Host-Plus Pty Limited v Blackwell

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
HOST-PLUS PTY LIMITED v BLACKWELL
[2022] SASC 59
Judgment of the Honourable Justice Blue
SUPERANNUATION - PRIVATE SECTOR FUNDS - TRUSTEES - GENERALLY
SUPERANNUATION - PRIVATE SECTOR FUNDS - AMENDMENT OF TRUST DEED
EQUITY - TRUSTS AND TRUSTEES - POWERS, DUTIES, RIGHTS AND LIABILITIES OF TRUSTEES - MISCELLANEOUS OTHER POWERS, DUTIES AND LIABILITIES - POWER TO VARY TRUSTS
The applicant trustee sought orders under section 59C of the Trustee Act 1936 (SA) varying the trust deeds governing the Hostplus Pooled Superannuation Trust and the Hostplus Superannuation Fund to insert a new clause empowering the trustee to charge a Risk Charge.
The motivation for the proposed amendments was that, particularly after 1 January 2022, the trustee of the Fund and the Trust, and trustees of superannuation funds generally, would be liable to the potential imposition of fines and penalties in relation to any contravention of Commonwealth laws in respect of which they would not be indemnified by their respective superannuation funds. The applicant has no significant capital of its own out of which to pay any such fine or penalty and in this respect is in a similar position to other trustees of industry superannuation funds.
The application was opposed by the respondent, a member of the Fund, as the representative of all actual and potential beneficiaries of the Fund and of the Trust. The interested party, the Australian Prudential Regulation Authority, made submissions without taking a position in relation to the application.
The application was heard as a matter of priority. Orders were made varying the respective trust deeds because of the imminent legislative changes due to come into operation.
Held:
1The proper construction of subsections 56(2) and 57(2) of the Superannuation Industry (Supervision) Act 1993 (Cth) considered (at [154]).
2The proposed clauses would not be rendered void by subsections 56(2) or 57(2) of the Superannuation Industry (Supervision) Act 1993 (Cth) (at [162]).
3In the absence of the acquisition by the Applicant of substantial capital, it would be rendered insolvent by the imposition of any significant non-indemnifiable penalty and this would cause very substantial costs and losses to the Fund and the Trust and thereby to the beneficiaries (at [126]).
4A preferable mechanism to provide capital to a trustee in the position of the Applicant would be for its superannuation funds to acquire shares in the trustee company but this is presently precluded by the Superannuation Industry (Supervision) Regulations 1994 (Cth) (at [194]).
5Given legislative provisions and time constraints, it was not possible to satisfactorily mitigate that risk by 1 January 2022 other than by the introduction of a trustee risk charge of the type proposed (at [220]).
6In the circumstances, there was good reason to vary the trust deeds and it was in the interests of the beneficiaries of the respective trusts to do so (at [221]).
7In the circumstances, the variations would not result in one class of beneficiaries of either trust being unfairly advantaged to the prejudice of another class (at [255]).
8The proposed variations accorded as far as reasonably practicable with the spirit of each trust, would not disturb each trust beyond what was necessary to give effect to the reasons for the variation and were not motivated by taxation minimisation considerations (at [259]).
9Given the lack of empirical data and other limitations:
(a) the trust deed of the Fund should be varied to provide for charging by the trustee of an annual risk charge in an amount equal to 0.03% per annum of the net assets of the Fund and the Trust (on a consolidated basis) subject to charging of a lesser amount by the trustee, with a monetary ceiling on the annual charge fixed by reference to the risk premium reserve not exceeding 0.06% per annum of the net assets of the Fund and the Trust (on a consolidated basis); and
(b) the trust deed of the Trust should be varied to provide for charging by the trustee of an annual risk charge in an amount equal to 0.03% per annum of the net assets of the Fund and the Trust (on a consolidated basis) subject to charging of a lesser amount by the trustee, with a monetary ceiling on the annual charge fixed by reference to the risk premium reserve not exceeding 0.06% per annum of the net assets of the Fund and the Trust (on a consolidated basis) (at [271]).

