The Pensions Regulator has confirmed that it has barred three people from acting as pension fund trustees after an investigation determined they had 'inappropriately profited from their position as trustees' and were not 'fit and proper persons' for the role.

Robert Angus Hill, Nicholas John Halton and Simon Christopher Ragg were trustees of the Hugh Mackay Retirement Scheme at a time when the regulator deemed them to be breaching investment regulations. The scheme had invested 'almost exclusively' in property and is now facing financial troubles that make it on course to enter the Pension Protection Fund, according to the Regulator's report.

Alan Steinfeld QC, who represented the three trustees in front of the Regulator's determination panel, accepted that the trio conducted "persistent and serious breaches of pensions legislation or associated regulations."

One of the key failings, according to the Pensions Regulator, was that the trustees were carrying a conflict of interest in two speculative property deals worth £10 million. Robert Hill, who has a background as a property developer, had holdings in the two companies selling the properties.

Hill, for instance, owned 50% of the company which sold "a former car park site in a semi-derelict condition" (according to the new trustees) to the scheme for £1.55 million in 2006.

The three were also found to have wrongly paid the scheme's sponsoring company, Chartpoint, over £1 million from the scheme between 2006 and 2009. These came primarily from investment and financing fees.

Chartpoint was a property company owned by Robert Hill and his two daughters, and this cash injection is alleged to have benefited all three banned trustees financially. Robert Hill and his daughters received £190,000 from Chartpoint in dividend payments in 2007, while the other two banned trustees earned salaries and bonuses from Chartpoint worth at least £18,000 a year in 2009.

The scheme's sponsor until 2003 had been a carpet manufacturer.

That £35 million was invested by the scheme in commercial property, said to be a "vast majority of the scheme's assets" was another reason for the ban. This broke a regulation which states that a pension scheme's assets must be predominantly held in investments tradable on regulated markets.

The Pensions Regulator based the ban on failings of the three trustees' to show sufficient 'competence and capability'. Their 'honesty and integrity' were not part of the probe, according to the Pensions Regulator's Determination Notice in a section that has largely been blocked prior to publication.

The three trustees tried to bargain with the Pensions Regulator twice in 2011 by accepting a ban in exchange for certain allegations to be dropped and some details of the case not to be published. These offers were both rejected by the Regulator.

The three trustees had a right to appeal to the Tax and Chancery Chamber of the Upper Tribunal but otherwise stand to be excluded from "acting as trustees of trust schemes in general."

Pensions Regulator Bill Galvin said, on the release of the reasons behind the decision, that the investigation "unearthed some of the most worrying examples of mismanagement of a final salary pension scheme that we've seen. Typically the sponsoring employer supports the pension scheme - here the scheme provided the company's main source of income.

"The risk to members' benefits posed by the investment strategy and borrowings secured against scheme assets was stark; and it is difficult to imagine a more clear-cut conflict of interest than a trustee effectively negotiating with himself as the vendor in a property deal. The scheme's finances are in a serious state and the Pension Protection Fund will be required to step in to pay compensation to members."

Unaware

Robert Hill, one of the banned trustees, has told Pension Funds Insider that he had no knowledge of the Pension Regulators' existence or governance rules before his home was raided by police at 5 o'clock one morning in 2010.

Hill said that the trustees poured almost the whole fund into commercial property deals as they were unable to find an equity investment manager who could deliver 6% annual returns to match the pension fund's liabilities. He claims to have declared all conflicts of interest before deals were completed and insists that the particular deals criticised by the Regulator as showing a negligent conflict of interest made the scheme a £7.5 million profit.

Hill also explained the setting up of the criticised Chartpoint sponsor company came after he acquired the Hugh Mackay carpet firm for one pound. He said that trustees soon decided to detach the scheme from the original sponsors in order to help make it attractive to new buyers while it continued to struggle from overseas competition.

Hill said: "We were lay trustees and took advice up to the hilt.

"The Regulator has made a series of innuendos and never listened to our point of view. All the Regulator's success are against one or two-man bands, they want to justify their existence by picking on small guys like us.

"My local council lost £140 million from its pension fund last year and I bet they didn't even get a letter from the Regulator. According to the Regulator it would have been fine to put all the fund's money in Icelandic banks and lose every penny. I was aware that the overarching duty of trustees is to their members and when you pick up a newspaper and see crash, crash, crash everywhere why would you want to invest in stocks and shares?"

Hill added that he believes the Pensions Regulator should write to every trustee to clarify rules in the wake of his experience.

A Durham police investigation into the affair is ongoing.

Last February the newly outsourced trustees for the Hugh Mackay fund stated that 2010 audited accounts revealedthat the scheme had around £800,000 in assets against approximately £43 million of liabilities.

A spokesperson for the Pensions' Regulator repsonded to Hill's claims by telling Pension Funds Insider that the body has made plenty of high profile rulings against large companies recently, such as Lehman Brothers, Nortel and ITV. They also said that the Regulator publishes a wide range of educational resources to help trustees fulfil their legal governance duties, such as their trustee toolkit.

dbillingham@wilmington.co.uk