The Maxwell Effect

Posted: 19 November 2021

The Maxwell Effect


When a disaster happens, the natural human response is to try and find out why it happened, whether anyone is to blame, and what can be done to stop it happening again. It was inevitable that the trail of financial chaos and personal hardship which emerged after Robert Maxwell’s death on 5 November 1991, would lead to an official investigation and a clamour for change.


The DTI Report into the Maxwell scandal was not published until 2001, having been delayed by the criminal prosecution of some of the people involved. Heavily criticised at the time, the Report is nonetheless a remarkable account of what went wrong and, with the benefit of 30 years’ perspective, a crucial starting point for analysing the effectiveness of the regulatory response. The Report couldn’t have been clearer. Robert Maxwell saw the pension scheme as his fund: a strategic asset of the sponsoring company. Because the employer had an obligation to support the fund, the fund could in turn be used to help the company. The two were inextricably linked.


To acknowledge the link between employer and pension scheme in a final salary context, in which the employer bears the balance of cost, is merely to state the obvious. A strong employer is better able to bear such an open -ended risk; the better the net investment return generated by the fund the more the employer risk is mitigated. Conversely, an underfunded scheme is a drag on the employer’s financial performance and may ultimately lead to dividends or corporate activity having to be curtailed. But deliberately using the fund as a strategic corporate asset and subordinating scheme members’ interests to those of the company is a step change. How did the misuse of scheme assets arise?


The Report holds Robert Maxwell primarily responsible. Maxwell was a strong personality with a reputation for bullying. He exerted as much control as he could over group companies and pension schemes alike-the take of an insider quoted in the Report was that ‘RM will control pensions until he dies’. He operated on a ‘need to know’ basis, opposing disclosure of his business affairs as a matter of principle. The corporate group structure was complex, and the use of a nominee company for making investments obscured the identity of the beneficial owner. Mr Maxwell was the Chairman of the trustee board.  He invested pension assets directly without reference to the fund’s investment committee. When an in-house investment management company (Bishopsgate) was established in order to invest a substantial portion of group pension assets in a Common Investment Fund or CIF, Maxwell became a director. Most of Bishopsgate’s other directors were closely involved with the running of Mr Maxwell’s private business interests. As the Report notes, the creation of Bishopsgate made it easier to use the pension fund as an adjunct to Maxwell’s business interests at a time when the requirements of his private business interests made that need greater.


Mr Maxwell’s approach meant that the pension fund and CIF were used as a piggy bank to support his private business interests. Pension assets were required to take risks and to provide support on terms that commercial lenders would have refused to accept. Soft cash loans were made to Maxwell’s private companies and pension assets invested in shares of related companies and used as collateral for unsecured loans which benefited the private companies. Other dealings were made for the benefit of the employer (for example by acquiring assets from related companies.) The CIF was used to hold shares that were strategically useful for the company and to acquire assets for the benefit of the group that it could not itself afford.


The legal separation of a pension trust from its sponsoring group and related companies is a key protection for members, although self-investment (investing in the shares or property of the sponsor or related companies above prescribed limits) was not legally prohibited until 1992. (It was however common for self-investment to be restricted by the investment provisions of a scheme’s trust deed and rules and for protection to be afforded through trust law.) In 1986 self-investment in shares, property or loans to the company had to be disclosed if in excess of 5 % of total net assets. The change in the law did not alter Mr Maxwell’s view of the relationship between the company and pension fund but meant that ways round the new rules had to be found (such as by ensuring that soft loans were settled by the end of an accounting year and so might arguably escape disclosure).


The revelation that £ 400 million had disappeared from Mirror Group’s pension scheme created a shockwave of concern about pensions security. Public and politicians alike demanded that “something must be done.” The government established a review into the law of pension schemes chaired by Professor Roy Goode. A thorough and careful review was undertaken, and evidence gathered from a wide range of respondents. Broadly, the Goode Report accepted that trust law (with appropriate legislative clarification in some areas) remained a suitable basis for regulating pension schemes. No major changes were needed. The government accepted the recommendations and in due course brought in legislation-the Pensions Act 1995.


Evidence to the Goode Report had included many suggestions about how pensions security could be enhanced, and many of those ultimately found their way into the new legislation. An industry regulator was introduced for the first time-the Occupational Pensions Regulatory Authority. Civil and criminal penalties could be imposed on trustees and advisers whose respective roles were clarified. Statutory backing was given to the trust law concept of a member’s accrued rights. Controls were introduced on funding levels, with the advent of the Minimum Funding Requirement or MFR. The role of trustees was enhanced, with certain powers and functions becoming regulated. The trustees’ investment role was clarified, earlier statutory provisions on investment consolidated and updated and new duties imposed such as the preparation of a Statement of Investment Principles. Member nominated trustees became mandatory with certain exceptions. Unsuitable persons could be disqualified from acting as a trustee. And a new obligation was imposed on actuaries and auditors to ‘blow the whistle’ if they had reasonable cause for concern about the operation of the pension scheme.


At the time, the Pensions Act changes were widely considered to be measured and proportionate. But while many of the changes designed to improve member security were useful in themselves, they were not all relevant to the issues which led to the misuse of the Mirror pension funds.