10 Consideration of the other terms of the proposed new clauses (at [276 - 308]).
11 Orders made varying the trust deeds (at [288]).
Corporations Act 2001 (Cth); Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth); Financial Sector Reform (Hayne Royal Commission Response No 2) Act 2020 (Cth); Occupational Superannuation Standards Act 1987 (Cth); Superannuation Industry (Supervision) Act 1993 (Cth) s 99G, s 29V, s 29VA, s 56, s 57; Superannuation Industry (Supervision) Regulations 1994 (Cth); Superannuation Legislation Amendment (MySuper Core Provisions) Act 2012 (Cth); Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Act 2012 (Cth); Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No 1) Act 2019 (Cth); Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 (Cth); Treasury Laws Amendment (Your Future, Your Super) Act 2021 (Cth); Trustee Act 1936 (SA) s 59C, referred to.
Application by LGSS Pty Ltd atf Local Government Super [2021] NSWSC 1613; Application by Maritime Super Pty Ltd atf Maritime Super [2021] NSWSC 1614; Application by Motor Trades Association of Australia Superannuation Fund Pty Ltd atf Spirit Super [2021] NSWSC 1672; AustralianSuper Pty Ltd v McMillan [2021] SASC 147; Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth of Australia [2019] HCA 20, (2019) 268 CLR 524; Lane v Deputy Commissioner of Taxation (2017) 253 FCR 46; National Wage Case June 1986 (1986) 14 IR 187; Retail Employees Superannuation Pty Ltd v Pain [2016] SASC 121, (2016) 115 ACSR 1; Re Care Super Pty Ltd [2021] VSC 805; Re HEST Australia Ltd [2021] VSC 809; Re QSuper Board [2021] QSC 276, considered.

