H.E.S.T. Australia Ltd v Inkley
[2018] SASC 127
•6 September 2018
SUPREME COURT OF SOUTH AUSTRALIA
(Civil: Application)
H.E.S.T. AUSTRALIA LTD v INKLEY
[2018] SASC 127
Judgment of The Honourable Justice Blue
6 September 2018
SUPERANNUATION - PRIVATE SECTOR FUNDS - AMENDMENT OF TRUST DEED
SUPERANNUATION - INDUSTRY SUPERVISION
SUPERANNUATION - PRIVATE SECTOR FUNDS - TRUSTEES - POWERS AND DUTIES
EQUITY - TRUSTS AND TRUSTEES - POWERS, DUTIES, RIGHTS AND LIABILITIES OF TRUSTEES - MISCELLANEOUS OTHER POWERS, DUTIES AND LIABILITIES - POWER TO AMEND TRUST DEED
Application for order under section 59C of the Trustee Act 1936 (SA) varying the terms of the Health Employees Superannuation Australia Trust.
The plaintiff is the trustee of the Trust, which was established as an industry superannuation fund in 1987. Clause 31 of the First Schedule to the Trust Deed confers power on the Trustee to amend the terms of the Trust Deed, including clause 31 itself, subject to certain conditions. Over the last 30 years the plaintiff has amended the Trust Deed on 27 occasions. However, it has recently entertained doubts whether some of those amendments comply with the criteria contained in clause 31.
The plaintiff seeks an order varying the Trust to substitute a set of proposed rules for the existing rules contained in the Schedules to the Trust Deed. The proposed rules effectively alter the power of amendment contained in the Trust Deed, validate prospectively historical amendments, alter the overall structure and form of the Trust Deed and make various other amendments to substantive provisions of the Trust Deed.
Held (making the order sought):
1. The Court has jurisdiction to make the order and should exercise the discretion to entertain the application (at [24]-[26]).
2. For the purpose of making an order, the proposed rules should be amended in relation to investment options, successor fund transfers, trustee covenants, liability of the Trustee and the amendment power (at [54]-[57], [73]-[75], [116], [121], [126], [142] and [161]).
3. Subject to such amendments being made, the criteria for making an order are satisfied. An order will be made in terms of the minutes of order produced by the plaintiff (at [163]-[164]).
Corporations Act 2001 (Cth); Income Tax Assessment Act 1936 (Cth); Income Tax Assessment Act 1997 (Cth) ; Superannuation Industry (Supervision) Act 1993 (Cth) ss 52, 56-58, 59A , 63, 103-105, 109, 243 ; Superannuation Industry (Supervision) Regulations 1994 (Cth) regs 6.17A, 4.02A; Trustee Act 1936 (SA) s 59C, referred to.
Retail Employees Superannuation Pty Ltd v Pain (2016) 115 ACSR 1; [2016] SASC 121; Westpac Securities Administration Ltd v Cooper [2016] SASC 122 , considered.
H.E.S.T. AUSTRALIA LTD v INKLEY
[2018] SASC 127BLUE J:
The plaintiff H.E.S.T Australia Ltd seeks an order under section 59C of the Trustee Act 1936 (SA) varying the terms of the Health Employees Superannuation Australia Trust (the Trust) contained in its trust deed (the Trust Deed).
The defendant Bruce Inkley is a member of the Trust. He was appointed to represent the interests of beneficiaries and potential beneficiaries of the Trust in the action. The Australian Prudential Regulation Authority (APRA) was joined as an intervenor to assist the Court.
The plaintiff seeks variation of the Trust Deed in three ways. First, variation of the power of amendment of the Trust Deed. Secondly, variation of substantive provisions of the Trust Deed to reflect past amendments whose validity has recently been doubted. Thirdly, new proposed variations of substantive provisions of the Trust Deed.
Background
The plaintiff was incorporated on 23 July 1987 as a company limited by guarantee for the sole purpose of becoming the trustee of the Trust. The Trust was established by a trust deed dated 30 July 1987 under which the plaintiff was constituted the trustee (the Trustee). The trust deed comprised an initial set of three clauses (the covering clauses) together with a set of rules set out in the First and Second Schedules[1] (the Original Rules). The Trust was originally established to provide superannuation for employees in the health and community services industries.
[1] The First Schedule contained general rules and the Second Schedule comprised rules addressing a select number of subjects. There was also a pro forma deed of adoption comprising the Third Schedule but this can be ignored for the purposes of this action.
The trust deed has been amended (or purportedly amended) on 27 occasions over the past 30 years by a series of amending deeds executed by the Trustee. The trust deed as amended or purportedly amended (the Trust Deed) now comprises the covering clauses together with a set of rules set out in the First and Second Schedules[2] (the Current Rules).
[2] The First Schedule contains general rules and the Second Schedule comprises rules applying only to the MySuper product.
The members of the plaintiff are of comprised unions and employee associations (employee guarantors) and employers and employer associations (employer guarantors).[3] The directors of the plaintiff are comprised of equal numbers of persons nominated by employee guarantors and persons nominated by employer guarantors together more recently with two independent directors.
[3] Although the identity of the specific members has changed over time.
The Trust has evolved and grown over time in a manner which closely mirrors the evolution and growth of the Retail Employees Superannuation Trust (REST) described in detail in Retail Employees Superannuation Pty Ltd v Pain.[4] That evolution has included the introduction of a specific pension product; the introduction of different and increasing numbers of Investment Options; the introduction of investment and administration fees; the Trust becoming a public offer fund; the unitisation of investments; and the introduction of a MySuper product. Amendments to the Trust Deed have been made over time to implement these changes. The Trust is and always has been solely an accumulation fund.
[4] [2016] SASC 121 at [80]-[96].
As at 30 June 2016 the Trust had 827,031 members with account balances totalling $33.8 billion. It had 63,113 South Australian members with account balances totalling $2.7 billion.
Members of the Trust are presently assigned to one of three categories. The first two categories – HESTA and HESTA Personal Super – involve ordinary account-based superannuation. The difference between them is that members of the first category are employer-sponsored with contributions being made by their employers (as well as the employee in some cases) whereas members of the second category are not employer-sponsored. The only differences between the benefits provided to members of these two categories relate to insurance benefits.
The third category – HESTA Income Stream – involves account-based pensions. These are either transition to retirement pensions or retirement pensions.
The great majority of members and value of account balances of members of the Trust comprise members holding the MySuper product. This is illustrated by the following table showing member numbers and account balances as at 30 June 2016:
Product Members % of Total Account Balance % of Total MySuper 757,689 92% $28.8 billion 85% Non-MySuper 60,792 6% $2.7 billion 8% Pension 11,765 2% $2.4 billion 7% Total 827,031[5] $33.8 billion [5] This is slightly less than the sum of the three numbers above because some members (of which Mr Hinkley is an example) have investments in both ordinary account based superannuation and in a pension.
There are now 11 Investment Options available for members holding ordinary account-based superannuation and 10 Investment Options available for members holding account-based pension superannuation. By far the largest Investment Option is the Core Pool which is the default Investment Option and therefore the option applicable to the MySuper product. This is illustrated by the following table showing the value of assets invested as at 30 June 2016:
Investment Option Asset Value % of Total Core Pool $30.0 billion 86% Other diversified $2.2 billion 6% Sector specific $2.8 billion 8% Total Non-Pension $35.0 billion Balanced $1.1 billion 46% Other diversified $1.0 billion 42% Sector specific $0.3 billion 12% Total Pension $2.4 billion Grand Total $37.4 billion The hearing
In advance of the hearing the plaintiff produced a draft of the Proposed Rules; the defendant produced a statement of issues in relation to the Proposed Rules; and the plaintiff produced a response to each issue raised by the defendant. As part of and the result of that process, the plaintiff produced a revised draft of the Proposed Rules which addressed a significant number of the issues raised by the defendant.
