Derfshaw Limited Retirement Benefits Scheme - The Pensions ...

DETERMINATION NOTICE
under section 96(2)(d) of the
Pensions Act 2004 (“the Act”)
The
Pensions
Regulator
case ref:
372/04
To:
Of:
To:
To:
To:
Of:
Scheme: Derfshaw Limited Retirement Benefits Scheme
Mr F H Shaw
Trustee, Derfshaw Ltd Retirement Benefits Scheme
Derfshaw Limited
Bredgar Road
Gillingham
Kent ME8 6PN
Mr J E Simpson
Trustee, Derfshaw Ltd Retirement Benefits Scheme
XXXXXXXXXX
XXXXXXXX
XXXXXX
Mr R Benyon
Trustee, Derfshaw Ltd Retirement Benefits Scheme
XXXXXXXXXX
XXXX
XXXXXXXXXX
Thomas Eggar Trust Corporation Limited
Belmont House
Station Way
Crawley
West Sussex RH10 1JA
Date: 22 December 2005
TAKE NOTICE that the Pensions Regulator of Napier House, Trafalgar Place,
Brighton BN1 4DW (“The Regulator”) has made a determination on
13 December 2005.
1. Determination
1.1 An application by The Pensions Regulator to appoint an independent trustee to
this scheme.
1.2
The application was granted.
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2. Procedure Followed: Standard
2.1 By its Warning Notice dated 28 July 2005 (“the Warning Notice”) the Pensions
Regulator gave notice that it proposed to take the above action pursuant to the
application of the Regulator.
2.2 The Regulator determined that the following parties are directly affected by this
determination:
1. Mr F H Shaw in his role as a trustee of the scheme
2. Mr J E Simpson in his role as a trustee of the scheme
3. Mr R Benyon in his role as a trustee of the scheme
(collectively referred to as “the directly affected parties”)
These directly affected parties were entitled to make representations to the
Pensions Regulator about the determination.
2.3 Following the issue of the Warning Notice Mr F H Shaw, Mr J E Simpson and
Mr R Benyon exercised their right to make representations to the Pensions
Regulator, and having been granted an oral hearing, attended before the
Determinations Panel on 13 December 2005 together with their legal adviser
Mr M A Shepherd and their witness, Mr G W Mansell.
2.4 The Pensions Regulator has taken both the written and oral representations of the
directly affected parties into account and has considered those materials carefully
but has nevertheless determined to take the action as detailed in 7 below for the
reasons set out below.
3
Relevant Statutory Provisions/Legislation
Pensions Act 1995
Section 7 as amended by section 35 of the Pensions Act 2004 and in particular:
sections 7(3)(a), 7(5)(b), 7(5)(c), 8(1)(b), 8(2) and 8(4)(b)
The Pensions Regulator may grant an application for the appointment of an
independent trustee if it is satisfied that it is necessary to do so in order 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) of the
Pensions Act 1995.
Sections 36, 73, 75 and 91 of the Pensions Act 1995.
Section 97(4) of the Pensions Act 2004.
Regulation 4A of the Occupational Pension Schemes (Winding Up) Regulations
1996.
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4. Relevant Guidance
4.1 In relation to the point raised in UM/52 by the trustees, the regulatory lawyer
advised that the Determinations Panel did have the jurisdiction to appoint an
independent trustee to this scheme and referred them to the whole of section 7 of
the Pensions Act 1995 and in particular sub-section 7(3) where it states: ‘The
authority may also by order appoint a trustee of a trust scheme where they are
satisfied that it is necessary to do so in order-‘. The regulatory lawyer submitted
that there was no requirement at sub-section 3 for there to be any application from
the trustees or members of a scheme to give power to make such an appointment.
The Pensions Regulator can make an application where it considers it is
necessary to do so and this is the trigger for the authority to do so. The
independent legal adviser was asked what his view on this point was and he
stated that he was firmly of the view that what the regulatory lawyer had said was
correct. The Determinations Panel agreed with the views of the regulatory lawyer
and their independent legal adviser and decided to proceed with the hearing.
