Octopus used pensioners’ cash to fund its struggling investments

Thousands of pensioners who put money into an inheritance tax scheme run by Octopus Group bankrolled failed hospitals and care homes also owned by the group.

Octopus Inheritance Tax Service (OITS), a subsidiary of Octopus Group, raised money from 18,000 pensioners with the promise of lowering their inheritance tax bills by investing in businesses to qualify for relief.

OITS customers were sold shares in Fern Trading, which owns about 300 energy, property and telecoms companies. These businesses were the main selling point for investors.

However, The Telegraph can reveal that Fern also lent investors’ cash to struggling businesses separately owned by Octopus Group without explicitly telling the investors where the money was going.

A number of these investments turned sour, with Fern and the pensioners that backed it ultimately taking over the businesses.

The fact that Octopus held stakes in the businesses Fern lent money to was not always fully disclosed to the customers, with Octopus arguing that this was not material to the performance of the investment product.

However, the lack of disclosure raises questions about whether pensioners were kept fully informed about where their money was going.

In its investment literature, OITS makes clear that conflicts of interest can arise when it lends to businesses owned by the broader Octopus Group. The company states that Octopus Group could stand to profit when OITS provides financing. Pensioners would not share in any profit made at this level.

Andy Agathangelou, founder of consumer advocacy group Transparency Task Force, said: “These latest findings raise serious questions about whether Octopus has met the standard of transparency that investors are entitled to expect in a complex inheritance tax investment structure.”

Octopus insisted that it took transparency seriously and said all loans from Fern to companies it had stakes in were reviewed by its investment committee, the conflicts committee and Fern’s board. An independent party also reviews its approach to conflicts of interest. All loans were made at commercial rates.

Industry professionals and former employees at Fern-owned companies have already raised concerns about whether pensioners were being given adequate information about the performance of their investments.

One of the loans made by Fern was to a private-hospital group, One Healthcare, which was also part-owned by Octopus Group.

Fern lent the company £64m, but it was forced to write off the debt after the company ran into difficulties. Fern subsequently took control of it from the wider Octopus Group and pensioners who backed Fern through OITS ultimately suffered a £42m loss on this investment.

Although they were told about the loss on the loan, investors were not informed that Octopus itself had a stake in One Healthcare.

Fern also lent money to Rangeford, a retirement village developer that the Octopus Group had a stake in.

Cost overruns and significant delays meant that Rangeford was unable to pay its debts to Fern, leading Fern to write off the loan in exchange for taking ownership of Rangeford.

Again, OITS customers were never told that Rangeford was originally an Octopus Group venture.

In its official brochure for the OITS service, Octopus makes clear that “portfolio companies” could trade with other companies owned or managed by Octopus and could also provide finance to them.

Fern is understood to have no outstanding loans to Octopus Group companies.

However, Mr Agathangelou said more disclosures should have been made about the specific ties between Fern’s companies and Octopus Group in the past.

“Ultimately, this is about trust. Investors making inheritance tax planning decisions are placing considerable reliance on the investment manager to act as a faithful steward of their capital,” he said.

“That trust depends on openness. Where material information about the origin of investments or related-party connections is not made sufficiently clear, it risks undermining confidence not only in the individual investments but in the integrity of the investment process itself.”

A spokesman for Octopus Investments said: “Where Fern has provided financing to companies connected to Octopus, those transactions were reviewed through our conflicts governance process and approved only where they were considered to be in Fern shareholders’ interests.

“We’re committed to communicating openly with investors and their advisers, continually improving the information we provide, and focusing on delivering positive long-term outcomes for shareholders.”