In advance of the hearing APRA assessed compliance of the draft Proposed Rules with Part 6 of the Superannuation Industry (Supervision) Act 1993 (Cth) (the SIS Act) and formed the opinion that they so complied.
In advance of the hearing, the plaintiff in consultation with the defendant produced a list of issues for hearing that identified issues that remained after the process referred to above.
At the hearing the plaintiff tendered affidavits by Deborah Blakey, its Chief Executive Officer; Jorden Sou Lam, its general counsel and company secretary; and Noel Davis, a barrister specialising in superannuation law. The plaintiff also tendered a draft of the Existing Rules and a proposed notice to members informing them of the order varying the Trust assuming that it is made.
The defendant tendered an affidavit by himself relating to his own investments in the Trust. APRA tendered an affidavit by Jacinta Ellis deposing to her analysis of compliance of the draft Proposed Rules with Part 6 of the SIS Act.
At the hearing submissions were made by the plaintiff and defendant in relation to each of the issues identified in the list of issues for hearing. In the course of those submissions, various suggestions were discussed for amendments to the draft Proposed Rules. The plaintiff and defendant took the leading roles in the submissions. APRA did not make submissions as to how each issue should be resolved but provided information for the assistance of the Court and the parties and answered questions. After the hearing the plaintiff produced further draft Proposed Rules which further reduced the issues that remained.
The iterative process in relation to the draft Proposed Rules was both efficient and productive. I thank the defendant and APRA in particular for their assistance in this process and at the hearing.
Power and discretion
Section 59C of the Trustee Act provides:
59C—Power of Court to authorise variations of trust
(1)The Supreme Court may, on the application of a trustee, or of any person who has a vested, future, or contingent interest in property held on trust—
(a)vary or revoke all or any of the trusts; or
(b)where trusts are revoked—
(i)distribute the trust property in such manner as the Court considers just; or
(ii)resettle the trust property upon such trusts as the Court thinks fit; or
(c) enlarge or otherwise vary the powers of the trustees to manage or administer the trust property.
(2)In any proceedings under this section the interests of all actual and potential beneficiaries of the trust must be represented, and the Court may appoint counsel to represent the interests of any class of beneficiaries who are at the date of the proceedings unborn or unascertained.
(3)Before the Court exercises its powers under this section, the Court must be satisfied—
(a) that the application to the court is not substantially motivated by a desire to avoid, or reduce the incidence of tax; and
(b) that the proposed exercise of powers would be in the interests of beneficiaries of the trust and would not result in one class of beneficiaries being unfairly advantaged to the prejudice of some other class; and
(c) that the proposed exercise of powers would not disturb the trusts beyond what is necessary to give effect to the reasons justifying the exercise of the powers; and
(d) that the proposed exercise of powers accords as far as reasonably practicable with the spirit of the trust.
(4)An order made by the Supreme Court in the exercise of powers conferred by this section is binding upon all present and future trustees and beneficiaries of the trust.
(5)This section does not apply to—
(a)a trust affecting property settled by an Act; or
(b)a charitable trust.
(6)This section does not derogate from any other power of the Supreme Court to vary or revoke a trust, or to enlarge or otherwise vary the powers of trustees.
Power
This Court’s power to vary a trust is conditioned on satisfaction of eight[6] prerequisites:
1An application is made by a trustee of a trust (or a person with a vested, future, or contingent interest in property held on trust).[7]
2The interests of all actual and potential beneficiaries are represented in the proceeding.[8]
3The application is not substantially motivated by a desire to avoid or reduce the incidence of tax.[9]
4There is good reason to make the proposed variation.[10]
5The proposed variation would be in the interests of beneficiaries.[11]
6The proposed variation would not result in one class of beneficiaries being unfairly advantaged to the prejudice of another class.[12]
7The proposed variation accords as far as reasonably practicable with the spirit of the trust.[13]
8The proposed variation would not disturb the trust beyond what is necessary to give effect to the reasons justifying the exercise of the powers.[14]
[6] There is also a negative requirement imposed by section 59C(5) that the Trust not be a charitable trust or a trust affecting property settled by an Act but this requirement has no application in the present case and can be ignored.
[7] Trustee Act 1936 (SA) s 59C(1).
[8] Trustee Act 1936 (SA) s 59C(2).
[9] Trustee Act 1936 (SA) s 59C(3)(a).
[10] This requirement is implicit in the requirement that the proposed exercise of powers would not disturb the trusts beyond what is “necessary to give effect to the reasons justifying the exercise of the powers” and would be in the interests of the beneficiaries.
[11] Trustee Act 1936 (SA) s 59C(3)(b). It may be that the fourth and fifth prerequisites are a single composite prerequisite but it is convenient to treat them separately.
[12] Trustee Act 1936 (SA) s 59C(3)(b).
[13] Trustee Act 1936 (SA) s 59C(3)(d).
[14] Trustee Act 1936 (SA) s 59C(3)(c).
The meaning of these prerequisites was articulated in some detail in Retail Employees Superannuation Pty Ltd v Pain,[15] which I adopt’
[15] [2016] SASC 121 at [160]-[180].
The first three prerequisites are satisfied. The application is made by the trustee of the Trust. The interests of all actual and potential beneficiaries are represented by Mr Inkley. The application is not motivated by a desire to avoid or reduce the incidence of tax. The remaining prerequisites need to be considered in the context of the different types of variation proposed before a holistic conclusion can be reached.
None of the prerequisites relates to any connection between the Trust and South Australia. The Court has jurisdiction to entertain an application even if there is no connection between a trust and South Australia.[16]
Discretion
[16] See In re Ker’s Settlement Trust[1963] 1 Ch 553 at 556 per Ungoed-Thomas J; In re Paget’s Settlement[1965] 1 WLR 1046 at 1050 per Cross J.
The Court has a discretion to decline to entertain an application if there is no or an insufficient connection between a trust and South Australia.[17]
[17] In re Paget’s Settlement[1965] 1 WLR 1046 at 1050 per Cross J; Faye v Faye[1973] WAR 66 at 70 per Lavan J; Salkeld v Salkeld (No 2)[2000] SASC 296 at [26] per Perry J; Thomas Hare Investments Limited v Hare (2012) 34 VR 656 at [33] per Habersberger J.
As at June 2016, there were 63,113 members of the Trust in South Australia with account balances totalling $2.7 billion. There is a real and substantial connection with South Australia. There is no improper purpose in the plaintiff bringing the application in South Australia. The application should be entertained.
If the prerequisites are satisfied and the Court entertains the application, the Court nevertheless has a discretion whether to make the order. Given the comprehensive nature of the prerequisites, ordinarily it may be expected that there would need to be some reason not to make the order if all of the prerequisites are satisfied.
Proposed amendments generally
The Trust Deed has always contained clause 31 conferring a power on the Trustee to amend the terms of the Trust Deed, including clause 31 itself, subject to certain conditions. Clause 31 has only been amended once and there is no suggestion that the amendment was not authorised by clause 31.
Clause 31.1 is in virtually identical terms to clause 19.1 of the trust deed (the former REST Rules) considered in Retail Employees Superannuation Pty Ltd v Pain.[18] The restrictions in subclauses 31.4 and 31.5 are in virtually identical terms to clauses 19.4 and 19.5 of the former REST Rules.[19]
[18] [2016] SASC 121 at [614].
[19] [2016] SASC 121 at [614].
For the reasons given in Retail Employees Superannuation Pty Ltd v Pain[20] subclauses 31.4 and 31.5 give rise to considerable uncertainty as to the scope of the power to amend. In turn there is currently uncertainty about various amendments that have been made to the Trust Deed over the last 30 years. It is in the interests of beneficiaries that those uncertainties be removed, subject to considering whether it is in the interests of beneficiaries that past amendments be effectively ratified (with prospective effect only) by an order under section 59C.
[20] [2016] SASC 121 at [616]-[640].