HOST-PLUS PTY LIMITED v BLACKWELL
[2022] SASC 59

BLUE J: The applicant, Host-Plus Pty Limited (HPPL), sought orders[1] under section 59C of the Trustee Act 1936 (SA):
1varying the Trust Deed governing the Hostplus Pooled Superannuation Trust (the Trust) to insert a new clause 19.2A empowering the trustee of the Trust to charge a Risk Premium Charge (Risk Charge); and
2varying the Trust Deed governing the Hostplus Superannuation Fund (the Fund) to insert a new clause 4.11 empowering the trustee of the Fund to charge a Risk Charge.
[1] HPPL originally also sought orders under section 91 of the Trustee Act 1936 (SA) that, in its capacity as trustee of the Fund and the Trust respectively, it would be justified in charging a risk premium, paying the premium into a risk premium reserve in accordance with proposed rule 93 of its Constitution and otherwise setting the risk premium and maintaining a risk premium reserve in accordance with its proposed risk premium reserve policy. However, during the hearing of the application, HPPL did not ultimately pursue its application for this additional relief.
The motivation for the proposed amendments was that, particularly after 1 January 2022, the trustee of the Fund and the Trust (the Trustee), and trustees of superannuation funds generally, would be liable to the potential imposition of fines and penalties in relation to any contravention of Commonwealth laws in respect of which they would not be indemnified by their respective superannuation funds.[2] HPPL has no significant capital of its own out of which to pay any such fine or penalty and in this respect is in a similar position to other trustees of industry superannuation funds.
[2] As appears below, they were already not indemnified in respect of some penalties but the range of non-indemnifiable penalties was to substantially increase after 1 January 2022.
The application was opposed by the respondent, Trevor Blackwell, a member of the Fund, as the representative of all actual and potential beneficiaries of the Fund and of the Trust. The interested party, the Australian Prudential Regulation Authority (APRA), made submissions without taking a position in relation to the application.
The application was heard as a matter of priority. On 24 December 2021 orders were made varying the respective trust deeds because of the imminent legislative changes (described below) due to come into operation on 1 January 2022. These are my reasons for making those orders.
Although not heard together, the hearing and determination of this matter overlapped with the hearing and determination of an application by AustralianSuper Pty Ltd under section 59C for variation of the Australian Super Fund Trust Deed. The two applications, while ultimately turning on their own facts, gave rise to similar issues and considerations. These reasons should be read in conjunction with my reasons for judgment in AustralianSuper Pty Ltd v McMillan.[3]
[3] [2021] SASC 147.
I was greatly assisted by counsel for all parties and in particular thank Mr Blackwell for acting as a representative and contradictor and APRA for making submissions to assist the Court.
Background
Superannuation industry
Leaving aside self-managed superannuation funds, superannuation trustees and superannuation funds fall into two broad categories. In the first category, the trustee acts on a commercial, for profit, basis. I refer for convenience to such trustees as commercial trustees and the funds of which they are trustees as commercially operated funds.[4]
[4] They are commonly called “retail funds” in Australia but this risks confusion with the dichotomy between retail funds (such as the Fund) and wholesale funds (such as the Trust).
A commercial trustee charges a fee or fees to its superannuation fund and is free to use the money generated by the fee for its own purposes (including to pay out profits by way of dividends to its shareholders). Commercial trustees tend to be owned and controlled by banks or other financial institutions. Although commercial trustees are motivated by profit, they owe extensive fiduciary and statutory duties to act in the best interests of the members of their funds and, where there is a conflict between the interests of their fund’s members and their own interests, to give paramountcy to their duties to their fund’s members.
Governmental regulation requires disclosure of the amount of fees charged by trustees of regulated superannuation funds but (subject to the following qualifications) does not regulate the amount of such fees. Section 99G of the Superannuation Industry (Supervision) Act 1993 (Cth) (the Supervision Act) limits the amount of fees that can be charged by a trustee of a regulated superannuation fund to members with small account balances of less than $6,000. Section 29V of the Supervision Act limits the types of fees that can be charged to members holding a MySuper product but section 29VA, which imposes charging rules, does not limit the amount of administration fees or investment fees[5] that can be charged (provided that they meet defined equality criteria as between all (relevant) MySuper members).
[5] Section 29VC does limit the amount of certain more minor fees (activity fees and insurance fees) to a cost recovery basis.
In the second category, the trustee acts on a not-for-profit basis. I refer for convenience to such trustees as non-commercial trustees and the funds of which they are trustees as cooperative funds.
There are three broad types of cooperative funds: corporate, public sector and industry funds. Historically, each type was created for a particular class of employees. Corporate funds were created for employees of a private enterprise corporate group. Public sector funds were created for government employees. Industry funds were created for employees working in a particular industry. However, many if not most industry and public sector funds are now “public offer funds” open to any member of the public, whether or not employed and whether or not associated with a corporate group, government sector or industry. The original hard and fast distinction between corporate, public sector and industry funds no longer applies.
Traditionally trustees of cooperative funds were either several individuals or companies but they now tend to be companies. Typically, individual trustees or directors of corporate trustees comprise a mixture of persons nominated by the relevant employer/employer group and persons nominated by the relevant union(s).
History