A key measure introduced by the Pensions Act was, as already noted, the introduction of the MFR. Designed to address concerns about underfunding, the new measure would have made no difference to the loss of pension assets from the Maxwell funds. According to the Report the fund was sufficiently well funded for discussions to have taken place about the use of the surplus. Other improvements to member security, such as the statutory protection of accrued rights were not relevant either. And while OPRA had the power to stop unsuitable persons from acting as pension trustees, it is difficult to imagine that Robert Maxwell would not have mounted a robust legal challenge if an attempt had been made to stop him acting as a trustee. Despite reported misgivings, not to mention the finding of Mr Maxwell’s unsuitability as a director in an earlier DTI Report, IMRO had duly authorised Bishopsgate, the in-house investment management company. The Report noted with an air of frustration that regulators cannot act without hard evidence which will withstand scrutiny in Court.


Member nominated trustees would have been in no better position than others to understand opaque investment dealings. Transactions were concealed from trustees and their true purpose obscured. It would have been an exceptional member trustee who pressed for governance changes and greater transparency in the investment process, at a time when good returns were apparently being generated and other trustees appeared reassured as a result. As one of the trustees was reported to have said ‘If the horse keeps winning, you don’t break its leg’.


Would the Pensions Act changes have prevented the misuse of pensions assets and the hardship of members which resulted?  They would certainly have made it much more difficult. Self-investment above prescribed limits had already been prohibited, but greater transparency emerged as a result of the Statement of Investment Principles and other provisions relating to investment contained in the legislation. Trustees, reminded of their responsibilities, would almost certainly have insisted on more frequent meetings. (The Report had mentioned that only five full meetings of the MGN scheme trustees had taken place between 1988 and 1991.) There was a marked change in pension governance after the Act, as advisers competed to provide compliance checklists and advice to trustee boards, and the possibility of civil and criminal penalties became relevant. The focus on the role of advisers, and in particular their whistle blowing obligation, would have certainly caused them to consider more closely the way in which the schemes were being run and invested, what was being disclosed and whether they needed to delve more deeply and make further enquiries.


But if someone is determined to do wrong then law and regulation cannot prevent them. There have, after all, been laws against murder, theft and assault for as long as anyone can remember. All go on with distressing regularity. The DTI Report made the same point in commenting on wider financial services regulation:

 “Regulation plays an essential role in maintaining public confidence in institutions that are permitted to handle and invest pensions and savings. However, no system of regulation can prevent another series of events similar to that surrounding [Robert Maxwell’s] companies, though the risks of this should have been significantly reduced…. There should be no ‘expectations gap’ and the fact that an institution is approved and regulated does not obviate the need for vigilance.”


The expectations gap may arise because regulatory compliance tends to focus on the letter not the spirit of the law (ironically a criticism levelled at the auditors of the Maxwell scheme by the Report). There are usually multiple factors which lead to a disaster, rather than a single failing which can easily be fixed. There is rarely one simple cause. Identifying gaps in regulation which need to be filled is not always easy. The result is hugely frustrating for those affected and the general public who generally prefer a clear chain of accountability.


What then has been the Maxwell effect on pensions governance 30 years on?


The principal outcome has been an unstoppable drive towards member protection.  Scheme members are better protected than ever before against underfunding, adverse corporate activity and governance failings. In retrospect the Pensions Act 1995 was only the first step in the process, although conceived and seen at the time as a balanced response to the Goode Report for the long term. Since then, pensions law and regulation have increased in volume and complexity and a much tougher Pensions Regulator with greatly enhanced powers has emerged. The 1995 Act was evolutionary rather than revolutionary and designed to build on the trust law framework which had gone before. However, it proved impossible to withstand the clamour for more legislation and stronger regulation in the face of corporate insolvencies and restructurings widely perceived to subordinate the interests of scheme members to financial considerations. That there might be two sides to the story, or that things sometimes aren’t that simple, is often lost in the public debate.


There have been less obvious effects on pensions governance. Paradoxically, reforms which focus on the trustees’ central role in scheme decision making have created a risk environment which on occasions appears to discourage independent thought. A safety-first approach, a rush to take professional advice and a reliance on everything published by the Pensions Regulator -all are perhaps inevitable given the complexity of regulatory law and guidance, and the penalties (not least in terms of reputational damage) if things go wrong. However, the essence of good trusteeship is personal responsibility and the ability to take well informed decisions having considered relevant professional advice and weighing up relevant and discarding irrelevant factors. If there is decision making paralysis because of concerns about risk the system is not working as it should. Doing nothing because of perceived risk may itself be a risk.

Greater perceived risk has also led to increasing difficulty in persuading members and those most closely connected with the company to take on the trusteeship of their pension fund. This has led in turn to an increasing trend for appointing professional trustees - the best solution for some schemes but not all. We are moving from active decision making by those most closely connected to the scheme and its members to the professional administration of what seems to have become a troublesome duty.


The final Maxwell effect is the difference in the pensions landscape then and now. Then the scene was dominated by final salary provision, often on a self-administered basis. Now, few final salary schemes remain open in the private sector; DB active membership is now largely the preserve of the public sector. Complaints about the cost and complexity of the regulation that began in 1995 and which gathered speed over subsequent years are often overstated. They ignore the benefit of increased member security for those employees and former employees who contributed to the company during their working life. However, the combination of increased regulatory cost and added risk over the last 30 years has undoubtedly been one of several factors persuading many private sector employers to move from defined benefit provision. The Pension Schemes Act 2021 which came into force on 1 October is the latest link in the chain of legislation that began after Maxwell. It introduces tougher regulatory powers and sanctions, including new criminal offences, and brings a wider range of corporate activity under regulatory scrutiny. Lawyers will have a field day. Employers will draw their own conclusions.


While all regulation in some way penalises or inconveniences the majority in order to try and prevent the wrongdoing of the minority, it may also have unforeseen consequences. Pensions regulation is no exception. There is nothing new under the sun.



Jane Marshall

Director, The Pensions Archive Trust

19 November 2021