5. Background to the Application
1. By an Interim Trust Deed dated 27 April 1983, the principal employer
established the scheme with effect from 1 May 1983. Regular contributions to
the scheme stopped in September 1999 and the scheme commenced winding
up on 30 September 1999. A further payment of £275,000 was made by the
principal employer into the scheme in December 1999. There are three
trustees of the scheme all of whom are members.
2. The principal employer for the scheme is Derfshaw Limited. There are three
participating employers: Kestner Engineering Company Limited, Lennox
Foundry Company Limited and DJM Pollution Control Ltd (in liquidation). Mr
F H Shaw, chairman of the trustees, is managing director of the principal
employer and a director of both participating employers. Mr J E Simpson, a
trustee, was a director of both the participating employers until his resignation
as a director on 30 June 1999.
3. The trustees did not obtain a statutory determination and calculation of the
debt due from the employers in accordance with Section 75 of the Pensions
Act 1995. However, an actuarial valuation of the scheme, as at 1 January
2001, disclosed a Minimum Funding Requirement (MFR) deficit of £558,000.
4. Minutes of a trustees’ meeting held on 16 May 2003 stated that Mr Shaw
advised the meeting that Mr K Mitchell of AXA had resigned as scheme
actuary as of 21 March 2003 and that AXA had proposed that Mr M Meredith
be appointed in his place. The trustees agreed to this proposal. Mr Meredith
is the current scheme actuary.
5. This scheme was brought to the attention of Opra on 5 February 2004 when
the scheme actuary, Mr Meredith, wrote making a section 48(1) report under
the Pensions Act 1995. He wrote: “I wish to report that the trustees, acting on
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advice from their solicitor, have instructed me to allocate the available assets
of the scheme in a way that, in my opinion, is not permissible under Section
73 of the Pensions Act 1995 and Regulation 4A of the Occupational Pensions
Schemes (Winding Up) Regulations 1996.”
6. In his letter the actuary also advised that: “The assets of the scheme are two
insurance policies with AXA. One of these policies was set up in 1983 when
some of the members transferred from another scheme. Although this policy
is not earmarked under the trust deed and rules, the trustees’ solicitor has
advised the trustees that they have an obligation, as a result of
correspondence with the relevant members in 1983, to use this policy for the
benefit of those members alone.
The trustees and employer have finalised a compromise agreement, similar to
the Bradstock case. In the agreement, the employer has agreed to make a
final contribution of £100,000.
In addition, the Managing Director of the Company, who is also a trustee, has
agreed to waive 25% of his entitlement to benefits. I understand that his wife,
who is his only dependant, has agreed to this.
The trustees have suspended the issue of transfer value quotations. I am not
aware that they have received any requests for such quotations.
The trustees wish to secure GMPs [Guaranteed Minimum Pensions] for the
members. In September 2003 the position with regard to this was as set out
in the attached appendix 2. In summary:
Value of assets
= £1.51m
Value of MFR liabilities = £1.84 m
Cost of securing GMPs by non profit deferred annuities with AXA = £1.22m
Thus, on the face of it, there were sufficient assets to secure full GMPs.
However the cost of doing so, for the members highlighted on appendix 2,
would be more than the MFR value of their liabilities.
I have advised the trustees that, in my opinion, they are not allowed to secure
full GMPs in these circumstances. The trustees’ solicitor disagrees with this.”
7. On 10 February 2004 Mr Shaw, on behalf of the trustees, wrote to Opra and
referred to the actuary’s letter. Mr Shaw stated that, in fact, both of the
policies were set up in 1983: one at the inception of the scheme and the
second when the monies were received from the APV 1974 Pension Scheme.
In his letter Mr Shaw also wrote: “For our part, the trustees would be pleased
to receive your advice [Opra’s] as to how to complete the winding-up as
expeditiously as possible. Whilst we do not question the Actuary’s good faith
and best intentions, we have considered proceeding with a formal complaint
about AXA/Sun Life’s delays and the losses sustained by the Scheme
thereby.”
8. In a letter dated 26 January 2004 to the trustees the actuary wrote that in his
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opinion one of two things should happen to complete the winding-up:
• that the Inland Revenue acceded to their request to allow deemed
buyback even though the company was not insolvent;
• that the DWP formally assured both the insurer and the trustees that they
would be discharged from liability to provide any GMP above a partial
GMP secured by a buy out contract.