The drafting approach adopted by the plaintiff in drafting the Proposed Rules conceptually involved three stages (although the three stages were integrated). First, the substantive provisions of the Current Rules have been used as a starting point such that the Proposed Rules reflect past amendments (past amendment incorporation). Secondly they have been reordered and expressed in plainer language for the purpose of improving their form (form changes). Thirdly various substantive additions, deletions and alterations have been made (substantive changes).
Insofar as the Proposed Rules reflect past amendments whose validity may be doubted, in general and subject to the specific topics addressed under the following headings of these reasons, I am satisfied that it is in the interests of beneficiaries that past amendment incorporation be made.
Insofar as the Proposed Rules have been redrafted for the purpose of improving their form, I am satisfied that they represent an improvement on the Current Rules and it is in the interests of beneficiaries that the form changes be made.
Insofar as the Proposed Rules incorporate substantive changes, in general and subject to the specific topics addressed under the following headings of these reasons, I am satisfied that it is in the interests of beneficiaries that the substantive changes be made.
Leaving aside the specific topics addressed under the following headings of these reasons, many of the changes by way of past amendment incorporation and substantive changes are changes that were made to the former REST Rules that were addressed in Retail Employees Superannuation Pty Ltd v Pain[21] and are in the interests of beneficiaries for the reasons given in that case.
[21] [2016] SASC 121.
In light of the submissions of the parties, I address in the balance of these reasons only those matters that were the subject of submissions at the hearing.
New Divisions
Clause 6 of the Proposed Rules divides the Plan into four divisions:
·Division 1: HESTA MySuper;
·Division 2: HESTA Choice;
·Division 3: HESTA Transition to Retirement Pension;
·Division 4: HESTA Account-based Pension.
Clause 10 provides for applications by prospective members to nominate the Division in which they wish to invest and for the Trustee to allocate applicants to Divisions. Appendices 1 to 4 contain specific rules applicable to Divisions 1 to 4 respectively.
The Existing Rules do not create or refer to Divisions. However, they do provide for ordinary accounts and pensions. In addition the Trustee has issued different product disclosure statements for ordinary accounts (“HESTA” and “HESTA Personal Super”) and pensions (“HESTA Income Stream”). In practice, the Trustee necessarily distinguishes between MySuper members and other members holding ordinary accounts because it is required to do so by the Superannuation Industry (Supervision) Act 1993 (Cth) (the SIS Act) and Superannuation Industry (Supervision) Regulations 1994 (Cth) (the Regulations) and the Second Schedule of the Existing Rules contains provisions relating to the MySuper product. It also necessarily distinguishes between transition to retirement pensions and retirement pensions because it is required to do so by the income tax regime.
Creation of separate divisions
I am satisfied that it is in the interests of beneficiaries that separate divisions (Divisions 1 and 2) be created to distinguish between members insofar as they hold the MySuper product and members insofar as they hold a non-MySuper product (which the Proposed Rules call a Choice product). These are different products for the purposes of the regulatory regime enacted by the Corporations Act 2001 (Cth) and SIS Act. There should be separate divisions and separate products for the reasons given in Retail Employees Superannuation Pty Ltd v Pain.[22]
[22] [2016] SASC 121 at [248]-[258].
I am satisfied that it is in the interests of beneficiaries that separate divisions be created to distinguish between members insofar as they hold an ordinary product (Divisions 1 and 2) and members insofar as they hold a pension product (Divisions 3 and 4) and that there should be separate divisions for members insofar as they hold a transition to retirement pension (Division 3) and members insofar as they hold a retirement pension (Division 4). These different types of pension are regulated differently, particularly from a taxation perspective.
Division 3
The defendant raised a number of queries in relation to the original draft of Appendix 3 which relates to Division 3 Transition to Retirement Pension. These were addressed by the plaintiff in re-drafting Appendix 3. No query is now raised by the defendant in relation to Appendix 3.
Allocation of existing members to Divisions
Clauses 10.3 to 10.7 provide for the Trustee to admit persons from whom it has accepted an application as a member of Division 1, 2, 3 and/or 4 according to the nature of the application.
Because Divisions 1, 2, 3 and 4 will only be newly created on the date on which the Proposed Rules become part of the Trust Deed if an order is made in this action (the operative date), existing members are not presently members of any of those Divisions. However, existing members can be objectively classified by reference to the new Divisions. Existing members are either Pensioners (and to that extent must be classified as belonging to Division 3 and/or 4) or are non-Pensioners (and to that extent must be classified as belonging to Division 1 and/or 2). To the extent that they are Pensioners, they are either receiving a transition to retirement pension (and to that extent must be classified as belonging to Division 3) or a retirement pension (and to that extent must be classified as belonging to Division 4). To the extent that they are non-Pensioners, they have either chosen an Investment Option other than the MySuper default Investment Option (and to that extent must be classified as belonging to Division 2) or they have made no choice and been allocated to or have chosen the MySuper default Investment Option (and to that extent must be classified as belonging to Division 1).
The defendant observes that there is nothing in the Trust Deed that provides for the allocation of existing members to Division 1, 2, 3 and/or 4. Because this is a transitional issue that will only affect members who are members as at the operative date, the order for amendment of the Trust Deed should include an order that the Trustee as soon as reasonably practicable after the operative date allocate each existing member’s investments in the Plan between Division 1, 2, 3 and 4.
Investment Options
Clause 14.1 of the Proposed Rules requires the Trustee to establish one or more Investment Options and provides that the Trustee must:
(a)determine the investment strategy and objectives of each Investment Option; and
(b)make information about the investment strategy and objectives for each Investment Option available to Members on the Plan’s website, together with information about how a Member may make an investment choice.
Clause 14.2(a) and (b) provides that the Trustee may invite Members to choose and switch between Investment Options by giving an Investment Direction and may determine terms and conditions that apply to and circumstances in which a Member may give an Investment Direction. Clause 14.2(c) requires the Trustee to comply with a Valid Investment Direction.
Clause 1.1 defines an Investment Direction to be a direction by a Member in relation to the investment of all or part of the Member’s Account in one or more Investment Options and a Valid Investment Direction to be an Investment Direction that complies with the terms and conditions determined by the Trustee under clause 14.2(b). Clause 1.1 defines an Investment Option to mean a part of the Plan to which a discrete investment strategy applies.
Clause 14.2(d) requires the Trustee, if a Member has not given a Valid Investment Direction, to invest the relevant amount in the MySuper Product unless the Member is a Member of Division 3 or 4 in which case the Trustee may invest the relevant amount in the Investment Option it determines is the default Investment Option for the relevant Division.
Subsection 58(1) of the SIS Act imposes a prima facie prohibition on the giving of directions to the trustee.[23] Section 58(2)(d) provides an exception where a direction given by a beneficiary to take up, dispose of or alter the amount invested in an investment option in a registrable superannuation entity is given in circumstances prescribed by the Regulations. Regulations 4.02A(2) and 4.02A(4) prescribe the circumstances in which a beneficiary can give an initial direction (a direction other than a subsequent direction) to the trustee to take up, dispose of or alter the amount invested in an investment option. Those circumstances are as follows:
[23] Construed in isolation, this prohibition would probably not apply to a direction by a member about investment in a specific investment option. However, the exception created by section 58(2)(d) proceeds on the assumption that such a direction would (or might) otherwise be prohibited by subsection (1).
(a)the trustee:
(i) gives the beneficiary a choice of 2 or more strategies for investing the interest of the beneficiary in the fund; and
(ii) informs the beneficiary that the beneficiary may choose a strategy or combination of strategies;
(b)the beneficiary is fully informed of:
(i)the investment objectives of each strategy; and
(ii) anything else the trustee reasonably believes a person would need to know to understand the effect of, and any risk involved in, each strategy;
(c)the direction specifies:
(i) which strategy or combination of strategies the beneficiary has chosen; and
(ii) where applicable, matters related to the choice mentioned in subparagraph (i).