In February 1988 HPPL was incorporated. It was incorporated by the Australian Hotels Association and the Australian Liquor Hospitality & Miscellaneous Workers Union, who each held an equal number of shares in HPPL. The initial directors of HPPL were nominated in equal numbers by the two shareholders.
In February 1988 the Fund was established by HPPL executing a Trust Deed establishing the Fund (the Fund’s Trust Deed). The Fund was an industry superannuation fund. Membership was open to employees of employers in the hospitality industry (including hotel, liquor and tourism), presumably being employers who were members of the Australian Hotels Association. Membership is now open to any member of the public.
When the Fund was established, compulsory superannuation contributions by employers for employees had only recently been introduced under some awards and there was relatively limited federal government regulation of superannuation funds as such. In National Wage Case June 1986[6], the Australian Conciliation and Arbitration Commission had introduced compulsory superannuation into some industrial awards at the rate of three per cent of wages and this was subsequently extended to other awards. In 1987 the Commonwealth had enacted the Occupational Superannuation Standards Act 1987 (Cth), which introduced limited regulation of superannuation funds.
[6] (1986) 14 IR 187.
In 1993 the Commonwealth enacted the Supervision Act to regulate superannuation funds more comprehensively than the Occupational Superannuation Standards Act 1987 (Cth).
In 2002 the Corporations Act 2001 (Cth) (the Corporations Act) was amended by the insertion of Part 7.6 to introduce a requirement for persons carrying on a financial services business to hold an Australian Financial Services Licence (AFS licence) issued by the Australian Securities and Investments Commission (ASIC).
In 2004 the Supervision Act was amended by the insertion of Part 2A to introduce a requirement for certain superannuation trustees, including the trustee of the Fund, to hold an RSE licence issued by APRA.
In 2012 the Supervision Act was amended by the Superannuation Legislation Amendment (MySuper Core Provisions) Act 2012 (Cth) and the Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Act 2012 (Cth) to impose additional obligations on trustees and directors of superannuation trustee companies.
In February 2014 the Trust was established by HPPL executing a Trust Deed (the Trust’s Trust Deed). Whereas the Fund operated and continues to operate at the retail level (receiving superannuation contributions directly from members of the public), the Trust was created to operate, and operates, at the wholesale level. The Trust receives superannuation contributions only from superannuation funds operating at the retail level. The Trust is a unit trust and issues units to superannuation funds who invest in the Trust.
In November 2014 the Fund commenced investing its funds in the Trust instead of investing them directly in investments or in other wholesale level funds. 99 per cent of the Fund’s investments are now made in the Trust (all but those of Choice Plus members explained below). Investments by the Fund, and units held by the Fund, in the Trust represented 90.7 per cent[7] of the investments made by all superannuation funds in the Trust as at 30 June 2021.
[7] All percentages are rounded to the nearest tenth of a per cent unless otherwise shown.
At some point, trustees of self-managed superannuation funds commenced to invest their funds in, and to receive units issued by, the Trust. As at 30 June 2021 there were approximately 850 self-managed superannuation funds (SMSFs) who invest their funds in the Trust. Investments by SMSFs collectively represented 0.4 per cent of the investments made by all superannuation funds in the Trust as at 30 June 2021.
In 2018 and 2019 the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Hayne Royal Commission) was conducted by former High Court Justice the Honourable Kenneth Hayne AC QC. This triggered both legislative amendments to increase statutory regulation of superannuation funds and increased enforcement activities by regulators. In particular, ASIC instituted proceedings against several commercial trustees.
In 2019 the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 (Cth) and Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No 1) Act 2019 (Cth) amended the Corporations Act and the Supervision Act to increase the number of provisions contravention of which give rise to a criminal or civil penalty. In particular, section 54B was inserted into the Supervision Act[8] to provide that contravention of a section 52 or 52A covenant is a civil penalty provision such that contravention may give rise to a civil penalty order under section 196 (or an offence under section 202 if the contravention is fraudulent or dishonest and intended to gain an advantage).
[8] By the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No 1) Act 2019 (Cth).
In 2020 and 2021 the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth), Treasury Laws Amendment (Your Future, Your Super) Act 2021 (Cth) and Financial Sector Reform (Hayne Royal Commission Response No 2) Act 2020 (Cth) amended the Supervision Act and the Corporations Act to impose additional obligations on trustees of superannuation funds, many of which give rise to criminal or civil penalties. In particular, sections 766A and 766H were inserted into the Corporations Act[9] to provide that a person provides a financial service if they operate a registrable superannuation entity as trustee of the entity. This had the effect that trustees of regulated entities are now required to hold an AFS licence, are subject to the licensing requirements and financial product disclosure requirements in Parts 7.6 and 7.9 respectively and are subject to the criminal, civil penalty and infringement notice provisions in Parts 9.4, 9.4B and 9.4AB respectively. Chapter 7 of the Corporations Act had been amended in 2019[10] to increase the number of civil penalty provisions, penalties for criminal offences and provisions for which infringement notices could be issued. In addition, the Supervision Act was amended[11] to give to ASIC powers to enforce provisions of the Supervision Act protecting consumers from harm, market integrity, disclosure and record keeping.
[9] By the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth).
[10] By the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 (Cth).
[11] By the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth).