In the same letter the scheme actuary advised the trustees that because of a
substantial rise in the cost of deferred annuities offered by AXA the assets
available to the scheme now fell £620,000 short in aggregate of the cost of
purchasing full GMPs.
9. On 7 June 2004 the scheme actuary telephoned OPRA to advise that the
trustees had requested AXA to pay 100% GMPs for three members who had
passed normal retirement age and that AXA would be complying with this
request. This was despite the fund being underfunded. One of the members
was a trustee of the scheme.
10. During 2004 the trustees, together with their professional advisers, sought
alternative ways of securing member benefits with the remaining scheme
assets. “Deemed buy-back” was explored but rejected by the Inland Revenue
as the Principal Employer was not insolvent.
11. As at 3 March 2005 Opra wrote to the trustees to the effect that no policy
documentation so far supplied contained any reference which suggested that
the managed fund policy was “earmarked”, that is, to be used to benefit only
certain of the scheme members.
12. On 11 January 2005 Opra wrote requesting certain information and
clarification and stating that there appeared to be a conflict of interest in Mr
Shaw’s role as a trustee of the scheme and as a director of the holding
company, Derfshaw Limited, and as a director of other companies of the
employer. This letter also advised the trustees that in such circumstances the
Board of Opra had the power to appoint an independent trustee to the
scheme.
13. The trustees have been inconsistent in regard to saying whether they obtained
legal advice regarding the compromise agreement. Their letter to Opra dated
5 May 2004 stated at numbered paragraph 4: “The trustees have not received
separate advice over the level of the compromise agreement.” However, in
their letter to Opra dated 8 March 2005 they state: “we confirm the trustees
did obtain legal advice and, separately, actuarial advice, in connection with the
compromise”.
14. The minutes of the trustees’ meetings show that they agreed to the
compromise on the terms proposed by Mr. Shaw at the trustees’ meeting on
16 May 2003 (UM/3a). They broached the question of increasing the level of
the compromise at their meeting on 14 October 2003 (UM/3a) but agreed to
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leave the level unchanged after Mr. Shaw had stated that “such a contribution
was impossible, bearing in mind the employer’s financial situation and cash
flow.”
15. The Directors’ Report and Accounts of Derfshaw Limited for the year ended
31 December 2003 (UM /11a) show that even after a dividend of £400,000
had been taken retained profits carried forward to 2004 totalled £1,391,752.
In a letter to the Regulator dated 24 August 2005 Mr. Shaw states that the
dividend was shared between three shareholders (of whom he was one).
16. On 19 April 2005 the scheme actuary wrote to Opra stating: “With regard to
the managed fund policy, AXA’s documentation department has previously
commented to the trustees that:
‘The scheme consists of a common trust fund and there is no earmarking of
entitlements. There are no provisions in the scheme rules that segregate or
protect the money transferred into the managed fund policy.’
Notwithstanding the above, I understand that the trustees were advised by
their solicitor that they were able to earmark the managed fund policy for the
benefit of the members who transferred from the APV scheme on the grounds
that this was always their intention. As far as I am aware, the managed fund
policy has indeed only been used for the benefit of these members.”
17. The trustees have made no written statement of the principles governing their
decisions about investments, as required by Section 35(1) of the Pensions Act
1995. In reply to Opra’s letter of 11 January 2005, asking the trustees to
supply copies of investment advice obtained since wind up, the trustees in
their reply of 8 March 2005 referred Opra to the scheme actuary. The latter in
his letter of 19 April 2005 said that “no-one at AXA has given the trustees
investment advice since the scheme started to wind up.”
18. Scheme accounts have not been provided within seven months of the scheme
years ended 31 December 2002, 2003 and 2004. Despite numerous requests
from the Regulator copies of the audited accounts for 2003 and 2004 have not
been received.
