This report outlines how we successfully prosecuted two scheme trustees for making illegal loans from a company pension scheme to the sponsoring employer.
Case summary
We prosecuted two trustees, Andrew Kyprianou and Colin Werb, for two counts of prohibited employer-related investments (ERI).
Appearing at Leeds Crown Court, the pair pleaded guilty to the ERI charges on 17 August 2022. They were sentenced to 16 months’ imprisonment, suspended for two years and given 250 hours of community work each.
Kyprianou and Werb were also charged with two counts of providing false or misleading information to The Pensions Regulator. These charges are laid on file.
They were also suspended from acting as trustees. We obtained written commitments from them to resign from all trustee roles they held and not to act as trustees in future unless authorised by us.
Background
Kyprianou and Werb were trustees of a defined benefit (DB) scheme called the Eastman Machine Company Limited Superannuation Scheme and directors of Eastman Staples Limited, the scheme’s employer. Kyprianou is also the owner of the company, which he acquired in 2011.
The scheme was set up in 1970 with the Eastman Machine Company as the scheme employer. The company changed its name to Eastman Staples Limited in 2000.
At the time of our intervention, the scheme had 19 members and assets of around £1.67 million invested with Aviva. The scheme had a funding deficit but deficit repair contributions under the scheme’s recovery plan had been suspended for reasons claimed to be related to employer affordability. The scheme’s liabilities were not bought out with an insurance company, albeit that the assets were invested with Aviva.
The scheme trustees disinvested funds held with Aviva and made illegal loans to the scheme employer totalling around £240,000, which was in breach of ERI restrictions.
Making a loan from a pension scheme to the scheme’s employer is a criminal offence and a trustee who agrees to do this can be sentenced to up to two years’ imprisonment and an unlimited fine.
Regulatory action
We were first alerted to a possible ERI breach by the scheme’s auditors, who became aware of a prohibited loan through the scheme’s accounts. We opened a case and following a meeting with Kyprianou, Werb, another company director and the scheme actuary, we indicated no further action would be taken. This was on the basis that the breach had been inadvertent and there were arrangements in place to repay the loan.
We made it clear in our initial intervention in 2013 that ERI loans were illegal. We also stressed the importance of avoiding conflicts of interest and taking independent advice, including from the scheme actuary.
We were again alerted to a new loan made in April 2018 and continued our inquiries into possible ERI breaches. The trustees said the payments were made into the company to keep it afloat in the face of the adverse impact of Brexit. Whilst investigating this we became aware of another loan made in October 2018. After further investigation into both loans we ascertained that payments totalling £240,000 were transferred from scheme funds into Eastman Staples Limited, in contravention of ERI regulations.
In May 2019 we arranged voluntary interviews with Werb and Kyprianou. The interviews were carried out under caution (under the Police and Criminal Evidence Act 1984) in July 2019.
Immediately prior to the interviews, Kyprianou and Werb produced photocopied documents attempting to show the payments were not loans but were funds provided by the scheme to the employer to buy property on behalf of the scheme. Further documents also appearing to show this were provided by Kyprianou following the issue of a section 72 notice to him. However, the information provided did not support the claims the payments were not loans. There were also inconsistencies between other documentation we reviewed and what the pair said, including their own initial accounts to us of the reasons for the transfer of scheme monies to the company.
Consequently, in July 2020 we began criminal proceedings against Kyprianou and Werb who were each charged with two counts of employer related investment offences contrary to section 40 of the Pensions Act 1995 and two counts of providing false or misleading information to TPR contrary to section 80 of the Pensions Act 2004.
In parallel to the criminal proceedings, we also sought to suspend Kyprianou and Werb from acting as trustees pending consideration being given to prohibiting them. Subsequently, we obtained written commitments from Kyprianou and Werb to resign from all trustee roles they held and not to act as trustees in future. An independent trustee was subsequently appointed to the scheme.
Outcome
As a result of our intervention, scheme governance has improved significantly and the independent trustee is reaching an agreement with the employer on the future financing of the scheme.
During the court proceedings, the defendants committed to making restitution to the scheme from the proceeds of selling the property (which they initially claimed they acquired for the benefit of the scheme). Subsequently, an employer contribution of £270,000 was made to the scheme which means it’s now fully funded as of September 2021.
Our approach
Employer-related investment restrictions safeguard scheme funding and protect savers, and we are clear we will take swift enforcement action where an employer breaches these safeguards.
This case shows we will bring the full force of the law against people who act in their own benefit at the cost of savers, in schemes of all sizes.
The case also demonstrates we investigate fully and persistently where we suspect ERI breaches. Providing false or misleading information to us will not be tolerated and we will take action.
In this case, there was a voluntary payment to the scheme to restore scheme funding. The defendants used this as a mitigating factor at sentencing. However, we are clear that DB scheme employers have a continuous responsibility to make ongoing scheme contributions to protect savers.