In March 2021 ASIC commenced a civil penalty proceeding in the Federal Court against the trustee of an industry superannuation fund alleging that it made false or misleading representations to approximately 12,500 members representing that they held insurance cover when they did not and deducting approximately $1.5 million from members’ account for insurance premiums in respect of insurance that did not exist.
In March 2021 ASIC commenced another civil penalty proceeding in the Federal Court against a different trustee of a different industry superannuation fund alleging that it made false or misleading representations to members about their ability to transfer their superannuation out of the fund. These two proceedings had not in December 2021 been determined.
In April 2021 HPPL (as trustee of the Trust) entered into a deed with Maritime Super Pty Limited (as trustee of Maritime Super). Maritime Super Pty Limited (MSPL) is the trustee of Maritime Super (Maritime Super), an industry superannuation fund with a focus on employees working in the maritime industry. The Deed provided for MSPL as trustee of Maritime Super to invest in and receive units issued by the Trust. Investments by Maritime Super in the Trust represented 8.9 per cent of the investments made by all superannuation funds in the Trust as at 30 June 2021.
On 10 and 19 September 2021 HPPL sent memoranda to the Australian Hotels Association (AHA) and the United Workers Union (UWU), its shareholders, describing the proposed application to the Court under section 59C of the Act, attaching amendments to HPPL’s Constitution proposed to be made if the proposed Risk Levies were to be introduced and seeking written confirmation of their willingness to adopt the proposed amendments to the Constitution in that event.
On 20 September 2021 representatives of AHA and UWU indorsed the memoranda confirming the willingness of AHA and UWU to adopt the proposed amendments to the Constitution if the proposed Risk Levies were to be introduced.
On 15 October 2021 HPPL sent emails to APRA, ASIC, Maritime Super and the Commonwealth, South Australian and Victorian Attorneys-General informing them of the application for variation of the trust deeds.
On 22 and 25 October 2021 Lewis Tassone spoke to the National Secretary of UWU and the Chief Executive Officer of AHA respectively. Mr Tassone was informed that the shareholders were not prepared to provide financial support, whether by capital contribution or other form of support, if HPPL did not have the capacity to satisfy a penalty imposed after 1 January 2022.
In November 2021 a merger (by way of successor fund transfer) was completed between Intrust Super and the Fund. Intrust Super was an industry superannuation fund based in Queensland with a focus on hospitality. Its trustee was IS Industry Fund Pty Ltd (IIFPL). It had approximately 96,000 members and net assets of $2.6 billion. Members of Intrust Super became members of the Fund and had their account balances transferred into the Fund.
In November 2021 APRA issued a Discussion Paper entitled Strengthening Financial Resilience in Superannuation (the APRA Discussion Paper). The Paper referred to legislative changes made since the Hayne Royal Commission, including the forthcoming amendments to sections 56 and 57 of the Supervision Act. It referred to the importance of building a financial contingency reserve on a trustee’s balance sheet to meet non-indemnifiable penalties. It referred to the importance of setting fees that are appropriate and proportionate and in the best financial interests of beneficiaries. It invited submissions by 11 March 2022, which submissions it said may inform the need for enhancements to the prudential framework to ensure that RSE licensees prudently manage their financial resilience in the best financial interests of beneficiaries.
In December 2021 HPPL (as trustee of the Fund) and Statewide Superannuation Pty Ltd (SSPL) (as trustee of Statewide Super) executed a Successor Fund Transfer Deed. Statewide Super is an industry superannuation fund in South Australia with a focus on members living in South Australia and the Northern Territory. It has approximately 142,000 members and net assets of $10.8 billion. The Deed provided for a merger between Statewide Super and the Fund to occur on 1 April 2022.
Subsections 56(2) and 57(2) of the Supervision Act before 1 January 2022 rendered void a provision of the governing rules of a superannuation entity insofar as it would have the effect of indemnifying a trustee, or director of a trustee, of the entity against:
·liability for a civil penalty in respect of a contravention of a provision of the Supervision Act identified as a civil penalty provision;
·liability for an administrative penalty imposed by section 166 of the Supervision Act in respect of defined contraventions of the Supervision Act in relation to self-managed superannuation funds; and
·payment of an amount payable under an infringement notice issued by APRA under section 224 of the Supervision Act in respect of a contravention of a defined offence or civil penalty provision of the Supervision Act.
With effect on 1 January 2022 those subsections were to be repealed and replaced[12] by subsections that rendered void a provision of the governing rules of a superannuation entity insofar as it would have the effect of indemnifying a trustee, or director of a trustee, of the entity against the following liabilities or payments (non-indemnifiable penalties):
·liability for a criminal penalty incurred by a superannuation trustee in relation to a contravention of any law of the Commonwealth;
·liability for a civil penalty incurred by a superannuation trustee in relation to a contravention of any law of the Commonwealth;
·liability for an administrative penalty incurred by a superannuation trustee in relation to a contravention of any law of the Commonwealth; or
·payment of an amount payable under an infringement notice (however described) given under any law of the Commonwealth.
[12] By the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth) Schedule 9 items 63 and 64.
The substantive changes effected by the amendments (albeit achieved by the repeal and replacement of the respective subsections) to subsections 56(2) and 57(2) were to be to the following effect:
A provision in the governing rules of a superannuation entity is void in so far as it would have the effect of exempting a [trustee[13]/director of the trustee[14]] of the entity from, or indemnifying a trustee of the entity against:
(a)     liability for breach of trust if the [trustee[15]/director[16]]:
(i)    fails to act honestly in a matter concerning the entity; or
(ii)     intentionally or recklessly fails to exercise, in relation to a matter affecting the entity, the degree of care and diligence that the [trustee[17]/director[18]] was required to exercise; or
(b)liability for ~~a monetary penalty under a civil penalty order~~[19] an amount of a criminal, civil or administrative penalty incurred by the [trustee[20]/director[21]] of the entity in relation to a contravention of a law of the Commonwealth (including this Act); or
(c)the payment of any amount payable under an infringement notice[22] (however described) given under a law of the Commonwealth (including this Act); or
(d)liability for the costs of undertaking a course of education in compliance with an education direction[23] (within the meaning of this Act)~~; or~~.
