John Marcus Worthington: determination notice

Determination Notice in respect of a section 10 Pensions Act 1995 penalty to John Marcus Worthington in relation to Worthington Employee Pension Top Up Scheme.

The Pensions Regulator case ref: C178413237

Introduction

Members of the Determinations Panel (“the Case Panel”) of the Pensions Regulator (“TPR”) met on 29 November 2022 to consider the issues in a Warning Notice addressed to John Marcus Worthington (“Mr Worthington”) dated 9 August 2022. Mr Worthington is a trustee of the Worthington Employee Pension Top Up Scheme (“WEPTUS” or “the Scheme”).
The Warning Notice was referred to the Determinations Panel on 3 November 2022, following a period to allow for representations.

Matters to be determined

The Warning Notice asked the Determinations Panel to determine whether to issue a penalty notice under section 10 of the Pensions Act 1995 (“PA 95”) for six penalties of £5,000 each, totalling £30,000, in respect of alleged breaches by Mr Worthington of the restrictions on employer-related investments under section 40(1) PA 95 and the Occupational Pension Schemes (Investment) Regulations 2005 (“the Investment Regulations”).
The power to issue a penalty notice requiring a person to pay a penalty under section 10 PA 95 is a reserved regulatory function and is therefore only exercisable by the Determinations Panel.
There was no request from any party to attend the Determination Meeting in this matter, and the Case Panel proceeded on the papers before it. These comprised:
1. the Warning Notice and its exhibits (including the transcripts of interviews, and a Power of Attorney in respect of Mr Worthington supplied subsequently by the Case Team); and
2. the Representations on behalf of Mr Worthington dated 29 September 2022.

The Decision

For the reasons set out below, the Case Panel determined that Mr Worthington be required to pay a penalty in the amount of £29,000.

Next Steps

The penalty notice will not be issued until at least 28 days after the date of this Determination Notice in case a reference of the determination is made to the Upper Tribunal.
The penalty is payable within 28 days of the date of the penalty notice (in accordance with Regulation 21 of the Occupational Pensions Regulatory Authority (Determinations and Review Procedure) Regulations 1997).
This Determination Notice gives the Case Panel’s reasons for its determination.

Directly Affected Persons

Under section 96(2)(d) of the Pensions Act 2004 (“PA 04”) the Determinations Panel must give notice of its determination to such persons as appear to it to be directly affected by it. The Case Panel considered Mr Worthington to be the only person directly affected by this determination.

Background

The Scheme

The Warning Notice gave the following information regarding the Scheme.
WEPTUS is a money purchase trust-based occupational pension scheme. The Scheme’s benefits, although targeted to a percentage of members’ salaries, were not promised to members. The Scheme was designed as a discretionary top-up scheme for longer-serving employees, to top up other pension benefits which members had.
The Scheme was established by a Definitive Deed and Rules dated 5 June 2006 and it was registered as an occupational pension scheme with TPR. Its sponsoring employer was Marcus Worthington and Company Limited (“MWCL”). The trustees of the Scheme at the time of its establishment were Mr Worthington, Stephen Smith and David Boardman. They were also the trustees of the Scheme at the time of the various decisions to enter into certain scheme loans and an investment and throughout the period of those loans and investment in respect of which penalties are now sought.
According to the scheme return submitted by the trustees of WEPTUS to TPR on 22 January 2009, the value of its assets at that time was £308,589. The WEPTUS annual report for the year ending 31 March 2016 showed that, at that time, its assets were valued at £754,294. In the (largely unsigned) 2017 Annual Report for the Scheme obtained by the Case Team, net assets were then valued at £1,196,046. Following MWCL going into administration in 2019 the Scheme’s assets were approximately £900.

Mr Worthington

As well as being a trustee of WEPTUS Mr Worthington held several other key positions:
1. Mr Worthington founded MWCL in 1975 and he was its Managing Director. MWCL went into administration on 30 September 2019;
2. Mr Worthington owned between 31% and 60% of the share capital of the parent company of MWCL, Stonewell Property Company Ltd (“Stonewell”), at the time that loans were made to Stonewell and at the time of an investment (“the Breightmet Investment”) in the Breightmet Estate (see further below). He was also the Managing Director of Stonewell throughout the period from 2008 to 2018;
3. Mr Worthington was also a trustee and member of Brockholes Pavilion Trust Fund (“Brockholes”), a trust-based occupational pension scheme established for the benefit of the Worthington family members, from the time when that pension scheme was established in 1986 until at least August 2022 (when the Warning Notice was issued).
Mr Worthington is not a professional trustee, and the Case Team is not aware of him having acted as a trustee of any other schemes.

Case Team’s Position

Following MWCL going into administration in September 2019, TPR was alerted to a number of transactions entered into by the trustees of the Scheme between 2009 and 2019 for the benefit of companies related to the employer. The transactions included three loans to Stonewell, two loans to Brockholes and the Breightmet Investment.
Pursuant to section 40(1) PA 95, trustees are under a duty to secure that their scheme complies with 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 (“ERI”). Those prescribed restrictions are further set out in the Occupational Pension Schemes (Investment) Regulations 2005 (“the Investment Regulations”).
Under section 40(2) PA 95 employer-related investments include:

“(b) land which is occupied or used by, or subject to a lease in favour of, the employer [or any person who is connected with, or an associate of, the employer]” and
…
“(d) loans to the employer [or any person who is connected with, or an associate of, the employer].”