19. In view of all of the above the Regulator considered that an application should
be made to the Determinations Panel of the Regulator to consider the
appointment of an independent trustee to this scheme to secure that the
trustees as a whole have, or exercise, the necessary knowledge and skill for
the proper administration of the scheme. The Regulator noted in particular
that the conflict of interest in Mr Shaw’s role as a trustee and managing
director of the holding company, which is also the sponsoring employer,
provided grounds sufficient to justify the application.
Oral Hearing
In a telephone conversation on 19 August 2005 between Mr Shaw and the
Regulator, Mr Shaw asked if the trustees would be allowed to be present at the
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Determinations Panel meeting and was told that they could not. It was
subsequently agreed by the Determinations Panel that the trustees should be
given the opportunity to attend the hearing if they so wished. All three trustees
said that they wished to attend and details of the attendees are given in 2.3 above.
The Panel heard the submissions in relation to this case on behalf of the Regulator
and then the trustees of the Derfshaw Ltd Retirement Benefits Scheme. Both
sides were given the opportunity to question each other and the Panel put
questions to both sides. All three trustees were questioned as was their witness
Mr Mansell.
The Panel retired to make their decision.
On returning, and before informing all those present of the Panel’s decision, the
chairman spoke to the trustees and stated that the Panel did fully understand that
winding up a pension scheme in these circumstances was extremely difficult. It
was almost impossible to meet the expectations of all members and it appeared to
the Panel that the trustees had a high moral commitment to do what they thought
was right by the ex APV scheme members. It was evident from the papers that
that thread of commitment to honour the promises the trustees had made, orally
and in writing, had clearly driven all their actions and thoughts over the years. It
was also very clear that Mr Simpson and Mr Benyon in particular had carried a
heavy workload during this time.
6. Facts and Matters Relied Upon
1. The Determinations Panel is satisfied that it is necessary to appoint a trustee to
the scheme trust in order to secure that the trustees as a whole have, or exercise
the necessary knowledge and skills for the proper administration of the scheme
on the following grounds:-
• the trustees’ lack of understanding of, and in some cases lack of willingness to
comply with, the relevant statutory, regulatory and fiduciary requirements
which they should have complied with in carrying out their duties as trustees;
• the failure of the trustees on a number of occasions to take appropriate
independent professional advice on their duties in winding up the scheme;
• the trustees’ failure to properly manage the problems caused by the inherent
conflict between Mr. Shaw’s interests as the managing director and
shareholder of the principal employer and his responsibility as a trustee to the
scheme members. As a consequence, the trustees did not adequately carry
out their fiduciary duty to seek to recover as much as possible of the statutory
debt owing from the employer to the scheme.
The facts and matters relied on by the Determinations Panel in reaching these
conclusions are set out in more detail in the following paragraphs.
Understanding and Compliance
2. The trustees did not understand, or were not willing to accept, a duty to comply
with Section 73 of the Pensions Act by allocating all the available assets of the
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scheme in accordance with the statutory order of priorities shown in that section.
The trustees persisted in their intention to disregard these statutory requirements
despite frequent advice to the contrary from the scheme actuary and after being
informed by Opra in its letter of 3 March 2005 (UM/24) that it concurred with views
of the scheme actuary. The trustees did not seek independent professional advice
from a third party, (as suggested by Opra in its letter of 3 March 2005) in order to
resolve the disagreement between the scheme actuary and their own legal
adviser on this matter.
3. The trustees did not understand, or were not willing to accept, that the managed
fund (copy of the policy located at page 345 between UM/41 and 42) was an
asset of the scheme as a whole, despite clear indications in the policy itself that
this was the case, and accordingly, under Section 73, had to be used for the
benefit of all the members once wind-up had commenced, despite clear advice
from the scheme actuary on this point. The trustees again failed to take
independent professional advice to resolve the disagreement between the
scheme actuary and their legal adviser on this point
4. The Trustees were aware of, but did not comply with the requirement in section
75(5) that a determination and calculation of the employer’s statutory debt must
be obtained from the scheme actuary. In May 2003 Mr. Shaw on behalf of the
employer put forward a proposal for a Supplementary Compromise and Waiver
(UM/3d), which was subsequently agreed by the trustees at their meeting of 16
September 2003 and confirmed at their meeting of 14 October (UM/3a). Mr.
