The Small Self-Administered Scheme and a Connected-Party Loan
Ronan is the sole trustee and a member of a small self-administered pension scheme (SSAS) with two other member-directors of a family construction company. Scheme assets are €1.8m, of which €900,000 is invested in a commercial unit leased back to the company at market rent. The company is now short of working capital and Ronan proposes lending €400,000 of scheme cash to the company at 6% interest, secured by a floating charge. The scheme's trust deed permits loans to the sponsoring employer. One member, Siobhan, has objected, saying the loan is too large and unsecured in substance. Ronan wants to proceed at the next trustee meeting, where he and the other director would outvote Siobhan two to one.
1. Advise the trustees on the governance and conflict-of-interest issues raised by the proposed loan and how the decision should properly be made.
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Several overlapping problems arise.
Conflict of interest. Ronan and the other director-member are connected parties: they benefit from the company receiving the loan. A trustee must act in the members' interests, not the employer's. Where a trustee has a conflict, best practice is to exclude that trustee from the decision and record the exclusion. A 2-1 majority achieved by conflicted trustees does not cure the conflict - Siobhan's dissent should be minuted and the conflicted trustees should not vote.
Prudence and concentration. The scheme is already heavily exposed: €900,000 (50%) in a property leased to the same employer. Adding a €400,000 loan (22% of assets) to the same connected party concentrates risk enormously - if the company fails, the scheme loses both the tenant and the loan. The trustees must assess affordability, security and the scheme's liquidity needs.
Documentation. The trust deed permits employer loans, but the trustees must still take independent advice, set a commercial interest rate, obtain proper security (a floating charge ranks behind fixed charges and is weak security), and document the investment rationale. Siobhan's objection should be addressed on the merits, not overruled by numbers.
2. Siobhan asks what would happen if the company became insolvent shortly after the loan was made. Explain the risks to the scheme and to Ronan personally.
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If the company fails, the scheme faces a double hit: the €400,000 loan becomes a claim in the insolvency (a floating charge generally ranks behind preferential and fixed-charge creditors, and recovery may be minimal), and the €900,000 property loses its tenant and may fall in value. Members' benefits could be materially reduced.
For Ronan personally:
- Breach of trust. If the trustees failed to act prudently or allowed a conflicted trustee to vote, the trustees (including Ronan) may be personally liable to make good the loss. Trustees can be jointly and severally liable.
- Regulatory exposure. The pensions regulator can investigate, issue directions and, in serious cases, pursue trustees. Making a loan to a connected party on weak terms may be treated as an unauthorised payment or a breach attracting tax charges on the scheme and members.
- Insolvency clawback. The loan, and any security, may be examined if made at a time the company was already in difficulty.
The lesson: the trustees should have taken independent legal and actuarial advice, capped the loan to a prudent proportion of assets, and required robust security. The minute recording Siobhan's dissent will be important evidence - for her.