~~(e)~~     ~~liability for an administrative penalty imposed by section 166~~.
[13] Section 56(2).
[14] Section 57(2).
[15] Section 56(2).
[16] Section 57(2).
[17] Section 56(2).
[18] Section 57(2).
[19] A civil penalty order is defined to mean a declaration or order under section 196 and thereby is confined to orders in respect of contraventions of defined provisions of the Supervision Act. After the amendments come into force on 1 January 2022, this paragraph will no longer referred to a civil penalty order.
[20] Section 56(2).
[21] Section 57(2).
[22] An infringement notice in the present version means an infringement notice issued by APRA under section 224 in respect of a contravention of a defined offence or civil penalty provision of the Supervision Act.
[23] An education direction is defined by sections 10 and 160 to mean an education direction given by APRA under section 160 in respect of a contravention of the Supervision Act in relation to a self-managed superannuation fund.
The amendments were to expand the invalidation of governing rules of a superannuation entity in respect of indemnification of a trustee or director of a trustee to apply to:
·a fine or other amount payable in respect of a Commonwealth offence;
·a civil penalty under Commonwealth legislation other than under the Supervision Act (which was already encompassed by the pre-existing provisions); and
·an administrative penalty under Commonwealth legislation other than under the Supervision Act (which was already encompassed by the pre-existing provisions).
HPPL has not, to the knowledge of Mr Tassone, incurred a significant fine or civil or administrative penalty or amount payable under an infringement notice. The only penalty that it has incurred, to the knowledge of Mr Tassone, is a relatively small penalty imposed by an infringement notice issued by ASIC in about May 2019.
HPPL
HPPL has a share capital of $600. 300 shares are held by AHA. 300 shares are held by UWU.
HPPL has nine directors. Three directors are appointed by AHA. Three directors are appointed by UWU. Three directors are appointed jointly by AHA and UWU (or in default of agreements by a selection committee comprising a nominee of each of AHA and UWU, two nominees of the Australian Institute of Superannuation Trustees and one nominee of the President of the Law Institute of Victoria).
HPPL’s Constitution requires its shares to be held equally by AHA and UWU or their respective nominees (rule 6). It provides for the appointment of directors as described in the previous paragraph (rules 39, 40 and 69). It contains relatively standard provisions concerning shares, directors, meetings and other matters.
As noted above, HPPL’s shareholders agreed to amend the Constitution upon introduction of the proposed Risk Levies. The agreed amendments included the following:
·amendments to rule 3.1 to provide that HPPL is to act only as trustee of the Fund and the Trust and in doing so has a not-for-profit objective as defined in rule 3.3;
·insertion of new rule 3.2 requiring any exercise of power or determination to be consistent with the not-for-profit objective, the Constitution and the objectives of the Fund and the Trust and not to give rise to any breach of the Fund’s Trust Deed or the Trust’s Trust Deed;
·insertion of new rule 92.1 prohibiting (except on winding up but then subject to clause 93) the distribution, transfer or payment of any income or capital directly or indirectly to or for the benefit of shareholders;
·insertion of new rule 93 regulating the use of reserves, including new rule 93.3 governing the use of the Risk Reserve and new rule 93.4 prohibiting use of any reserves for the benefit of shareholders, including on a winding up; and
·insertion of new rule 112.1 preventing any variation of the Constitution that may affect rule 3.2, 3.3, 92 or 93.4 except a decision complying with rule 3.2 and approved by all shareholders or otherwise necessary to ensure that HPPL is able to comply with the Relevant Laws.
HPPL holds an AFS Licence and a Registrable Superannuation Entity Licence (RSE Licence). These licenses are required for it to act as trustee of the Fund and the Trust.
The Fund
The Fund had over 1.3 million members and net assets excluding member benefits (net assets) valued at $62.0 billion[24] as at 30 June 2021.
[24] All figures in billions of dollars are rounded to the nearest tenth of a billion dollars unless otherwise shown.
The Fund has three Divisions:
·Divisions 1 and 2 are for members not in receipt of a pension. Division 1 (Employer Division) is for members whose participating employer is making or has made contributions on their behalf to the Fund. Division 2 (Personal Division) is for members who make their own contributions to the Fund. For the purpose of this case, there is no material distinction between Division 1 and Division 2.
·Division 3 (Pension Division) is for members in receipt of a pension (and typically who were previously members of Division 1 or 2).
The Fund has multiple investment options. A member can choose any one or more of the investment options regardless of the member’s Division. The largest investment option is the Balanced investment option, which is the Fund’s default investment option and MySuper investment option. The other investment options are:
·Host Plus Life; Shares Plus; Indexed Balanced; Socially Responsible Investment–Balanced; Conservative Balanced; and Capital Stable (each encompassing mixed asset classes);
·Australian Shares; International Shares; International Shares–Indexed; International Shares (Hedged)–Indexed; Infrastructure; Property; Diversified Fixed Interest; and Cash (each comprising a single asset class);
·Macquarie Investment Management–Australian Fixed Interest; BlackRock Asset Management–International Fixed Interest; Industry Super Property Trust–Property; Lendlease Managed Australian Prime Property Funds–Property; IFM–Australian Infrastructure; IFM–Australian Shares; Paradice Investment Management–Australian Shares; Neuberger Berman–International Shares (each comprising an asset class managed by the nominated external funds manager); and
·Choiceplus (comprising assets selected by the member).
The monies comprising all investment options other than Choiceplus are invested via the Trust. The Trust offers to Maritime Super members and SMSF investors subsets of the investment options available to Fund members. The monies comprising the Choiceplus investment option are invested by the Fund directly in the ultimate investment assets and not via the Trust. However, a member holding an investment in the Choiceplus member investment option (a Choice Plus member) is required to invest at least $2,000 in another investment option which is invested via the Trust.
As at 30 June 2021 there were about 12,700 Choiceplus members and net assets of the Choiceplus investment option were $830 million,[25] representing about one per cent of the net assets of the Fund.
[25] All figures in millions of dollars are rounded to two significant figures unless otherwise shown.
The Trust
The Trust had net assets valued at $68.3 billion as at 30 June 2021. These assets were attributable to:
·the Fund as to $61.9 billion (90.7 per cent);
·Maritime Super as to $6.1 billion (8.9 per cent);
·SMSFs as to $240 million (0.4 per cent); and
·reserves as to $71 million (0.1 per cent).
The Trust and the Fund
The net assets of the Trust and the Fund on a consolidated basis (and ignoring reserves) are represented in the following table (in billions of dollars):