Regulations 12(1) and 12(2A) of the Investment Regulations respectively further prescribe that “not more than five per cent of the current market value of the resources of a scheme may at any time be invested in employer-related investments” and “…none of the resources of a scheme may at any time be invested in any employer related loan”.
Pursuant to section 40(4) PA 95, TPR may require a person to pay a penalty under section 10 PA 95 for a failure by a trustee to take all such steps as are reasonable to secure compliance with section 40(1) PA 95. The maximum amount of such a penalty in respect of an individual is £5,000 (section 10(2)(a) PA 95).
Section 40(5) PA 95 states that any trustee who agreed in the determination to make an investment contrary to section 40(1) is guilty of an offence and liable on conviction to a fine or imprisonment. The Case Team at TPR (the Case Team) is currently pursuing criminal proceedings against Mr Smith and Mr Boardman, as well as against an adviser to the WEPTUS trustees, Derek Thomas. TPR has decided not to pursue criminal proceedings against Mr Worthington due to his health but is seeking financial penalties in these proceedings given the seriousness of the breaches.
As a trustee, Mr Worthington was under a duty to take all such steps as were reasonable to secure compliance with the prescribed restrictions with respect to the proportion of the Scheme’s resources that might at any time be invested in, or in any description of, employer-related investments. The Case Team submits that he did not comply with that duty in respect of the loans and the Breightmet Investment made using scheme assets in the period from 2009 to 2019, both in relation to the decisions to make the investments and by allowing them to remain in effect thereafter without disinvestment. The Case Team submits that six penalties should be imposed on him under section 10 PA 95.

The loans and investment

The Warning Notice identified the following investments as being made contrary to the restrictions contained in the Investment Regulations:
1. 3 loans made by WEPTUS to Stonewell;
2. 2 loans made by WEPTUS to Brockholes; and
3. an investment made by WEPTUS in land occupied and used by (and subject to a lease in favour of) Breightmet Investments 1 Ltd and Breightmet Investments 2 Ltd (“the Breightmet Companies”), which is referred to as the “Breightmet Investment.”
The Warning Notice further asserted that:
1. Each of the counterparties to the investments were associated and connected with the Scheme’s sponsoring employer, MWCL;
2. in respect of each loan and the investment, the breaches of the restrictions arose when each investment was made, and the breach continued whilst each investment was in effect.
The Warning Notice sets out the factual background to each of the loans / investment and the basis on which they were prohibited employer related investments as follows.

Stonewell loans

The first loan to Stonewell was made following a meeting of the WEPTUS trustees on 13 March 2009 which Mr Worthington attended as its Chair. The meeting minutes show that the trustees, including Mr Worthington, agreed to grant a loan of £200,000 to Stonewell and signed a resolution to that effect.
A loan agreement reflecting a loan of £200,000 between WEPTUS and Stonewell to be repaid in monthly instalments ending on 15 March 2014 was signed by the trustees of WEPTUS, including Mr Worthington, on 16 March 2009 and on 24 March 2009 a transfer of £200,000 was made to Stonewell from the WEPTUS business bank account. A certificate of registration of a mortgage or charge issued by the Registrar of Companies shows a charge over Unit 1 at the Claughton Trading Estate, Brockholes Way, Preston (“the Claughton Trading Estate”) for the benefit of the trustees of WEPTUS. This charge was registered on 2 April 2009 as security for the loan of £200,000 and a statement of satisfaction in full of this charge was filed on 31 October 2018.
On or about 21 December 2009, the WEPTUS trustees, including Mr Worthington, agreed to make the second loan to Stonewell. They each signed an agreement to lend Stonewell £140,000 repayable over five years on terms including a legal charge over the property at the Claughton Trading Estate. £140,000 was debited from the WEPTUS bank account on 21 December 2009. Unlike with the first loan there is no evidence of a charge over the property at the Claughton Trading Estate having been registered as security against the loan of £140,000.
On or about 11 February 2010 the WEPTUS Trustees, including Mr Worthington, agreed to make a third loan of £70,000 to Stonewell repayable over five years and secured on a property at the Claughton Trading Estate and signed an agreement to that effect. The WEPTUS bank statement shows a transfer of £70,000 made to Stonewell on 11 February 2010. Again, there is no evidence that the charge over the Claughton Trading Estate property was registered as security for this loan in spite of the loan term to that effect.
In respect of each of the three loans to Stonewell the terms of the agreements provided, amongst other things, for provision for interest to be payable at 4% over the current base rate and contained reference to Stonewell having submitted to the trustees an auditor’s statement and opinion to the effect that the loans were being made on normal commercial terms and that, on reasonable assumptions of future trading, Stonewell would be able to meet its obligations in respect of these loans.
Intermittent repayments were made on the three loans as evidenced by the Scheme bank account and references to the loan stock in the Scheme annual report. (The trustees appear to have been aware that the repayment terms were not being fully complied with.) Any remaining balance on these loans was later converted into the investment vehicle known as the Breightmet Investment (see further below).

Brockholes loans

In 2013, WEPTUS also made two loans to the trustees of Brockholes. On or about 24 May 2013, the WEPTUS trustees, including Mr Worthington, agreed to make a loan of £430,000 to the Brockholes trustees to be repaid over five years with monthly interest payments. According to the loan agreement The Fleece Inn public house was to be provided as security for this loan although no corresponding charges were registered except for one in favour of the HANDELSBANKEN PLC made on 29 January 2016. There is evidence of this loan in the form of an unsigned loan agreement dated 24 May 2013 which names Mr Worthington and the other WEPTUS trustees as lenders and the trustees of Brockholes as borrowers. The terms of the agreement included interest to be payable at 4½% over the current base rate for the Royal Bank of Scotland. There is also reference to the trustees of Brockholes having submitted an auditor’s statement and opinion to the effect that the loan was on normal commercial terms and that, on reasonable assumptions of future trading, Brockholes would be able to meet its obligations in respect of the loan. On 23 May 2013, £430,000 was transferred from the WEPTUS bank account with the reference ‘Paid to Stonewell Proper Ref Fleece.’ The register of title for The Fleece Inn shows that it was acquired by the trustees of Brockholes for £525,000 plus VAT on 24 May 2013.
On or about 4 December 2013, Mr Worthington, and the other two WEPTUS trustees, agreed to make a further loan to the trustees of Brockholes, in the sum of £110,000. The Case Team was unable to find a written agreement evidencing this loan but provided evidence in the form of a WEPTUS bank statement of a transfer of £110,000 on 4 December 2013 from a WEPTUS bank account to Brockholes with the description “TO BROCKHOLES TRUST FUN TFR TO TRUST”. The WEPTUS Annual Report for the period ending 31 March 2014 shows that WEPTUS had made loans to Brockholes with a total value of £540,000 being the total value of the two loans (£430,000 and £110,000).
The Warning Notice provided details of intermittent repayments made on these two loans as evidenced by the Scheme bank account and references to the loan stock in the Scheme’s annual report. Both loans remained outstanding until they were converted to the pooled investment vehicle known as the Breightmet Investment (see below).