Shaw appears to have been unaware that the waiver of a quarter of his and his
wife’s pension rights contained in this proposal was in breach of Section 91(1) of
the Pensions Act 1995 and therefore unenforceable. The Determinations Panel
noted the view of the regulatory lawyer at the oral hearing that this may have
rendered the entire compromise invalid.
5. The trustees showed a lack of willingness to comply with the statutory
requirements on them to produce audited trust accounts (Section 41 of the
Pensions Act 1995 and Regulation 2(1)(a) of the Occupational Pension Schemes
(Requirement to obtain Audited Accounts and a Statement from the Auditor)
Regulations 1996 (SI 1996/1975)) within seven months of the end of the financial
year to which they relate. In particular, the trustees assumed, without taking any
advice, that they would not have to produce scheme accounts after the scheme
went into wind up in 1999. This led to a significant delay in the production of the
scheme accounts in respect of that year. The trustees have so far failed to have
the scheme accounts for 2003 and 2004 audited.
Seeking and Taking Advice
6. The trustees did not consider whether they needed to review the continuing
suitability of the scheme’s investments when the scheme went into wind-up, as
required by Section 36(4) of the Pensions Act 1995. In answer to Opra’s
enquiries on this point (letter dated 11 January 2005 in UM/20) the trustees
referred Opra to AXA. In the trustees’ replies to the Warning Notice (p224 at UM/
40) the trustees stated that they ‘expected investment advice to be offered by the
scheme actuary’ but in AXA’s letter to OPRA dated 19 April 2005 the scheme
actuary said that “no-one at AXA has given the trustees investment advice since
the scheme started to wind up.”
DM No: 523964 8

7. In particular, the trustees confirmed during the oral hearing that (i) they had taken
no professional advice before deciding to invest the £275,000 top-up contribution
provided by the employer in December 1999, in the existing insured policy DA 77
(second document exhibited at UM/14) and (ii) they had not understood the
detrimental impact of the scheme’s entry into wind-up on the value of this policy.
Managing Conflicts of Interest
8. In agreeing to Mr. Shaw’s proposal at their meeting in September 2003 and in
the subsequent discussion of it at their meeting on 14 October 2003, the trustees
collectively failed to deal adequately with the conflict of interest in Mr. Shaw’s
position. Specifically, Mr. Simpson and Mr. Benyon took no independent financial
advice, either on the resources available to the company, or on the level of
settlement for which they should aim. (During the oral hearing the Determinations
Panel heard that the two trustees had rejected their legal adviser’s suggestion
that they should seek independent financial advice). The two trustees thereby
failed to test Mr. Shaw’s assertion, which he explicitly made in his capacity as
managing director of the employer, that “such a contribution [to increase the level
of the settlement] was impossible, bearing in mind the employer’s financial
situation and cash flow”.
9. As a consequence, the trustees collectively did not comply with their fiduciary
duty to seek to recover as much as possible of the statutory debt due from the
employer to the scheme. Mr. Shaw individually failed adequately to manage the
conflict between his duty as a trustee to seek the best possible settlement for the
scheme members and his personal interests as a shareholder. The panel noted
that after refusing any increase in the settlement at the 14 October meeting, Mr
Shaw participated, as a director, in a decision to pay a dividend to shareholders
of £400,000 out of the company’s retained profits at the end of 2003 (UM/11a).
10. Following the confirmation of the agreement on the compromise on 14 October
2003, Mr. Shaw failed to comply with the binding undertaking on the employer in
paragraph 3.1 of the Supplemental Deed of Compromise and Waiver (UM3d) to
pay £100,000 to the scheme “forthwith” and did not make the payment until
March 2005.
In considering their decision the Determinations Panel noted that in the course of the
oral hearing the trustees expressed their willingness to take independent advice on
the allocation of the assets of the scheme among the members and to comply with
the statutory requirement to have their accounts audited. While regarding this offer
as helpful, the Determinations Panel considered that these undertakings did not
excuse the failings described in paragraphs 1 to 10 above and did not affect its
overall judgement that it was necessary to appoint an additional trustee with
exclusive powers. The panel expressed the hope that all the trustees would work with
the appointed independent trustee in order to facilitate the winding-up of the scheme.