(d)the beneficiary is fully informed of the range of directions that can be given and the circumstances in which they can be changed;
and in the case of an employer-sponsored member:
(e)the trustee, when presenting a choice of 2 or more investment strategies to the beneficiary, informs the beneficiary which strategy the trustee will adopt if no direction is given.
Regulation 4.02A(5) provides that a subsequent direction may be given in the following circumstances:
(a)the beneficiary is given all the information the trustee believes a person would need to understand the effect of, and any risk involved in, giving the subsequent direction;
(b)the subsequent direction relates to the strategy for investing the beneficiary's interest in the fund.
The defendant observes that clause 14.1(b) does not require the Trustee to provide information about a number of matters mandated by regulation 4.02A including the risk involved for each option and the circumstances in which an option can be changed and there is no prescription as to how the Trustee determines the default option for Divisions 3 and 4 under clause 14.2(d).
Clauses 14.1 and 14.2 should be more closely aligned with and conform to the requirements imposed by regulation 4.02A. The plaintiff submits that it is otiose for the Trust Deed to prescribe requirements imposed by regulation 4.02A in any event. However clause 14.1 does not adopt the approach of imposing the obligation to provide information by simple cross-reference to regulation 4.02A. Rather it sets out independently of and without reference to regulation 4.02A the information required to be provided by the Trustee. The problem is that it does not do so comprehensively. In addition, regulation 4.02A does not impose an obligation on the Trustee to provide such information but merely prescribes when an investment direction can be validly given.
Clause 14.1(b) should require that, if the Trustee establishes more than one Investment Option, the Trustee must make available to Members on the Plan’s website information:
1that a range of Investment Options is available;
2that a Member may choose to invest in one or more Investment Option;
3about the investment strategies, objectives and effect of and risks involved in each Investment Option;
4the range of Investment Directions that can be given;
5the circumstances in which an Investment Direction can be given and changed; and
6which Investment Option the Trustee will choose if no Investment Direction is given (in respect of each Division if the Trustee might choose a different Investment Option depending on the relevant Division).
Clause 14.2(d), or another provision of clause 14, should require the Trustee at all times to have in force a determination as to which Investment Option is the default Investment Option for each of Divisions 3 and 4 (as well as Division 1). The reference in clause 14.2(d) to a direction “in respect of a contribution or other amount” should be replaced by a reference to a direction “in relation to the investment of all or part of the Member’s Account” to accord with the definition of Investment Direction in clause 1.1.
The definition in clause 1.1 of an Investment Direction should include that, when the direction is to invest in more than one Investment Option, the direction specifies the proportions to be invested in each Investment Option.
Categories
Clauses 6.3(a) and 6.3(b) of the Proposed Rules empower the Trustee to create and determine rules that apply to different categories of members either within a division or across Divisions. This power is limited to the purposes of:
·promoting interests in the Plan;
·administrative ease; and
·providing tailored benefits to employees of an employer or any other group of members or employers.
Clauses 6.3(c) and 6.3 (d) preclude the Trustee from exercising this power in a manner that:
·affects any substantive right or obligation of an existing member or other employer under the Trust Deed; or
·breaches any provision of the Trust Deed.
As observed above, the Trustee presently distinguishes between members who are employer-sponsored members (“HESTA” members) and those who are not (“HESTA Personal Super” members). In general such members have the same rights and interests regardless of whether they are employer-sponsored members or not, subject only to different insurance terms reflecting the collective bargaining power of employer-sponsored members. Otherwise differences in rights and interests turn on whether members hold the MySuper product or not, hold an account-based or pension product, and which Investment Options they hold.
The present distinction between “HESTA” members and “HESTA Personal Super” members would represent two different categories within the meaning of clause 6.3 of the Proposed Rules. Those different categories would be created for the purposes referred to in clause 6.3 of the Proposed Rules.
The defendant queries whether it is or will remain in the interests of beneficiaries that the Trustee have the power to create different categories of membership. The plaintiff submits that it is. I observe that, in deciding whether to create or maintain different categories, the Trustee will be required by the express and/or imputed covenants referred to above (as well as its general fiduciary obligations) to consider whether this is in the best interests of beneficiaries and it will be required to exercise the care, skill and diligence of a prudent superannuation trustee.
The defendant also queries whether it is in the interests of beneficiaries that, if there are to be different categories, they be embodied within the Trust Deed rather than being created by the Trustee. The plaintiff submits and accepts that different categories do not represent different classes of interest in the Plan. The plaintiff submits that it is in the interests of beneficiaries that the Trustee have the flexibility to create different categories from time to time.
I am satisfied that it is in the interests of beneficiaries that the Trustee have the proposed power to create different categories of membership. It is appropriate that the question whether and how this be done be determined by the Trustee from time to time in accordance with its obligations. Because the purpose and effect of the creation of different categories is limited, different categories will not per se represent different classes of interest in the Plan.
Trustee powers
The Original Rules did not contain a clause addressing the general powers of the Trustee but contained specific provisions addressing specific powers (such as the power of investment conferred by clause 3.1 and the power to appoint an investment manager pursuant to clause 4.1).
Clause 2.7 of the Existing Rules confers on the Trustee “complete management and control of the Plan” and empowers the Trustee to “perform any acts and do anything which it may consider necessary, desirable or expedient for the proper administration and maintenance of the Fund”. Clauses 2.7(a) to (g) and 2.8 confer eight specific powers on the Trustee without limiting the general power and various other provisions of the Existing Rules confer other specific powers.
Clause 4.1(a) of the Proposed Rules confers on the Trustee “the powers of a natural person” and clause 4.1(b) confers a general power in similar terms to that conferred by clause 2.7 of the Existing Rules. Clause 4.2 confers 16 specific powers on the Trustee without limiting the general powers.
Apart from querying whether additional specific marketing and augmentation powers should be conferred (addressed below), the defendant does not raise any issue in relation to clauses 4.1 and 4.2 of the Proposed Rules.
I am satisfied that it is in the interests of beneficiaries that powers be conferred on the Trustee in terms of clauses 4.1 and 4.2 of the Proposed Rules.
Successor fund transfers
Clause 22.4(a) of the Proposed Rules empowers the Trustee to transfer a Member’s benefit to an Approved Benefit Arrangement that is a Successor Fund without the Member’s consent if:
(i)the Trustee has determined to terminate the Plan, including to merge the Plan with another regulated superannuation fund;
(ii)the Trustee has determined to terminate a Division and the Member is a Member of the Division and it is not practicable or in the interests of the Member to transfer the Member’s benefit to another Division; or
(iii)an Employer requests in circumstances where the Employer is contributing to the Successor Fund for one or more of its Employees and the Member is an Employee of the Employer.
It is in the interests of beneficiaries for the Trustee to have power to make transfers in such circumstances for the reasons given in Westpac Securities Administration Ltd v Cooper.[24]
[24] [2016] SASC 122 at [60]-[68].
The defendant queries whether the exercise of the power should be subject to the obligations and notice provisions referred to in Westpac Securities Administration Ltd v Cooper.[25] The plaintiff submits that this is unnecessary.
[25] [2016] SASC 122 at [69].
It is in the interests of beneficiaries that an additional paragraph be included for their protection in clause 22.4 that imposes an obligation on the Trustee to use reasonable endeavours in exercising the power to ensure:
1that the timing of the transfer does not cause one subset of the Members to be transferred to suffer a significant detriment compared to another subset of the Members to be transferred; and
2in the case of a transfer under (ii) or (iii), that the transfer does not cause a significant detriment to Members not to be transferred.[26]
[26] See Westpac Securities Administration Ltd v Cooper [2016] SASC 122 at [69].