The Breightmet Investment

At some time prior to 31 March 2016, the trustees, including Mr Worthington, decided to invest the Scheme’s assets in a project for the development and leasing of a retail park on land in Bolton (“Breightmet Land”), occupied and used by (and subject to a lease in favour of) the Breightmet Companies, (the Breightmet Investment). The outstanding amounts on the Stonewell and Brockholes loans were converted into this investment. When the Breightmet Companies went into administration, the Scheme lost the total value of the investment.
The Breightmet Investment was referenced in the Scheme Annual Report for the year ending 31 March 2016 with a statement from Mr Worthington as Chair of the trustees stating:

“The Trustees has [sic] taken a major decision during the year to withdraw its funds from the loan stock to invest in Breightmet Development which engages in the development, leasing and financing of retail park at Breightmet, Bolton. The development of [sic] is executed by a trust in which Worthington Employee Top Up Scheme is 75% beneficial owner. The Trustees are expecting to generate better future income from the investment than from the loan stock.”

The Breightmet Investment was structured as follows:
1. The Breightmet Companies took a lease of the Breightmet Land for a term of 999 years. They held the Breightmet Land on trust as bare trustees, and they let the several premises in the retail park to tenants;
2. The WEPTUS trustees, including Mr Worthington, completed a deed with the Breightmet Companies and Stonewell on 23 November 2016 (the “Trust Deed”) to create the Breightmet Trust for the development, leasing and financing of the retail park on the Breightmet Land. From the Scheme Annual Report for the year ending 31 March 2016, it appears that the Breightmet Investment was made before the date of the Trust Deed;
3. The Trust Deed identified the Breightmet Companies as the trustees and WEPTUS and Stonewell as the beneficiaries having provided funding for the development. According to the Warning Notice and the Scheme annual report dated 31 March 2016 the Scheme invested £700,000. WEPTUS obtained a beneficial interest in the Breightmet Land;
4. The trust property referred to in the Trust Deed included the Breightmet Land;
5. Under the Trust Deed, WEPTUS would receive 75% of the net income generated by the development, and Stonewell would receive the remaining 25%;
6. The Breightmet Companies obtained loans secured by a legal charge on the Breightmet Land from the Cumberland Building Society. (These funds were needed to complete the purchase of the lease and develop the retail park);
7. The trustees of WEPTUS completed a Deed of Postponement dated 23 November 2016 giving Cumberland priority over the interests of WEPTUS and Stonewell.

Prohibited ERI

Stonewell

The Case Team submits that all three loans were prohibited employer-related investments, in breach of section 40 PA 95 and regulation 12(2) of the Investment Regulations, because Stonewell was associated and connected with MWCL when the loans were made and whilst they were in effect. Such loans were prohibited under the Investment Regulations.
By section 123 PA 95 the definitions of “associated” and “connected” under the Insolvency Act 1986 (“IA 86”) apply for the purposes of the provisions of section 40 PA 95.
The Case Team’s position is that Stonewell was associated and connected with MWCL, on the basis that:
1. Stonewell held all of the shares in MWCL and so controlled it when the loans were made;
2. Stonewell continued to hold all the shares in MWCL as shown by Annual Returns for MWCL for the periods ending 9 October for 2011 to 2015 and so the control by Stonewell of MWCL continued when the three loans remained in effect;
3. Since Stonewell controlled MWCL, it was its associate and vice versa (applying sections 435(1) and 435(7) IA 86); and
4. Since Stonewell was an associate of MWCL, then it was also connected with it (section 249(b) IA 86).

Brockholes

Similarly, the Case Team submits that the two loans to the trustees of Brockholes were prohibited under the Investment Regulations because Brockholes was associated and connected with the employer, MWCL. As Brockholes is not a legal entity in its own right the Case Team sets out the association and connection by reference to the trustees of Brockholes. It submits that the trustees of Brockholes were associated and connected with MWCL on the basis that:
1. At the time of the loans, the trustees were Mr Worthington, Angela Worthington, Giles Worthington and Russell Worthington. Each of these individuals were associates of one another being either a spouse, parent or sibling (sections 435(2) and 435(8) of IA86);
2. These individuals also controlled Stonewell by shareholding, in the proportions: Mr Worthington 30.59%; Angela Worthington 20.4%; Giles Worthington 16.33%; Russell Worthington 16.33%; and Simeon Worthington 16.33%;
3. Given Stonewell’s control of MWCL, each of the trustees with their associates controlled MWCL. Therefore, each of the trustees was associated with MWCL (sections 435(7) and 435(10) of the IA86);
4. As the trustees of Brockholes were associates of MWCL, then they were also connected with it (section.249(b) IA86);
5. the connection and association between the trustees of Brockholes and MWCL continued after the loans had been made and whilst they were in effect.

