SSAS is relatively unique in that, subject to certain conditions, it enables a scheme to loan funds to third parties. As opposed to loans to Sponsoring Employers, loans to third parties so not need to be secured by a first charge over an asset. This flexibility provides benefits to members to manage their investments and hopefully obtain better returns than might be obtained from more restricted pension offerings.
This flexibility and the ability to make third party loans without a first charge is always likely to be present heightened risk. Indeed, we have seen for many years now a growing sub-sector promoting SSAS lending (particularly to property developers) on the basis that a borrower taking a loan from a SSAS will likely not need to provide first charge security for the loan. For those businesses seeking a loan the advantages of having access to a substantial liquid fund without the obligation to provide adequate security is obvious. This unique blend is often marketed directly to SSAS members as ‘investment opportunities’ or ‘joint ventures’, neither term correctly describing what is, ultimately, a loan with limited security.
We have in the past highlighted the considerable risk to members of making third party loans and, as we continue to see high risk loans being marketed to SSAS members, it’s worthwhile reiterating our message: members should not loan money to third parties without undertaking due diligence and obtaining sufficient security for the loan.
The Position of Professional Trustees
Following the Pension Ombudsman’s Decision Mr N (PO-25984), it is now clear that a Professional Trustee’s obligations in respect of loans proposed by members are, amongst other things:
- To “take such care as an ordinary prudent man would” when investing the assets, to act in the beneficiaries’ best financial interests and to avoid “all investments attended with hazard”; and
- Discharge all Statutory, Common Law and Equitable obligations as a Trustee of a Scheme and not rely on merely advising Member Trustees. The Professional Trustee is as responsible for investment decisions as the Member Trustee who may have proposed the investment.
It’s no longer sufficient for Professional Trustees to take advice and highlight the potential risks to members – if the Professional Trustee believes, on the basis of the advice received, that the loan is High Risk then it’s incumbent on the Professional Trustee to prevent the loan (provided the Scheme Rules permit the Professional Trustee to veto).
The Importance of Advice for members and Professional Trustees
It’s not suggested by the Ombudsman that Professional Trustees should be making decisions by themselves. Indeed, the requirement is to take advice and make a decision based on that advice, particularly where the nature of the investment or security is opaque or couched in weasel words.
The main thing we, as legal advisors to Professional Trustees, are interested in is:
What exactly is the security for the loan and is it sufficient to obtain repayment in the event of borrower default?
- Getting to the bottom of what security is actually being offered can sometimes be a difficult thing to ascertain. For example, taking a Debenture over a company’s assets may seem like good security – but does the Debenture say what the members and trustees think it says? Does it actually give security over the assets of the company that have value or does the way the Debenture has been drafted skilfully exclude those assets?
- Does anybody else have security over the asset that’s being offered?
- That leads into the related question of what is the security actually worth and will it retain its value?
- Can the Scheme prevent the security being sold or moved?
- In the event of default, can the Scheme enforce the security without any third-party consents being required?
- Can the borrower subordinate the Scheme’s security in favour a superior lender or lenders or dilute the security by giving the same security to more lenders?
- If the Scheme is taking a Personal Guarantee from a director of a company or third party, does that guarantor own any assets?
Together with other financial advice, these are now questions that both members and Professional Trustees need to ask before making third party loans and Professional Trustees l, being held to a higher standard of accountability, will now have to protect their positions by obtaining and retaining the advice that’s been given, together with evidence of the Professional Trustee’s considerations in respect of the loan lest a member decides to refer a failed loan to the Ombudsman.
Doing it right? Retain Buckles.