Clause 22.4(b) provides that the Trustee must only exercise the power under clause 22.4(a) if it has provided at least 60 days' prior notice to the affected Member which:
(i)contains the information that the Trustee considers the Member is reasonably likely to need to understand:
(A) the effect of the transfer on the Member; and
(B) the options available to the Member and how the Member can exercise those options;
(ii)tells the Member where they can get further information; and
(iii)explains when the transfer will occur if the Member does not make another choice.
The notice should also be required to explain:
·the nature and effect of the Trustee’s decision, including details of the successor fund and plan or product to which it is proposed that the Member’s benefits be transferred and any conditions to which the proposed transfer is subject; and
·the reasons for the Trustee’s decision;
Eligible rollover fund transfers
Clause 22.5 of the Proposed Rules empowers the Trustee in accordance with the SIS Act to transfer a Member’s benefit to an eligible rollover fund. There is no requirement to obtain the Member’s consent.
At first sight this is a surprising provision. However section 243 of the SIS Act provides that a trustee of a superannuation fund may apply on behalf of a beneficiary to a trustee of an eligible rollover fund for the issue to the beneficiary of a superannuation interest in the eligible rollover fund, in which event the beneficiary is taken to have authorised it (despite any direction by the beneficiary to the contrary) and the trustee of an eligible rollover fund can issue a superannuation interest for the same consideration as the value of the interest in the superannuation fund in which the beneficiary ceases to have any rights. Subsection 243(6) provides that section 243 has effect despite anything contained in the governing rules of the superannuation fund.
The defendant does not raise any issue in relation to clause 22.5. In light of section 243 and the fact that clause 22.5 only applies if and to the extent that the SIS Act operates, I am satisfied that it is in the interests of beneficiaries that clause 22.5 be included.
Marketing power
Clauses 34.1 and 34.2 of the Existing Rules confer on the Trustee power to engage in a marketing, promotion, advertising or educational activity for the purpose of promoting superannuation, industry-based superannuation or the Plan. This power is to be exercised for the purpose of maintaining and increasing membership levels and any other purposes that the Trustee believes are in the best interests of beneficiaries. Clause 34 provides that this power is subject to limitations that the Trustee has determined that the activity is in the best interests of the present and future members and the expense is reasonable having regard to the likely benefits and the total value of the assets in the Plan.
The defendant observes that there is no specific marketing power conferred by clause 4.2 of (or elsewhere in) the Proposed Rules and queries whether an express specific marketing power should be included. The defendant also queries whether such a power should be subject to the limitations contained in clause 34 of the Existing Rules.
The plaintiff submits that the general power contained in clause 4.1 is adequate to confer power to engage in marketing activities and it is not necessary to include the limitations contained in clause 34 of the Existing Rules.
I am satisfied that it is not necessary that there be a specific power to engage in marketing activities and that such a power is adequately conferred by clause 4.1. I am satisfied that the other obligations imposed on the Trustee (including the express and imputed covenants referred to above and its fiduciary obligations) adequately ensure that the Trustee should only exercise the marketing power when it considers that it is in the best interests of beneficiaries and the expense is reasonable having regard to the prospective benefits and all other relevant considerations.
Augmentation power
Clause 32 of the Existing Rules confers on the Trustee power to augment from the Fund the amount of any benefit payable on the retirement, retrenchment, disablement or death of a member.
The defendant observes that there is no augmentation power conferred by clause 4.2 of (or elsewhere in) the Proposed Rules and queries whether an augmentation power should be included.
Clause 32 of the Existing Rules is a provision that is appropriate in a defined benefit fund (where the employer may contribute funds for the purpose of augmentation) or perhaps in a commercial (retail) fund. However, in the case of an accumulation industry superannuation fund (such as the Trust) the only source of augmentation of a benefit would be reserves of the fund which are maintained in the interests of beneficiaries collectively rather than for any specific member. The Trustee has power under clause 18.2 to credit excess reserves to member accounts but any such power would be exercised generally rather than in relation to a specific member who leaves the fund. In those circumstances there is no compelling reason to include an augmentation power in the Proposed Rules and I am satisfied that it is not in the interests of beneficiaries to do so.
Conflicts of interest
Clause 4.5 of the original draft of the Proposed Rules provided that powers and discretions conferred on the Trustee may be exercised even if the Trustee or a director has an interest in the result. The defendant expressed concern that this clause as drafted had the effect of permitting the Trustee to act in a position of conflict of interest. The plaintiff clarified that this was not the intention of the clause and redrafted it.
Clause 4.5 of the Proposed Rules now provides that the exercise of a power or discretion conferred on the Trustee is valid notwithstanding that the Trustee or a director has an interest in the result. The purpose and effect of this clause is to ensure that a transaction with a third party is not invalid merely because the Trustee or a director is in a position of conflict of interest. This avoids uncertainty and is in the interests of beneficiaries. This clause does not permit or excuse the Trustee or a director acting in a position of conflict of interest.
Trustee fees and costs
Clause 7 of the Proposed Rules empowers the Trustee to set and charge fees to members for the purpose of recovering costs and expenses incurred or likely to be incurred as Trustee of the Plan. Clause 8 empowers the Trustee to deduct, pay or otherwise make provision from the assets of the Plan for costs and expenses incurred as Trustee that are not recovered by fees charged under clause 7.
Clauses 7.2 and 8.2 require the Trustee in setting fees under clause 7 and recovering costs and expenses under clause 8 respectively to satisfy itself that costs and expenses are allocated on a fair and reasonable basis.
The Original Rules (by clause 8.3(e) and 8.5(a)) provided and the Existing Rules (by clause 8.3(e), 8.4(q) and 8.5(a)) provide to some extent for charging of a fee, although that power was and is expressed in more limited terms than proposed clause 7. The Original Rules (by clause 8) provided and the Existing Rules (by clause 8) provide for the recovery of costs and expenses that, although expressed quite differently, were and are as broad as under proposed clause 8.
The SIS Act regulates the types of fees that can be charged by trustees of superannuation funds and their manner of calculation. It contemplates that the majority of costs and expenses incurred by superannuation trustees will be recovered via such fees. This is now general practice of superannuation trustees.
The defendant raised a number of queries in relation to the original draft of clauses 7 and 8 of the Proposed Rules. The plaintiff redrafted those clauses in response in a manner that resolved the defendant’s queries.
I am satisfied that it is in the interests of beneficiaries that the Trustee have power to set and recover fees in the manner provided in clause 7 of the Proposed Rules. Clause 7 is a much clearer and more transparent provision relating to the setting and recovery of fees. It reflects the general practice of superannuation trustees and the approach contained in the SIS Act. The provisions for fair and reasonable allocation adequately protect the interests of different classes of members and of members whose funds are invested in different Investment Options.
Trustee covenants
Clauses 2.15 to 2.26 of the Existing Rules contains various covenants by the Trustee. Some clauses reflect the wording (to a greater or lesser degree) of covenants imputed into trust deeds of a registrable superannuation fund (of which the Trust is one) by subsection 52(2) of the SIS Act. Some clauses reflect substantive obligations imposed directly on superannuation fund trustees by the SIS Act. In some cases the wording of the covenant imputed by or obligation imposed by the SIS Act has changed to some degree since the covenants were introduced into the Trust Deed.
The plaintiff originally proposed that all of these clauses be removed from the Trust Deed because they replicate covenants imputed into superannuation fund trust deeds or obligations imposed directly by the SIS Act and they are therefore otiose. The plaintiff also observed that subsection 52(1) provides that, if the governing rules of a registrable superannuation entity do not contain covenants to the effect of the covenants set out in section 52, those governing rules are taken to contain covenants to that effect. The plaintiff submitted that if there is now or in future a difference between an express covenant and an imputed covenant, uncertainty might be caused as to whether the express covenant is to the effect of the imputed covenant and hence whether the imputed covenant applies.
The first to fifth covenants
Clause 2.15(a) to (e) of the Existing Rules contains covenants by the Trustee that are expressed in general terms and clause 2.16 qualifies the covenant contained in clause 2.15(e).