Breightmet Investment

The Case Team asserts that the Breightmet Investment was a prohibited employer-related investment, in breach of section 40 PA 95 and regulation 12(2) of the Investment Regulations, because
1. The Breightmet Investment fell within the category contained in section 40(2)(b), as an investment in: “land which is occupied or used by, or subject to a lease in favour of, the employer or any such person …”, the reference to any such person being to persons connected with or associates of the employer, MWCL;
2. The Breightmet Investment was an investment in land, since WEPTUS obtained a beneficial interest in the Breightmet Land under the Trust Deed as consideration for its investment of £700,000;
3. The Breightmet Companies were associates of and connected with MWCL when the investment was made and whilst it was in effect, given that Mr Worthington’s son, Russell Worthington, controlled the Breightmet Companies by shareholding and he and his family associates (Mr Worthington, Angela Worthington, Giles Worthington and Simeon Worthington) controlled MWCL through their control of Stonewell by shareholding (sections 435(6)(a), 435(1) and 249(b) IA 86);
4. As at 31 March 2016, the Breightmet Investment of £700,000 amounted to 92.8% of the market value of the resources of the scheme and so it was substantially in excess of the permitted 5% of the market value of the resources of WEPTUS. Similarly, as at 31 March 2017 the value of the Breightmet Investment was stated to be £1,167,154. That was 97.6% of the market value of the resources of the Scheme.

The Role of Derek Thomas

The minutes of the initial trustee meeting held on 14 July 2006 indicate that Derek Thomas was appointed to the role of “strategic investment manager” for WEPTUS. He retained his role as strategic investment adviser to WEPTUS when the five loans were made but had stopped acting in this role by the time of the Breightmet Investment.
Derek Thomas attended the trustee meeting of 13 March 2009 at which Mr Worthington was also present and at which the decision was made to grant the first loan to Stonewell. The minutes of the meeting do not record any advice given by Derek Thomas as to whether the loan was lawful, although they do state that he confirmed that the loan would be in accordance with the requirements of the Inland Revenue (as it was then known). He also created the form of the loan agreement and arranged to register the loan in respect of Stonewell at Companies House.
Mr Thomas also appears to have been present at other trustee meetings at which a number of the loans were approved. There is no record of any legal advice having been provided in the meeting minutes, or of suggestions that legal advice should be obtained.
It appears from the minutes of a trustee meeting held on 29 June 2011, at which both Mr Worthington and Derek Thomas were present, under the heading of “Regulation Matters” that “DWT [Derek Thomas] explained briefly, the requirements of HMRC and the Pensions Regulator and referred back to Minutes of the Trustees’ meeting on 14th July 2006. DWT was asked to accept the responsibility of advising the trustees on these matters and to ensure that returns were made in a timely fashion.”
In a subsequent letter to the Trustees dated 28 July 2011 Mr Thomas stated that “D W Thomas & Co cannot give investment advice as defined in the Financial Services Acts and is not a Financial Adviser authorised under those acts”. He further expressly stated that his “opinion did not constitute giving investment advice and if it is followed it cannot be relied on as advice nor would anyone following it have any protection under the acts”.
When interviewed under caution by TPR, Derek Thomas suggested that there were frequent occasions when the trustees at WEPTUS trustee meetings agreed to the appointment of a legal adviser, but this was never implemented. Mr Thomas insisted that he did not give legal advice or advise against the investments as being in breach of provisions in PA 95 commenting that he “missed that” because he was not a specialist legal adviser.
Mr Thomas had previously been prohibited by TPR’s predecessor organisation, the Occupational Pensions Regulatory Authority (“OPRA”) in 1988 apparently as a result of his lack of trustee knowledge. Mr Thomas’ request to have his prohibition revoked was refused by the Determinations Panel in 2006 on the grounds that he had not demonstrated his competence and capability to act as a trustee including the knowledge and understanding required under section 247 PA 04. In his interviews Mr Thomas indicated that Mr Worthington had known of his prohibition and stopped using him but then resumed within a year.

Case Team’s position on the penalties

In respect of each of the loans and the investment, the Warning Notice asserts that Mr Worthington failed to take all such steps as were reasonable to secure compliance with the employer related investment requirements. The Case Team sought to pre-empt any argument that Mr Worthington took all reasonable steps to secure compliance on the basis that:
1. Given the obvious conflict of interest with loans to MWCL, Mr Worthington should have obtained adequate written advice as to the lawfulness of the investments. Similarly given the obligations in section 36 PA 95 Mr Worthington and his fellow trustees should have obtained proper written advice as to whether the proposed investments were satisfactory;
2. As a trustee, he should have had the appropriate knowledge and understanding in accordance with section 247 PA 04;
3. It was not reasonable for him to rely on Mr Thomas given his knowledge of Mr Thomas’ previous prohibition from acting as a trustee;
4. There is no evidence that Mr Worthington sought proper advice, including legal advice.
The Warning Notice asserts that penalties are appropriate in respect of each of the six prohibited employer related investments, asking that the maximum penalty of £5,000 for each breach be imposed i.e. £30,000 in total.