Fund

Trust

Consolidated

Fund members Choice Plus

$0.8

$0.8

Fund members other

$60.4

$61.9

$61.9

Maritime Super

$6.1

$6.1

SMSFs

$0.2

$0.2

Total

$61.2

$68.2

$69.0

Financial aspects

HPPL engages external asset managers in respect of all investments made via the Trust. Approximately 25 to 30 of HPPL’s employees are involved in investment, including overseeing and dealing with the external asset managers. Investment costs incurred by HPPL include fees paid to external asset managers, wages and salaries and other costs associated with investment (investment expenses).
HPPL employs approximately 210 employees in total. Those personnel not involved in investment are engaged in or associated with administration and other operations of HPPL as trustee.
Costs incurred by HPPL are charged to the Fund or the Trust if they relate exclusively to the Fund or the Trust respectively. Otherwise, they are allocated between the Fund and the Trust in accordance with allocation rules developed by HPPL designed to ensure that the allocation is fair and equitable as between the Fund and the Trust.
The Fund
Members of the Fund are charged an “investment fee” and “indirect costs” to recoup investment expenses. The investment fee and indirect costs are charged at a percentage of a member’s account balance and depend on which investment option or options are held by a member. Because all investments (other than for the Choiceplus investment option) are made via the Trust, the investment fee and indirect costs are effectively charged by the Trust (other than for Choiceplus) and are deducted before calculation of a member’s account balance.
For the Balanced investment option, the investment fee was 0.71 per cent and indirect costs were 0.39 per cent for the financial year ending 30 June 2021. The investment fee for the other investment options ranged from 0.00 per cent to 0.78 per cent.
The Fund charges to members an administration fee for the purpose of recouping costs incurred by the Trustee associated with administration and other operations apart from investment (operation expenses). For the financial year ending 30 June 2021:
·the administration fee charged to non-pension members (Division 1 or 2) was $78 per annum;
·the administration fee charged to pension members (Division 3) was $234 per annum; and
·the administration fee charged to Choiceplus members included an additional $180 per annum as well as the Division 1/2 or 3 administration fee.
The amount of administration fees debited to customer accounts is credited to an Administration Reserve in the equity section of the Fund’s balance sheet. Operation expenses are debited to the Administration Reserve. As at 30 June 2021 the total amount standing to the credit of the Administration Reserve was $217 million.
The Fund has three other reserves:
1 An Operational Risk Financial Requirement Reserve (the Operational Risk Reserve) is required by legislation. Section 52(8)(b) of the Supervision Act imposes a covenant in the governing rules of a registrable superannuation entity requiring a trustee to maintain and manage (in accordance with the prudential standards set by APRA) financial resources (capital of the trustee, a reserve of the superannuation fund or both) to cover the operational risk that relates to the entity. The Operational Risk Reserve is only available to be used to cover losses sustained by members arising from an operational risk. As at 30 June 2021 the total amount standing to the credit of the Operational Risk Reserve was $154 million.
2An Insurance Reserve is maintained to manage insurance premiums payable by the Fund to the external insurer. As at 30 June 2021 the total amount standing to the credit of the Insurance Reserve was $53 million.
3An Investment Reserve (or Residual Reserve) which holds investment earnings before allocation to members’ accounts. As at 30 June 2021 the total amount standing to the credit of this Reserve was $381 million.
The financial statements for the Fund for the financial year ended 30 June 2021 show total investment and other revenue earned by the Fund of $10.4 billion. Expenses incurred by the Fund comprised $7.4 million of investment expenses and $123 million of administration expenses. The Fund paid tax at the rate of 15 per cent of taxable income.
The financial statements for HPPL for the financial year ended 30 June 2021 show trustee services income of $1.6 million. HPPL pays income tax at the general corporate tax rate of 30 per cent.
The Trust