During the hearing of the application, I expressed the provisional view that the covenants contained in paragraphs (a) to (e) should be retained (subject to changing the wording to match the corresponding covenants imputed by the SIS Act (the SIS covenants)). This was because removal of those covenants would remove an existing protection to beneficiaries in the event (albeit unlikely) that the SIS Act were to be amended in future to weaken the corresponding imputed covenants and because those covenants impose such basic obligations that it is very unlikely that any difficulty would be caused to the Trustee in observing both the express covenants and imputed covenants in the event of any difference. The plaintiff then altered its proposal so as to retain those five covenants reworded where applicable to match the corresponding SIS covenants.
The wording of the first and fifth covenants continues to match precisely the wording of the SIS covenants and the plaintiff does not propose any change to the wording.
The plaintiff proposes the following changes to the wording of the second covenant to match the current wording of the covenant imputed by section 52(2)(b) of the SIS Act:
The Trustee covenants… to exercise, in relation to all matters affecting the plan, the same degree of care, skill and diligence as
an ordinary,a prudentpersonsuperannuation trustee would exercise indealing with property of another for whom the person felt morally bound to providerelation to an entity of which it is trustee and on behalf of the beneficiaries of which it makes investments.I am satisfied that an objective test by reference to a prudent superannuation trustee exercising trustee powers is a more appropriate and preferable test, from the perspective of the beneficiaries, to an objective test by reference to an ordinary prudent person feeling morally bound to provide for another when dealing with his or her property. I am satisfied that the newer test provides at least the same level of protection as, and in some circumstances might provide a higher level of protection than, the current test.
The plaintiff proposes the following changes to the wording of the third covenant to match the current wording of the covenant imputed by section 52(2)(c) of the SIS Act:
The Trustee covenants… to
ensure thatperform the Trustee’s duties and exercise the Trustee’s powersare performed and exercisedin the best interests ofbeneficiariesthe beneficiaries.The substantive change is the alteration from the Trustee covenanting to ensure that the duties are performed and exercised in the required manner to the Trustee covenanting to perform and exercise the duties and powers in the required manner.
When the Trustee itself performs duties and exercises powers, there is no material difference in the wording. When the Trustee delegates a duty or power, it is clear on a reading of the entirety of the Trust Deed that the Trustee remains responsible to ensure that the duties and powers are performed in the best interests of beneficiaries. I am satisfied that the newer covenant provides the same level of protection as the current covenant.
The plaintiff proposes the following changes to the wording of the fourth covenant to match the current wording of the covenant imputed by section 52(2)(g) of the SIS Act:
The Trustee covenants… to keep the money and other assets of the Plan separate from any money and assets, respectively:
(A) that are held by the Trustee personally; or
(B) that are money or assets, as the case may be, of
an employera standard employer-sponsor, or an associate of a standard employer-sponsor, of the Plan.The substantive change is the separating out of money from other assets. The other change is to update the terminology from employers to standard employer-sponsors and to extend (B) to apply to associates. I am satisfied that the newer covenant provides at least the same level of protection as, and to some extent a higher level of protection than, the current covenant.
The sixth to ninth covenants
The sixth to ninth covenants are contained in clause 2.15(f) to (i) and clause 2.17 which qualifies clause 2.15(f).
The sixth and seventh covenants respectively require the Trustee to formulate and give effect to an investment strategy having regard to the circumstances of the Plan including specific aspects thereof and for the potential management of any reserves. I am satisfied that the same duty is already imposed on the Trustee by the general covenants referred to above.
The eighth and ninth covenants respectively require the Trustee to allow a member access to information or documents, and to comply with any additional covenants, prescribed by Applicable Requirements. Applicable Requirements are defined to include the SIS Act and Regulations. These two covenants are otiose because they only apply when and to the extent that the Applicable Requirements impose an obligation in any event.
Investment managers
Clause 2.19 of the Existing Rules applies in respect of agreements entered into by the Trustee with an Investment Manager placing Plan assets under the control of the Investment Manager. It requires the Trustee to ensure that the agreement complies with rule 4, which governs the appointment of Investment Managers, and contains adequate provisions enabling the Trustee to require information as to investments, returns, the Investment Manager’s capability and other information that the Trustee or the regulators may require pursuant to the Applicable Requirements. It also requires the Trustee to require such information whenever necessary or desirable. I am satisfied that the same duty is already imposed on the Trustee by the general covenants referred to above.
Complaints and notice to regulators
Clause 2.18 of the Existing Rules requires the Trustee to maintain arrangements for dealing with enquiries and complaints in accordance with the Applicable Requirements. Clause 2.24 requires the Trustee to give notice to the regulators of events when required to do so by the Applicable Requirements. These covenants are otiose because they only apply when and to the extent that the Applicable Requirements impose an obligation in any event.
Employer and Member Representatives
Clause 2.25(a) of the Existing Rules requires the Trustee to establish rules within its Constitution setting out a procedure for appointing Employer Representatives and Member Representatives and ensuring that the latter can only be removed by the same procedure as that by which they were appointed, except as provided for in the Applicable Requirements. Clause 2.25(b) requires the Trustee to publish those rules in such a way as will make Members aware of the procedure for appointment and removal of Member Representatives.
The context of these provisions is section 63 of the SIS Act which empowers the Regulator (typically APRA) to direct the trustee of a regulated superannuation fund (of which the Trust is one) not to accept any contributions made to the fund by an employer-sponsor if the trustee has contravened a regulatory provision of such seriousness or with such frequency as justifies giving the direction. One of those regulatory provisions is section 93 which requires a public offer superannuation fund (of which the Trust is one) to comply with the basic equal representation rules or to have an independent trustee. In turn section 89 provides that, in the case of a corporate trustee, the basic equal representation rules require that the trustee’s directors comprise equal numbers of Employer Representatives and Member Representatives (subject to an ability to have additional independent directors appointed by the Employer Representatives and Member Representatives).
The Constitution of the plaintiff requires it to have equal numbers of Employer Representatives and Member Representatives subject to additional independent directors. The plaintiff contends that there is therefore no need to include a provision such as clause 2.25 addressing appointment or removal of Employer Representatives and Member Representatives.
In the absence of clause 2.25, there would be nothing legally to prevent the plaintiff from amending its Constitution in respect of Employer Representatives and Member Representatives. Similarly, there would be nothing legally which requires a Trustee who might be appointed in place of the plaintiff to have such rules in its Constitution. I accept that for practical reasons this is unlikely to occur. However, clause 2.25 gives an existing legal protection to beneficiaries. It is in the interests of beneficiaries that the Trust remain eligible to receive contributions from employer-sponsors and hence that it continue to comply with the basic equal representation rules (or perhaps in the alternative at least have an independent trustee).
On the other hand, the plaintiff has not identified any material disadvantage in clause 2.25 remaining in the Trust Deed. It is very unlikely that in the foreseeable future the plaintiff will seek for the Trust to cease to be an industry superannuation fund or that it not comply with the basic equal representation rules or the provisions of clause 2.25. Any such change would be a fundamental change for the Trust and in that event the plaintiff can make an application to this Court to vary the Trust Deed under section 59C of the Trustee Act 1936 (SA).
In the circumstances, it is not in the interests of beneficiaries that clause 2.25 be removed.
Maintenance of records
Clauses 2.20 to 2.22 of the Existing Rules require the Trustee to keep and retain for at least 10 years minutes of meetings of the directors of the Trustee; up-to-date records of changes of directors of the Trustee and consents by directors to appointment; and copies of reports given to members under the Trust Deed or Applicable Requirements.
The plaintiff contends that these provisions are otiose because the same obligations are imposed by sections 103 to 105 of the SIS Act.
Section 103(2)(a) of the SIS Act imposes an obligation on the directors of the trustee of a superannuation entity to keep and retain for 10 years minutes of meetings of the directors of the trustee. Section 104 imposes an obligation on a corporate trustee of a superannuation entity to keep and retain for 10 years up-to-date records of changes of directors of the trustee and consents by directors to appointment. Section 105 imposes an obligation on the trustee of a regulated superannuation fund to keep and retain for 10 years copies of all member or beneficiary reports.