Representations made on behalf of Mr Worthington

The Case Panel has been advised that Mr Worthington’s ill-health means that he has not responded directly to the matters raised in the Warning Notice. The Warning Notice was served on Mr Worthington’s sons, Simeon Worthington and Russell Worthington, who act on Mr Worthington’s behalf under a lasting power of attorney.
The representations served on Mr Worthington’s behalf may be summarised as follows:
1. The Case Panel should not impose the maximum penalty for each breach, particularly as “the maximum penalty should be reserved for a professional trustee who had acted … with full knowledge of the transgressions” or “for those who do not care, acted deliberately or recklessly, not someone who acted on professional advice”;
2. Mr Worthington’s experience with the Brockholes scheme, which appears to have been a small, self-administered scheme to which different investment rules apply, would have led him to believe that “the WEPTUS investments were valid pension investments and was not advised otherwise ... [Mr Worthington] lacks experience and did not know the difference between the schemes”;
3. Mr Worthington’s motives were to make a return for the Scheme; he was not acting out of self-interest to make a profit;
4. Even if Mr Worthington misjudged the soundness of this investment, it is wrong to punish him for it going wrong when, if it had been an investment in a third party “there would be nothing for [him] to answer…[He] was not reckless in the investment, just unfortunate”;
5. Mr Worthington was motivated by “trying to do his best for his long serving staff which involved giving away his own assets and money through WEPTUS ... WEPTUS was only ever intended to be a modest thank you to staff”;
6. Mr Worthington “relied on the advice of Steve Smith, his Finance Director … and Derek Thomas, the Actuary, instructed by Steve Smith. Marcus trusted them to act within [the] law and was badly let down”;
7. To impose the maximum penalty multiplied by six is disproportionate given the mitigating factors identified above.
The representations provided did not challenge the Case Team’s evidence on the loans /investment nor challenge the fact that these were prohibited employer related investments.

The Law

Section 40 PA 95 has been set out briefly above. It provides:
(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.
(2) In this section—
“employer-related investments” means—
(a) shares or other securities issued by the employer or by any person who is connected with, or an associate of, the employer,
(b) land which is occupied or used by, or subject to a lease in favour of, the employer or any such person,
(c) property (other than land) which is used for the purposes of any business carried on by the employer or any such person,
(d) loans to the employer or any such person, and
(e) other prescribed investments,
…
(4) If in the case of a trust scheme subsection (1) is not complied with, section 10 applies to any trustee who fails to take all such steps as are reasonable to secure compliance.
Section 10 PA 95 provides
(1) Where the Authority are satisfied that by reason of any act or omission this section applies to any person, they may by notice in writing require him to pay, within a prescribed period, a penalty in respect of that act or omission not exceeding the maximum amount.
(2) In this section “the maximum amount” means—
(a) £5,000 in the case of an individual and £50,000 in any other case, or
(b) such lower amount as may be prescribed in the case of an individual or in any other case,
and the Secretary of State may by order amend paragraph (a) by substituting higher amounts for the amounts for the time being specified in that paragraph.
The Occupational Pension Schemes (Investment) Regulations 2005, SI 2005/3378 came into force on 30 December 2005. The relevant restrictions which applied in relation to the three loans to Stonewell, were contained in regulation 12(2), as follows:
“Subject to regulations 13 to 16:
(a) not more than five per cent. of the current market value of the resources of a scheme may at any time be invested in employer-related investments; and
(b) none of the resources of a scheme may at any time be invested in any employer-related loan.”
The 2005 regulations were amended by regulation 19 of the Occupational, Personal and Stakeholder Pensions (Miscellaneous Amendments) Regulations 2009, SI 2009/615, with effect from 23 September 2010. Amended restrictions are set out in regulation 12(2) (maximum employer related investment of 5% of total scheme assets) and 12(2A) (prohibition on employer related loans), as follows and these are relevant to the two loans to Brockholes and the Breightmet Investment. These provide as follows:
“12(2) Subject to regulations 13 and 16, not more than five per cent. of the current market value of the resources of a scheme may at any time be invested in employer-related investments,” and
“12(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.”
In accordance with section 123 PA 95 certain provisions of the Insolvency Act 1986 define what is meant by “connected” and “associated.” Section 249 IA 86 Act defines what is meant by “connected with” and section 435 IA 86 sets out the meaning of “associate”.
Section 249 IA 86 provides that a person is connected with a company if:
“(a) he is a director or shadow director of the company or an associate of such a director or shadow director, or
(b) he is an associate of the company;”
By section 435 IA 86:
“(1) For the purposes of this Act any question whether a person is an associate of another person is to be determined in accordance with the following provisions of this section (any provision that a person is an associate of another person being taken to mean that they are associates of each other) …
(2) A person is an associate of an individual if that person is—
(a) the individual's husband or wife or civil partner,
(b) a relative of—
(i) the individual, or
(ii) the individual's husband or wife or civil partner, or
(c) the husband or wife or civil partner of a relative of—
(i) the individual, or
(ii) the individual's husband or wife or civil partner.

(6) A company is an associate of another company:
(a) if the same person has control of both, or a person has control of one and persons who are his associates, or he and persons who are his associates, have control of the other, or
(b) if a group of two or more persons has control of each company, and the groups either consist of the same persons or could be regarded as consisting of the same persons by treating (in one or more cases) a member of either group as replaced by a person of whom he is an associate.

