees Limited shall be to the exclusion of all other trustees of the Scheme pursuant to section 8(4)(b) of the Pensions Act 1995.

Pursuant to section 8(1)(b) of the Pensions Act 1995, the fees and expenses of Dalriada Trustees Limited shall be paid out of the resources of the Scheme.

Pursuant to section 8(2) of the Pensions Act 1995, it is ordered that an amount equal to the amount paid out of the resources of the Scheme by virtue of section 8(1)(b) is to be treated for all purposes as a debt due from Yateley Industries for the Disabled Limited (the sponsoring employer) to the trustees of the Scheme.

Pursuant to section 9 of the Pensions Act 1995, any property of the Scheme be also vested in or be transferred to Dalriada Trustees Limited.

This order may be terminated, or the appointed trustee replaced, at the expiration of 28 days notice from the Pensions Regulator to the appointed trustee, pursuant to section 7(5)(c) of the Pensions Act 1995.”

Reasons for decision

In making its decision the Panel had regard to the objectives of the Regulator as set out in Section 5 of the Act and to the matters mentioned in Section 100.
The Panel determined that it was appropriate to use the Special Procedure and exercise the regulatory function immediately. In the Panel’s view there was an immediate risk to the interests of members or the assets of the Scheme, for the following reasons:-

i. since its appointment on 1 April 2011, the Trustee has made a number of unusual investments in what appear to be high risk, illiquid assets, including an investment in PHAL, the purchase of a warehouse, an investment in Plane Sailing and a loan to the Trustee;

ii. there appears to be a continuing course of conduct in making such inappropriate investments; and

iii. from the information available to the Regulator, there appears to be in the region of £300,000 of Scheme funds, disinvested from the Legal & General policies, which may be at immediate risk of further inappropriate investment.
The Panel further determined that it was appropriate to appoint an independent trustee, Dalriada Trustees Limited, because of the serious concerns identified by the Regulator.
In particular, the Panel’s decision was based on the following:-

60.1 The Trustee appears not to have the required knowledge and understanding of the principles relating to the investment of Scheme assets, including the requirements of Section 36 of the 1995 Act together with common law requirements. In particular, the Trustee appears to have failed to properly diversify the Scheme’s portfolio or invest in the best interests of members by:-

i. investing a high proportion of the Scheme assets in PHAL, a single company in a single industry;

ii. investing approximately 8% of the Scheme’s assets in a single property;

iii. investing in Plane Sailing, a single dormant company dealing in antiques;

iv. making a loan to the Trustee itself where the ability to repay the loan is entirely dependent on the Trustee’s ability to charge funds from the Scheme.

The Panel noted that the Trustee has stated that it did not obtain independent investment advice on the investments.

60.2 A number of the investment decisions made by the Trustee, appear to involve a conflict of interest or potential conflict of interest, including:-

i. the relationship between Plane Sailing and the Trustee;

ii. the loan made to the Trustee;

the vesting of the warehouse in the name of Mr McLarry and the lease to Plane Sailing, a company owned and controlled by Ms Dudley (Mrs McLarry).

60.3 It appears that the Trustee has failed to understand the legislation relating to payment of surpluses to employers in making a payment to the Employer of £97,499 or £42,620, whichever it may be.

Important notices

This Determination Notice is given to you under Sections 98(2)(a) of the Act. The following statutory rights are important.

Compulsory review

This determination is subject to a compulsory review by the Regulator under Section 99 of the Act. Any representations received will be considered by the Regulator before a determination is made on review. This review must be determined as soon as reasonably practicable.
The Regulator’s powers on a review under this Section include power to

i. confirm, vary or revoke the determination;

ii. confirm, vary or revoke any order, notice or direction made, issued or given as a result of the determination;

iii. substitute a different determination, order, notice or direction;

iv. deal with the matters arising on the review as if they had arisen on the original determination, and

v. make savings and transitional provision.
You will be informed of the outcome of the review by way of a 'Final Notice'.

Referral to the Tax and Chancery Chamber of the Upper Tribunal

After the compulsory review, you will have the right to refer the matter, to which this Determination Notice relates, to the Tax and Chancery Chamber of the Upper Tribunal (The Tribunal) under Section 99(7) of the Act. The Final Notice will give more details regarding referrals to the Tribunal.

Chairman: Anthony Stern

Dated: 6 September 2013