DM No: 523964 9

7. Conclusion: Details of Determination
1. Thomas Eggar Trust Corporation Limited of Belmont House, Station Way,
Crawley, West Sussex RH10 1JA is hereby appointed as trustee of the
Derfshaw Limited Retirement Benefits Scheme with effect on and from 13
December 2005.
2. This order is made because the Pensions Regulator is satisfied that it is
necessary to do so in order 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) of the Pensions Act 1995.
3. The powers and duties exercisable by Thomas Eggar Trust Corporation
Limited shall be to the exclusion of all other trustees of the scheme pursuant
to section 8(4)(b) of the Pensions Act 1995.
4. The appointed trustee’s fees and expenses shall be wholly paid out of the
scheme’s resources pursuant to section 7(5)(b) of the Pensions Act 1995 as
amended by section 35 of the Pensions Act 2004, and those fees and
expenses shall be deemed to be a debt due from the employer to the trustee
pursuant to sections 8(1)(b) and 8(2) of the Pensions Act 1995 as amended
by section 35 of the Pensions Act 2004.
5. This order:
a. will take immediate effect on the date of this order
b. may be terminated at the expiration of 28 days notice from the Pensions
Regulator to the trustees, pursuant to section 7(5)(c) of the Pensions Act
1995.
8. Decision Maker
The determination which gave rise to the obligation to give this Determination
Notice was made by the Determinations Panel.
9. Scheme details
Type of scheme
Defined benefit
Status of scheme Winding up with effect from 30 September 1999
Membership 56 as at March 2004
Size of fund £1,259,918 as at 31 December 2002
Contracted in/out
Contracted out
10. Scheme trustees
Name Period of office Status of trustee
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10. Scheme trustees
1. Mr F H Shaw 27 April 1983 to date Individual (Managing Director and Company
Secretary of the Principal Employer and a
director of subsidiary companies and all
participating employers).
2. Mr J E Simpson 27 April 1983 to date Individual (Pensioner and former director of
Kestner Engineering Co. Ltd and Lennox
Foundry Co. Ltd, participating employers).
3. Mr R Benyon 27 April 1983 to date Individual (Employee of a participating
employer).
11. Scheme advisers
Type Name Period of office Company
1. Scheme actuary Mr M Meredith from date unknown to date AXA Sun Life
Services plc, Bristol
BS99 5SN
2. Scheme auditor Spokes & Company from date unknown to date Spokes &
Company,
Hildenborough,
Kent
3. Scheme insurer from date unknown to date AXA Sun Life
Services plc, Bristol
BS99 5SN
4. Legal adviser Mr M Shepherd 27 November 2002 to date M A Shepherd &
Co, Lyndhurst,
London N3 1TA
12. Employer
Name
Address
Nature of business
Number of employees
Derfshaw Limited
Bredgar Road, Gillingham, Kent, ME8 9NG
Manufacture metal structures & parts
Unknown
13. Important Notices
This Determination Notice is given to you under sections 96(2)(d) of the Act. The
following statutory rights are important.
14. Referral to the Pensions Regulator Tribunal
14.1 You have the right to refer the matter to which this Determination Notice relates to
the Pensions Regulator Tribunal (“the Tribunal”). Under section 103(1)(b) of the
Act you have 28 days from the date this Determination Notice is given to you to
refer the matter to the Tribunal or such other period as specified in the Tribunal
rules or as the Tribunal may allow. A reference to the Tribunal is made by way of
DM No: 523964 11

a written notice signed by you and filed with a copy of this Determination Notice.
The Tribunal’s address is: 15-19 Bedford Avenue, London WC1B 3AS (tel: 020
7612 9700). The detailed procedures for making a reference to the Tribunal are
contained in section 103 of the Act and the Tribunal Rules.
14.2
You should note that the Tribunal 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 Support at The Pensions Regulator, Napier House, Trafalgar
Place, Brighton BN1 4DW.
Signed:
Olivia Dickson..................................................................................................
Chairman:
Olivia Dickson................................................................................................
Date: 22/12/05.....................................................................................................................
DM No: 523964 12