(7) A company is an associate of another person if that person has control of it or if that person and persons who are his associates together have control of it.
(8) For the purposes of this section a person is a relative of an individual if he is that individual's brother, sister, uncle, aunt, nephew, niece, lineal ancestor or lineal descendant, treating—
(a) any relationship of the half blood as a relationship of the whole blood and the stepchild or adopted child of any person as his child, and
(b) an illegitimate child as the legitimate child of his mother and reputed father;
and references in this section to a husband or wife include a former husband or wife and a reputed husband or wife and references to a civil partner include a former civil partner and a reputed civil partner.
…
(10) For the purposes of this section a person is to be taken as having control of a company if—
(a) the directors of the company or of another company which has control of it (or any of them) are accustomed to act in accordance with his directions or instructions, or
(b) he is entitled to exercise, or control the exercise of, one third or more of the voting power at any general meeting of the company or of another company which has control of it;
and where two or more persons together satisfy either of the above conditions, they are to be taken as having control of the company.”
Regulation 10 of the Investment Regulations provides that for the purposes of section 40 PA 95 the definition of “connected persons”, as defined in section 249 IA 86, is modified “so that a company shall not be connected with another company solely by reason of one or more of its directors being a director of that other company.”
Pursuant to section 247 PA 04, a trustee of an occupational pension scheme must have knowledge and understanding of the law relating to pensions and trusts and the principles relating to the investments of the assets of the scheme. The degree of knowledge and understanding required is that which is appropriate for the purposes of enabling the individual properly to exercise his functions as trustee of the scheme.
Section 36 PA 95 sets out requirements for trustees to properly exercise their powers of investment, including requirements to obtain proper advice. It sets out that:
“(1) The trustees of a trust scheme must exercise their powers of investment in accordance with regulations and in accordance with subsections (3) and (4), and any fund manager to whom any discretion has been delegated under section 34 must exercise the discretion in accordance with regulations.
…
(3) Before investing in any manner (other than in a manner mentioned in Part I of Schedule 1 to the Trustee Investments Act 1961) the trustees must obtain and consider proper advice on the question whether the investment is satisfactory having regard to the requirements of regulations under subsection (1), so far as relating to the suitability of investments, and to the principles contained in the statement under section 35….

(6) For the purposes of this section “proper advice” means—

(a) if the giving of the advice constitutes the carrying on, in the United Kingdom, of a regulated activity (within the meaning of the Financial Services and Markets Act 2000), advice given by a person who may give it without contravening the prohibition imposed by section 19 of that Act (prohibition on carrying on regulated activities unless authorised or exempt);
(b) in any other case, the advice of a person who is reasonably believed by the trustees to be qualified by his ability in and practical experience of financial matters and to have the appropriate knowledge and experience of the management of the investments of trust schemes.

(7) Trustees shall not be treated as having complied with subsection (3) or (4) unless the advice was given or has subsequently been confirmed in writing.”

Decision

The Case Panel considered each of the alleged breaches in turn, assessing whether each amounted to a breach of section 40 PA 95 and, if so, how serious they were and what mitigating factors there were, before deciding on an appropriate amount of penalty. It considered these matters in the light of the representations made on behalf of Mr Worthington, and the position of the Case Team. It applied the approach set out in the Monetary Penalties Policy (“MPP”) of August 2017, which sets out how TPR will generally use its powers to impose monetary penalties. Once that was complete, the Case Panel considered matters in the round to see whether the overall penalty was reasonable and proportionate in all the circumstances. In making its decision the Case Panel had regard to the matters mentioned in section 100 PA 04 as well as to the objectives of TPR as set out in section 5 PA 04.
The MPP provides a framework for the assessment of the amount to be imposed by way of monetary penalty (if any). Assuming that the relevant statutory threshold for imposing a monetary penalty is met, the MPP identifies the first question as whether to impose a penalty at all. This question is to be answered by looking at the underlying objective in imposing a penalty, the circumstances of the breach and any representations made.
The MPP sets out three principles and a framework that guides TPR in determining the amount of a penalty. The principles are:

“The penalty should be proportionate to the nature of the breach and any harm caused (eg the number of members affected and/or the level/significance of detriment).

The amount of the penalty should aim to change the behaviour of the person in breach.

The penalty should aim to deter repetition of the breach among the wider regulated community.”
The framework comprises three “bands” of breach, depending on the nature and impact (or potential impact) of the breach, which attract different levels of penalty. Thus band 1 is the lowest level, attracting a penalty between £0 and £1,000 for an individual, and Band 3 the highest, with penalties between £0 and £5,000 for an individual, and the framework gives examples for each Band.
The MPP provides that once a decision has been made to impose a monetary penalty, a decision is made about which band the breach or breaches in question fall into. In assessing the appropriate band, the Case Panel is guided by TPR’s statutory objectives and the circumstances of the case. Once it has decided on a band, the Case Panel will determine the appropriate starting point within that band for the penalty, and then adjust that starting point to take account of the facts of each case. Potentially relevant factors for this stage are listed in the MPP.
The MPP makes clear that different considerations may arise on a case-by- case basis, which may result in the appropriate penalty for a particular breach being higher or lower than the middle of the band in which the breach falls in the MPP.

Whether to require Mr Worthington to pay a penalty

The Case Panel considered each of the loans and the Breightmet Investment in turn. Whilst the Case Panel noted that the evidence in relation to each of the loans / investment was not always complete, it was satisfied on the balance of probabilities, and in the absence of any challenge from Mr Worthington (or his representatives), that the position was as set out by the Case Team in the Warning Notice.
The Case Panel was satisfied that Mr Worthington was aware of and agreed to each of the three loans to Stonewell and the two loans to Brockholes and that in each case they fell within the definition of prohibited loans to persons connected with or associates of the employer, MWCL. The Case Panel was satisfied that Stonewell held all of the shares in MWCL and so controlled it both at the times when the loans were entered into and for their duration. As Stonewell controlled MWCL it was therefore an associate of MWCL and connected with it in accordance with section 435(1) and 435(7) IA 86.
Similarly, as regards Brockholes, the trustees of Brockholes were associated, and connected with MWCL within the meaning of section 249(b) IA 86. The Case Panel was satisfied that at the time of the Brockholes loans, the trustees of Brockholes were all associates of each other within the meaning of section 435(2) and 435(8) IA 86. Those same individuals controlled Stonewell by shareholding and given Stonewell’s control of MWCL, each of the trustees with their associates controlled MWCL. Therefore, each of the trustees was associated with MWCL within the meaning of sections 435(7) and 435(10) IA 86.
As all employer related loans are prohibited by section 40 PA 95 and the Investments Regulations, the Case Panel was satisfied that Mr Worthington, as a trustee of the Scheme, had failed to secure that the Scheme had complied with the restrictions on employer related investments and had also failed to take all such steps as were reasonable to secure compliance with this restriction in respect of each of the loans to Stonewell and Brockholes.
The Case Panel accepted the Case Team’s conclusions in relation to the circumstances of the Breightmet investment set out above. The Case Panel agreed that the Breightmet Investment also fell within the definition of prohibited employer related investments in that the Breightmet Investment amounted to significantly more than the permissible 5% of the market value of the resources of the Scheme.
Specifically, the Breightmet Investment fell within the category contained in section 40(2)(b), as an investment in:

