Have you broken the law on scheme investments?

Do you know when a pension scheme can invest in its sponsoring employer or a linked business?

Can you be sure you haven’t fallen foul of the regulations yourself?

If you need any incentive to check, it’s worth noting that making a prohibited employer-related investment (ERI) can lead to a two-year jail sentence or a fine of up to £50,000.

The case of Roger Bessent, an accountant from Lancashire who faces prison after he admitted in court that he had broken the law, is a prime example of what not to do.

The ERI rules are there to stop employers using their pension schemes to prop up their businesses, which would obviously be a risk if the employer becomes insolvent.

There have been rules in place since the 1990s but we still uncover cases of wrongdoing – some of them where trustees have not understood the law, some where they have deliberately broken it.

Part of the problem is that the rules can be complex and also wide ranging. For example, leasing or allowing use of premises owned by the scheme is regarded as an investment, and an investment is regarded as employer-related if it is in a business connected or associated with the employer, which includes a company controlled by the same shareholders.

A particular issue appears to be confusion about the distinction between employer-related loans and other kinds of employer-related investment.

As a general rule, trustees are allowed to invest up to 5% of their scheme’s funds in investments related to their employer, such as in shares in the business. However, that is not the end of their legal duties. They have to monitor the performance of the investments to make sure they don’t go above the 5% threshold (and if the investments do better than the rest of the scheme’s portfolio they may have to sell some of them to comply with the rules).

But employer-related loans are completely forbidden under Section 40 of the Pensions Act 1995 and the Occupational Pension Schemes (Investment) Regulations 2005, regardless of the amount involved. This means that a pension scheme can never loan money or assets to its sponsoring employer. Any unpaid sum owed to the trustees is treated as a loan for these purposes, with some limited exceptions.

One danger here is that if the scheme were allowed to loan the employer money, it would tie itself too closely to the employer. If the business fails, the scheme loses out. There is also the temptation for the employer to seek a loan from the scheme on better terms than it would get from the market. This would be great for the employer – but the scheme would not be getting the best return for its members. Trustees may want to be helpful to the sponsoring employer by agreeing to loans but their responsibility must be to the members – and trustees must also, of course, obey the law.

A final point here is that ERI is not just about employers propping up their businesses – crooks can also get access to scheme funds by making an ERI in an employer that they control. This is another reason why these investments are restricted.

We have a number of investigations ongoing into ERI and we will take action where we suspect offences are being committed.

Sound internal governance is key to avoiding these problems and TPR has issued guidance on how to identify, monitor and manage conflicts of interest, including between the interests of the scheme and the employer.

For more information about ERI see our statement.

Trustees should also visit our website and access the free Trustee Toolkit to ensure they have the skills and knowledge to do their job.

By Simon Broadhurst
Litigation Lawyer