I accept that clauses 2.20 to 2.22 were inserted into the Trust Deed as a result of the existence of sections 103 to 105 of the SIS Act. So long as those sections continue to apply, clauses 2.20 to 2.22 may be seen as otiose. However, over the indefinite and potentially far-reaching life of the Trust, it is possible that sections 103 to 105 might be relaxed in their requirements and, although unlikely, even repealed. In the absence of clauses 2.20 to 2.22, in that event the beneficiaries would lose an existing protection. On the other hand, as long as sections 103 to 105 remain in force in their current terms, clauses 2.20 to 2.22 add nothing to the burden imposed on the Trustee.
In the circumstances, I am not satisfied that it is in the interests of beneficiaries that clauses 2.20 to 2.22 be removed.
Arm’s-length investments
Clause 2.26 of the Existing Rules provides that, except to the extent that Applicable Requirements otherwise provide, the Trustee or an Investment Manager must not invest assets unless it is dealing with the other party to the relevant transaction at arm’s-length in respect of the transaction.
The plaintiff contends that this provision is otiose because the same obligation is imposed by section 109 of the SIS Act.
Section 109(1)(a) of the SIS Act provides prima facie that a trustee or investment manager of a superannuation entity must not invest in that capacity unless it and the other party to the relevant transaction are dealing with each other at arm's-length in respect of the transaction. This is subject to an exception in section 109(1)(b) if the terms and conditions of the transaction are no more favourable to the other party than those which it is reasonable to expect would apply if the trustee or investment manager were dealing with the other party at arm's-length in the same circumstances.
I accept that clause 2.26 was inserted into the Trust Deed as a result of the existence of section 109 of the SIS Act. So long as that section continues to apply, clause 2.26 may be seen as otiose. However, over the life of the Trust, it is possible that section 109 might be amended in a manner such that it provides less protection to beneficiaries against non-arm’s-length transactions. Although unlikely, it is possible that section 109 might be repealed. In the absence of clause 2.26, in that event the beneficiaries would lose an existing protection. On the other hand the plaintiff does not point to any specific detriment if clause 2.26 remains in the Trust Deed.
In the circumstances, I am not satisfied that it is in the interests of beneficiaries that clause 2.26 be removed.
Compliance with regulatory regime
Covering clause III of the Trust Deed comprises a covenant by the trustee to manage the Plan in accordance with “all relevant legislation, regulations and guidelines relating to superannuation funds and their eligibility for taxation concession or exemption in accordance with” the Income Tax Assessment Act 1936 (Cth).
Clause 3.1 of the Proposed Rules provides that the Trustee must manage and administer the Plan for the benefit of the members “in accordance with the Trust Deed and Superannuation Law”. Superannuation Law is defined by clause 1.1 to mean, amongst others, the SIS Act, the Income Tax Assessment Act 1936 (Cth), the Income Tax Assessment Act 1997 (Cth) and any other law with which compliance is required to secure a concession for the Plan in respect of tax or to avoid a disadvantage to the Plan. Clause 2.14 of the Existing Rules is to similar effect to clause 3.1 of the Proposed Rules.
The defendant expresses a concern that the reference in covering clause III of the Trust Deed to “guidelines” is vague and might give rise to uncertainty or potentially to inadvertent contravention by the Trustee of the covenant imposed by covering clause III. The defendant observes that there is no reference in clause 3.1 of the Proposed Rules or clause 2.14 of the Existing Rules to “guidelines” and no definition in the Trust Deed of the term “guidelines”. The defendant suggests that the reference in covering clause III to “guidelines” be deleted.
The plaintiff opposes deletion of the reference in covering clause III to “guidelines”. The plaintiff is concerned that the covering clauses of the Trust Deed might be seen as more fundamental than the Rules and is concerned that the existing trusts not be disturbed in a manner that might have adverse consequences. The plaintiff says that it is its practice to comply with all relevant guidelines prepared by a regulator and it is confident that it understands its obligations in this respect under covering clause III.
Considered in isolation, the word “guidelines” would be vague and potentially ambiguous. However, in the context of covering clause III and the Trust Deed as a whole, it is clear that it refers to guidelines of the type issued by APRA as formal Guidelines as well as formal guidelines (such as are contained in public taxation rulings) issued by the Commissioner of Taxation.
I accept the concern expressed by the plaintiff. On balance I am satisfied that it is in the interests of beneficiaries that covering clause III not be amended in the manner proposed by the defendant.
Liability and indemnity of Trustee and directors
Liability and indemnity of Trustee
Clause 5.1 of the Proposed Rules provides that, except to the extent Superannuation Law or the Trust Deed provide otherwise, the Trustee is not responsible for any loss or damage arising from any exercise or failure to exercise any discretion or power by the Trustee or any act, omission, negligence or breach of trust of any person to whom it outsources performance of any function. Clause 5.3 provides that, except to the extent Superannuation Law or the Trust Deed provide otherwise, the Trustee is indemnified against any liability arising in the capacity of Trustee and premiums reasonably incurred for professional indemnity insurance.
Clauses 5.2 and 5.4 provide that nevertheless the Trustee is liable for anything done or omitted and is not indemnified if the Trustee fails to act honestly; intentionally or recklessly fails to exercise the care, skill and diligence required under Superannuation Law; or incurs a liability to pay an amount under a civil penalty order, administrative penalty, infringement notice or for the costs of compliance with an education direction under the SIS Act.[27]
[27] The exclusion for liability to pay is achieved by cross-referencing section 56(2)((b) to (e) of the SIS Act.
Existing clause 23.1 of the Existing Rules, although expressed in different terms, is to similar effect to clauses 5.1 to 5.4 of the Proposed Rules. Original clauses 23 and 25 of the Original Rules provided an exclusion of liability and indemnity to the Trustee which, although expressed in very different terms, were not of very dissimilar effect.
Subsection 56(1) of the SIS Act prima facie provides that a provision in the governing rules of a superannuation entity is void if it purports to preclude or limit the amount of a trustee’s indemnity out of the assets of the entity in respect of any liability incurred while acting as trustee of the entity.
Subsection 56(2) provides that a provision in the governing rules is void insofar as it exempts a trustee of the entity from, or indemnifies a trustee of the entity against, a liability in the same terms as clauses 5.2 and 5.4 of the Proposed Rules. Subsection 56(2A) provides that a provision in the governing rules of a registrable superannuation entity (of which the Trust is one) is void insofar as it allows a trustee to be indemnified for any amount expended out of capital of the trustee maintained to cover the operational risk of the entity or without first exhausting the reserve or any other financial resources maintained to cover operational risk relating to the entity maintained to cover that risk.
Subject to three qualifications, the limitation of liability and provisions as to indemnity effected by clauses 5.1 to 5.4 of the Proposed Rules mirror the provisions of section 56 of the SIS Act. The first qualification is that section 56 does not expressly address liability as opposed to indemnification of a trustee. However, if the trustee is indemnified out of the assets of the trust in respect of a liability, it necessarily follows that the trustee is not liable to the trust for the conduct the subject of the indemnity.
The second qualification is that the Proposed Rules provide for indemnity against professional indemnity insurance premiums. Although section 56 does not address insurance, particularly taking into account that the Trustee is a single purpose entity that acts only as Trustee of the Trust, it is in the interests of beneficiaries that the Trustee be indemnified against such premiums. The Trustee of course has a duty to act in accordance with the general covenants referred to above in effecting any such policy of insurance. The indemnity in respect of such premiums is subject to the exclusions contained in clause 5.4.
The third qualification is that the Proposed Rules do not contain any provision reflecting subsection 56(2A) of the SIS Act.