“land which is occupied or used by, or subject to a lease in favour of, the employer or any such person …”
(being persons connected or associated with the employer).
As the Scheme obtained a beneficial interest in the Breightmet Land under the Trust Deed as consideration for its investment of £700,000 and this land was subject to a lease in favour of the Breightmet Companies, the Case Panel was satisfied that this amounted to an investment in land occupied, used or otherwise leased in favour of the employer or persons connected and associated with the employer, MWCL, contrary to the requirements of section 40(2)(b) PA 95. Based on the Scheme’s assets as at 31 March 2016, the Breightmet Investment amounted to over 92% of those assets.
The Breightmet Companies were associated and connected with MWCL, given that Russell Worthington controlled the Breightmet Companies by shareholding; and he and his family associates, Mr Worthington, Angela Worthington, Giles Worthington and Simeon Worthington, controlled MWCL through their control of Stonewell by shareholding.
Finally, the Case Panel was satisfied that Mr Worthington was directly involved in the decisions to make the Breightmet Investment, evidenced by his Chair of Trustees’ statement in the Scheme annual report for the year ending 31 March 2016. Further Mr Worthington along with another trustee entered into the Trust Deed with the Breightmet Companies and Stonewell in 2016 for developing, financing and leasing the Breightmet Land.

Conclusion on breaches of ERI restrictions

In light of the above the Case Panel concluded that there had been six separate breaches of the law in relation to employer related investments and in respect of each of which TPR could impose a penalty.
The Case Panel considered that it was appropriate to require Mr Worthington to pay a financial penalty under section 10 PA 95 in respect of each of these breaches given the underlying objective to promote compliance with pensions legislation. The Case Panel was not persuaded that Mr Worthington had taken all such steps as were reasonable, or indeed any steps at all, to secure compliance with the restrictions on employer related investments under section 40 PA 95 and regulations 12(2) and 12(2A) of the Investment Regulations.
Whilst not expressly referenced as amounting to “reasonable steps to secure compliance” the Case Panel considered whether Mr Worthington’s representations in relation to having relied on Mr Derek Thomas (and Mr Smith) could amount to reasonable steps taken. The Case Panel accepted that Mr Worthington may have relied on Mr Thomas but did not consider that this was reasonable given that:
1. It would appear from interviews conducted with Mr Thomas and Mr Smith that Mr Worthington may have been aware of, and chose to overlook, the fact that Mr Thomas had been prohibited as a trustee by TPR’s predecessor;
2. Mr Thomas indicated that he was not able to advise in relation to any investments. In the letter dated 28 July 2011 to the trustees, including Mr Worthington, Mr Thomas stated that “he cannot give investment advice as defined in the Financial Services Acts and is not a Financial Adviser authorised under those acts”, and further that his opinion “does not constitute investment advice and if it is followed it cannot be relied on as advice nor would anyone following it have any protection under the acts...” Similarly, Mr Thomas stated in interview that he repeatedly advised the trustees to take legal advice, albeit this is not recorded in any of the trustee minutes and the Case Panel did not expressly rely on it. It would, however, appear that, in any event, no proper advice as required by section 36 PA 95 was taken in spite of Mr Thomas apparently explaining that he was not able to provide that advice;
3. Accordingly, there is no evidence of any steps, and certainly not reasonable ones, having been taken to obtain the appropriate advice in writing from qualified advisers.
In the Case Panel’s view, any reliance on Mr Thomas fell considerably short of what is to be expected of trustees considering such loans / investments, particularly where, in respect of a number of them, there were clear conflicts of interest which should have been apparent to trustees with only the most minimal trustee knowledge and understanding. The substantial and illiquid nature of the Breightmet investment should have been a further warning sign of the need for proper written advice. The Case Panel’s view was that this was a clear case of prohibited employer related investments, warranting financial penalties.

Amount of the penalty

Having considered the various bands as set out in the MPP, the Case Panel concluded that each of the six breaches fell within Band 3. In the Case Panel’s view, a number of factors listed as examples in the MPP were applicable, including:
1. The fact that specified employer related investments are clearly prohibited;
2. The fact that Parliament has decided that prohibited employer related investments can lead to criminal convictions;iii. the detrimental impact on members of the Scheme (who no longer would receive the benefits they might have expected).
  
