The Pensions Ombudsman (TPO) has issued directions to recover a total of nearly £13m, after an investigation revealed multiple breaches of trust and acts of maladministration, including facilitating a form of pension liberation.

The case followed a referral from Dalriada Trustees Limited, the independent trustee appointed to the Optimum Retirement Benefit Plan by The Pensions Regulator (TPR), on behalf of the scheme’s membership, alongside an individual member complaint.

The scheme was established in June 2015, with one of the respondents, Gordon Craig, as sole trustee and Optimum Financial Solutions Limited (OFSL), of which Craig was a 60 per cent shareholder, as the administrator.

Martin Kelly and Gerard Reilly, who were also identified as respondents in the complaint in their capacity as former trustees, were then appointed as trustees to the scheme in January 2017.

Broadly, the complaint alleged that the trustees had failed in their duties to the scheme, including failing to comply with statutory requirements, guidance from TPR and governance requirements, as well as failing to operate the necessary controls to ensure the effective and transparent administration of the scheme.

The complaint also suggested that the trustee had failed to comply with their various duties, under statute and case law, concerning the investment of the scheme’s assets, having invested the members’ funds in high-risk, unregulated, illiquid investments/assets that were inappropriate, and resulted in material losses of members’ funds.

Additionally, there was evidence that the trustees had allowed or facilitated pension liberation under the scheme, while one of the trustees, Craig, personally profited from his position in the scheme.

TPO's Pensions Dishonesty Unit undertook a comprehensive investigation, including an oral hearing, which was attended by attended by two representatives of Dalriada, as well as two of the respondents, Kelly and Reilly, although Craig did not appear.

The investigation revealed that, based on the Financial Conduct Authority’s (FCA) Register, OFSL did not have any permissions for pensions-related regulated activities, despite receiving “commission” payments from the scheme, amounting to over £1.3m.

According to TPO, approximately 288 members transferred a total of £13.4m of pension benefits into the scheme, with introducers paid over £600,000 by the scheme for their work to increase the scheme’s membership.

After transferring to the scheme, a number of members also accessed a proportion of their funds by entering into loan agreements with companies, which included one that was owned by Craig.

However, the ombudsman, Anthony Arter, argued that, based on the applicable charges and interest imposed on the members, it was "clear that those loans, some of which amounted to pension liberation, were made on unfavourable terms".

Indeed, TPO found that the investments made with scheme funds were generally made in companies that had only been incorporated a short while before the investments were made; were dormant; had been trading at a loss; and/or were companies in which one or more individuals involved in running the scheme had, in some way, an interest.

The investments were all deemed high-risk, unregulated and illiquid, and consisted of shares in, or loans to, the various companies, with TPO finding no evidence that due diligence was carried out or that ‘proper advice’ was taken, as required under the Pensions Act 1995.

Arter therefore upheld the complaints, concluding that Craig, Kelly and Reilly had all committed multiple breaches of trust and many acts of maladministration, issuing directions to recover a total of £12,578,051.44.

In particular, Arter stated that the trustees had failed to take steps to manage the various conflicts of interest that existed, in breach of section 249A of the Pensions Act 2004, and failed to act in accordance with the investment requirements and duties imposed on them by Part 1 of the Pensions Act 1995, the Investment Regulations.

In addition to this, Craig specifically was found to have committed a fraud on the power of investment, as well as acting outside the scope of his powers under the Trust Deed in making payments to three individuals, namely business development manager, Martin Dowd, administrator, Ivor Jenkins and OFSL’s Compliance Manager, Andrew Ewing.

Kelly and Reilly meanwhile were found to have acted in breach of trust by charging and accepting fees for their services as trustees at a rate that was excessive and unreasonable.

Alongside this, Arter found that Kelly and Reilly had breached their duty under the Scheme’s Trust Deed by failing to report matters to TPR promptly, or even to investigate whether they had a duty to do so, as soon as reasonably practicable after becoming aware of certain investments made and issues that existed in relation to the scheme.

TPO has therefore directed Craig, Reilly, and Kelly to repay to the scheme on a joint and several basis £1,764,014, together with £19,545 for the costs incurred by Dalriada Trustees in bringing its referral to TPO.

Craig was also ordered to pay the scheme £10,740,471, while Kelly and Reilly were ordered to pay £29,510 and £24,510 respectively, in relation to the excessive fees charged during their respective terms of office as trustees.

TPO specified that simple interest at 8 per cent per annum should be applied to each of the above payments, except the independent trustee’s costs.

The ombudsman also confirmed that he has shared the determination with TPR, and that he will also notify the Solicitors Regulation Authority in relation to Reilly's conduct.

Arter suggested that, given the findings of dishonesty against the trustees, the scheme may be eligible to receive compensation via the Fraud Compensation Fund (FCF), to the extent that such money is not recovered from the trustees as a result of TPO's directions.

However, he clarified that these directions aim to put scheme members back in the position they would have been but for the trustees breaches, and it is therefore not intended that members or Dalriada should benefit from double recovery, should a member or Dalriada recover twice for the same loss through some alternative action or process.

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