In these circumstances, and taking into account the fact that clause 23.1 of the Existing Rules is to similar effect to clauses 5.1 to 5.4 of the Proposed Rules, with one qualification I am satisfied that clauses 5.1 to 5.4 should form part of the Proposed Rules.
The qualification is that the Proposed Rules should contain a provision reflecting subsection 56(2A) of the SIS Act. While that provision has overriding force in any event, if the other provisions of section 56 are to be incorporated into the Rules, this subsection should not be omitted.
Indemnity of directors
Clause 5.5 of the Proposed Rules provides that clauses 5.3 and 5.4 apply to each director of the Trustee and the references therein to the Trustee are taken to be references to each director of the Trustee. These clauses effectively provide that the directors are indemnified out of the assets of the Plan for any act or omission and for professional indemnity insurance premiums except in respect of matters addressed by clause 5.4.[28]
[28] The exclusion for liability to pay is achieved by cross-referencing section 57(2)((b) to (e) of the SIS Act.
Clause 23.2 of the Existing Rules, although expressed in different terms, is to similar effect to clause 5.5 of the Proposed Rules.
Subsection 57(1) of the SIS Act prima facie provides that the governing rules of a superannuation entity may provide for a director of the trustee to be indemnified out of the assets of the entity in respect of a liability incurred while acting as a director. Subsection 57(2) provides that a provision in the governing rules is void insofar as it indemnifies a director against a liability expressed in the same terms as clauses 5.2 and 5.4 of the Proposed Rules.
In these circumstances, and taking into account the fact that clause 23.2 of the Existing Rules is to similar effect to clause 5.5 of the Proposed Rules, I am satisfied that clause 5.5 should form part of the Proposed Rules.
Binding death benefit nominations
Clauses 17.4 and 17.5 of the Proposed Rules create a regime for binding death benefit nominations to be given by members to the Trustee.
The defendant raised several queries in relation to the original draft of these provisions. The plaintiff redrafted the provisions in response. The defendant no longer raises queries in relation to these provisions.
Provisions in superannuation trust deeds relating to binding death benefit nominations are common and are largely influenced by section 59A of the SIS Act and regulation 6.17A of the SIS Regulations. In Retail Employees Superannuation Pty Ltd v Pain[29] problematic substantive and drafting matters in relation to those statutory provisions were identified. They have not yet been addressed by the Commonwealth.
[29] [2016] SASC 121 at [487]-[515].
I am satisfied that it is in the interests of beneficiaries that the Proposed Rules contained provision for binding death benefit nominations in terms of clauses 17.4 and 17.5.
One issue that arose at the hearing of this action was whether provision should be made for binding death benefit nominations which nominate payment of part of the death benefit to an ineligible recipient and whether in that event the balance of the nomination should be treated as valid. Ultimately the plaintiff has elected to treat such nominations as wholly invalid but to provide that the nomination will be taken into account in the exercise of the Trustee’s discretion. This decision is affected by the problematic drafting of the Commonwealth provisions referred to above and otherwise represents a policy choice made by the Trustee. While different views might be held concerning that policy choice, I accept that overall the inclusion of clauses 17.4 and 17.5 is in the best interests of beneficiaries.
Amendment power
Clause 31.1 of the Existing Rules empowers the Trustee to amend any provision of the Trust Deed subject to limitations set out in subclauses 31.4 and 31.5.
Clause 31.1 is in virtually identical terms to clause 19.1 of the trust deed (the former REST Rules) considered in Retail Employees Superannuation Pty Ltd v Pain.[30] The restrictions in subclauses 31.4 and 31.5 of the Existing Rules are in virtually identical terms to clauses 19.4 and 19.5 of the former REST Rules.[31]
[30] [2016] SASC 121 at [614].
[31] [2016] SASC 121 at [614].
For the reasons given in Retail Employees Superannuation Pty Ltd v Pain,[32] subclauses 31.4 and 31.5 give rise to considerable uncertainty as to the scope of the power to amend and it is in the interests of beneficiaries that there be as much certainty as possible as to the terms of the Trust Deed.
[32] [2016] SASC 121 at [616]-[640].
Clause 21 of the Proposed Rules is drafted in very similar terms to the proposed replacement clause 19 (the replacement REST Rules) that was approved in Retail Employees Superannuation Pty Ltd v Pain.[33]
Principal limitations on amendment power
[33] [2016] SASC 121 at [645]-[708].
The only material difference between clause 21.2 of the Proposed Rules and clause 19.2 of the replacement REST Rules, being the principal prima facie limitations on the power of amendment, is that clause 19.2 contains an additional limitation that an amendment may not “vary the method of calculating a Defined Benefit in any way that would reduce the value of the Defined Benefit”. This was appropriate because the REST fund was in part a defined benefit fund. It is not applicable to the Trust because the Trust is solely an accumulation fund.
The only material difference between clause 21.3 of the Proposed Rules and clause 19.3 of the replacement REST Rules, being the principal exceptions to the prima facie limitations on the power of amendment, is that paragraph (c)(i) of clause 19.3 refers to the amendment being necessary or desirable for the trustee to comply with its “legal obligations” whereas paragraph (c)(i) of clause 21.3 refers to the amendment being necessary or desirable for the Trustee to comply with its “legal obligations under Superannuation Law”. This change was made by the plaintiff in response to a submission by the defendant that a reference merely to “legal obligations” might be uncertain. There is little difference between the two formulations because any legal obligations the subject of clause 19.3(c)(i) are likely to arise under Superannuation Law. However, in any event the formulation in clause 21.3 is if anything more restrictive and less likely to be productive of uncertainty.
Clause 19.4(a) of the replacement REST rules contains a definition section for the term “the amount standing to a Member’s Retirement Account” referred to in clause 19.2(a). This definition is omitted in clause 21.4 of the Proposed Rules. I am satisfied that in the context of the Trust Deed a definition is unnecessary and the corresponding term “Member’s Account” within clause 21.2(a) has the same meaning as the definition contained in the REST Replacement Rules.
Notice provisions
Clause 19.8(a) of the replacement REST rules requires notice of any amendment to be given on the Plan’s website within seven days. Clause 21.7(a) of the Proposed Rules requires notice of equivalent amendments to be given on the Plan’s website within 30 days. The plaintiff did not adduce any evidence and does not submit that it is impracticable to include notice on the website within seven days. In addition, the Trustee will know of the proposed amendment before it is made and could prepare in advance for notice to be placed on the website.
The plaintiff points to the fact that clause 21.8, which addresses notice of material amendments, provides for notice to be given to members of such amendments not later than 30 days after the date the deed of amendment is executed. However, that clause requires the notice to be given “as soon as practicable” and the reference to 30 days is a long stop requirement. Moreover, that clause requires individual notices to be given to each member, typically by post or email, and it may be expected that this would take longer than for notice to be placed on the website.
In the circumstances the lesser period should be included in clause 21.7(a).
Conclusion
Subject to amendments being made in the specific respects identified above, I am satisfied that there is good reason to make the proposed variations, they are in the interests of beneficiaries, they would not result in one class of beneficiaries being unfairly advantaged to the prejudice of another class and they accord as far as reasonably practicable with the spirit of the Trust and will not disturb the Trust beyond what is necessary to give effect to the reasons justifying the exercise of the powers.
The plaintiff has produced minutes of order. They include an order that the Trust be varied by substituting the Proposed Rules for the existing Schedules to the Trust Deed; that the amendment take effect on the date of the order; and that nothing in the orders is intended to affect an existing right or claim by a beneficiary against the plaintiff, resettle the Trust or change the trusts on which an asset is held or vest assets of the Trust. These orders are appropriate, subject to including an order that as soon as reasonably practicable after the operative date the Trustee is to allocate members’ investments in the Plan between the Divisions.
The minutes also provide for notice to be given to members. The wording of the proposed notice is appropriate. Subject to questions of timing and how the notice is to be given to members, this order is appropriate.
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