  In the Case Panel’s view, the circumstances were most closely aligned with the examples of breaches set out in the MPP in relation to Band 3.
The Warning Notice proposed that the starting point for each of the breaches should be the top of Band 3. In support of this, the Case Team relied on the following:
1. the extent by which the restrictions were breached where the amounts loaned / invested represented a significant proportion of the Scheme’s assets. The initial loan represented 38% of the Scheme’s assets but, by the time of the Breightmet Investments, 98% of the Scheme’s assets were invested in employer related investments;
2. supposed mitigations and security for some of the investments, including charges over property in respect of some of the loans, were never actually put in place;
3. payments of interest and capital for a number of the loans were either intermittent and/or substantially delayed, a fact of which Mr Worthington was aware;
4. the investments ultimately failed completely leaving members with none of the benefits they might have expected from the Scheme;
5. the fact that there were a series of breaches, rather than an isolated incident, over a considerable period of time.
The Case Panel agreed with these factors and considered that there were some additional factors: the clear conflict of interest to which Mr Worthington was subject, coupled with the obvious unsuitability of the final, illiquid Breightmet Investment. All of these pointed to a higher starting point. However, the Panel was not persuaded that the starting point should be the top of the band: in the Case Panel’s view, a starting point of £4,000, rather than the mid-point, or the top of the band, for each of the six breaches was more appropriate.
The Case Panel went on to consider whether it was appropriate to adjust this starting point in light of the factors identified by the Case Team. These included the following:
1. Mr Worthington’s track record including the failure at the time of the Breightmet Investment to comply with the statutory rules relating to the need for diversification of investments even if not a prohibited employer related investment. Similarly, the apparent failure of Mr Worthington to recognise the obvious conflict of interest with each of the investments given the family connections;
2. A low level of trustee knowledge and understanding. The Case Team’s position is that this should not be a mitigating but an aggravating factor, given the legal requirements for trustees to have an appropriate knowledge and understanding of the law in relation to pensions and the principles in relation to the investment of scheme assets;
3. The fact that the breaches could have been prevented i.e. by making other lawful investments, and were not due to circumstances outside Mr Worthington’s control.
The Case Panel considered that the appropriate penalty for the first loan to Stonewell should remain at £4,000. In the Case Panel’s view this was an appropriate amount given it was Mr Worthington’s responsibility to ensure that he had the requisite knowledge and skill to act as a trustee of the pension schemes to which he was appointed and to ensure compliance with the legal obligations under pension legislation. This included but was not limited to, seeking and obtaining proper advice in relation to the investment of scheme assets.
As regards the subsequent loans to Stonewell, the Case Panel considered that the trustees, including Mr Worthington, displayed an increasingly cavalier attitude to their responsibilities to the Scheme. For example, no proper security was put in place for the second and third Stonewell loans and in the Case Panel’s view, this attitude justified a higher penalty. For these reasons, the Case Panel concluded that an increase in the penalty amount to £5,000 for each of the second and third loans to Stonewell was appropriate.
Similarly, as regards the Brockholes loans, the Case Panel considered that Mr Worthington’s reckless approach towards the Scheme assets, including as a result of the obvious conflict of interest in relation to these investments, also warranted a penalty at the top end of the band. Again, there was no attempt to ensure that the trustees acted in accordance with pensions legislation nor to ensure that appropriate security was put in place, and an increase in the penalty amounts to £5,000 for each of these loans was appropriate.
Finally, as regards the Breightmet Investment, in the Case Panel’s view, the reckless approach to investing almost the entirety of the Scheme’s assets in a prohibited investment without obtaining the appropriate advice justified a penalty at the top of the band, that is £5,000.
In reaching its decision the Case Panel considered the representations served on Mr Worthington’s behalf, particularly as regards his possible confusion in the rules relating to small, self-administered schemes, his good intentions and the suggestion that the highest penalties should be reserved for professional trustees “who act with full knowledge of the transgressions” or those who “knowingly deprive pensioners”. The Case Panel was not persuaded that this warranted a lower penalty for Mr Worthington, who the Case Panel considered to have been reckless in his approach to the investments and their legality, particularly in never seeking to obtain appropriate advice. Whilst the Case Panel accepted that there may be worse cases, including deliberate or conscious decisions to breach the statutory rules for personal gain, or cases involving professional trustees, these were nevertheless serious breaches which led to the loss of Scheme assets. They were also breaches which, had it not been for Mr Worthington’s health, might well have resulted in criminal charges against him.

Proportionality

Having decided on a penalty for each of the six breaches, the Case Panel then considered whether the total amount of £29,000 was reasonable and proportionate in all the circumstances of this case, as set out in the MPP.
The Case Panel concluded that it was: these were breaches of an important statutory obligation in relation to employer related investments, which had persistently occurred over several years and which, ultimately, led to the loss of members’ benefits. The five loans were outright breaches, being loans made to the employer, MWCL, and the final investment represented almost the entirety of the Scheme’s assets, when the permissible limit was 5%. The Case Panel would have expected a better level of technical knowledge and understanding of any trustee, particularly one who had been in post for the length of time Mr Worthington was trustee of the Scheme. In the Case Panel’s view, it was important to send a clear message to trustees in the wider pension community that this type of behaviour was unacceptable. A penalty at this level, close to the maximum for an individual, should help to deter repetition of these breaches in the regulated community.

Conclusion

For these reasons the Case Panel determined to require John Marcus Worthington to pay a penalty in the amount of £29,000, payable 28 days from the date of the penalty notice.
By virtue of section 96(5) PA 04 the penalty notice will not be issued during the 28-day period within which this determination may be referred to the Upper Tribunal and, if so referred, until the reference and any appeal against the Upper Tribunal’s determination has been disposed of. If no referral to the Upper Tribunal is made within 28 days, then a penalty notice will be issued to Mr Worthington.
Appendix 1 to this Determination Notice contains important information about the rights to refer this decision to the Upper Tribunal.

Signed:

Chair: Antony Townsend

Dated: 12 January 2023

Appendix 1

Referral to the Tax and Chancery Chamber of the Upper Tribunal

You 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”). You have 28 days from the date this Determination Notice is sent to you to refer the matter to the Tribunal, or such other period as specified in the Tribunal procedure rules or as the Tribunal may allow. A reference to the Tribunal is made by way of a written notice signed by you and filed with a copy of this Determination Notice.

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 of the Act and the Tribunal procedure rules.

You should note that the Tribunal procedure rules provide that at the same time as filing 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

A copy of the form for making a reference, FTC3 ‘Reference Notice (Financial Services)’, can be found at: https://www.gov.uk/government/publications/form-ftc3-reference-notice-financial-services

John Marcus Worthington: Determination notice