Members of the superannuation funds which invested in the Trust (the Fund, Maritime Super and the SMSFs) are charged an “investment fee” and “indirect costs” to recoup investment expenses. The investment fee and indirect costs depend on which investment option or options are held by a member. The investment fee and indirect costs are deducted before calculation of a member’s account balance.
The Trust charges to members an administration fee for the purpose of recouping its operation expenses. The administration fee charged for the financial year ending 30 June 2021 to:
·members of the Fund was a percentage per annum of the assets of each fund investment option managed through the Trust, charged and deducted monthly;
·members of Maritime Super was a percentage per annum of the assets of each fund investment option managed through the Trust, charged monthly; and
·SMSFs was $165 per annum, deducted from the relevant superannuation fund’s account.
The amount of administration fees debited to the member funds is credited to an Administration Reserve in the equity section of the Trust’s balance sheet. Operational expenses are debited to the Administration Reserve. As at 30 June 2021 the total amount standing to the credit of the Administration Reserve was $5.6 million.
The Trust has one other reserve. The Operational Risk Financial Requirement Reserve (the Operational Risk Reserve) is required by section 52(8)(b) of the Supervision Act as described above. It is only used to cover losses sustained by members arising from an operational risk. As at 30 June 2021 the total amount standing to the credit of the Operational Risk Reserve was $65 million.
Amendment powers
Clause 14 of the Fund’s Trust Deed relevantly provides:
14. Amending the Deed
The provisions of this Deed including this clause may be added to, amended, altered, modified, rescinded or varied (the Variation) from time to time by the Trustee either prospectively or retrospectively on the following basis:
14.1 Deed
The Variation must be by Deed executed by the Trustee.
14.2 Limitation on Variation
No Variation must have the effect of:
(a) reducing or adversely affecting the rights or claims of a Member to accrued entitlements under the Fund which have arisen prior to the Variation being effected; or
(b)reducing the amount of an entitlement other than an entitlement referred to in clause 14.2(a) above that is or may become payable in relation to a period before the date of the Variation, unless:
(i)the reduction is required to enable the Fund to comply with the Relevant Law; or
(ii) the Member so affected consents in writing to the reduction; or
(iii) the Regulator consents in writing to the reduction.
Clause 24 of the Trust’s Trust Deed relevantly provides:
24. Amendment
24.1 Amendment of Deed
Subject to clause 24.2, the Trustee may amend this deed by deed.
24.2 Effective date
Any amendment under clause 24.1 takes effect of:
(a)on any earlier of later effective date specified in the deed of amendment; or
(b)if no effective date is specified, on the date the deed of amendment is executed.
Evidence
Oral evidence was given by HPPL’s Group Executive Finance and Technology Lewis Tassone. Two affidavits by Mr Tassone were tendered (affirmed on 25 October and 12 November 2021). Mr Tassone gave evidence about HPPL’s dealings with regulators APRA and ASIC, trustee fees charged by commercial funds, insurance cover held by HPPL, the quantum of the proposed risk charges, the assessment by HPPL and PwC of future risks of penalties being imposed on HPPL in respect of which it would not be indemnified by the Fund or Trust and calculations by HPPL and PwC in relation to the proposed risk charges and the attitude and capacity of HPPL’s shareholders.
An affidavit by HPPL’s Chief Executive Officer David Elia was tendered (sworn on 12 October 2021). Mr Elia gave evidence about HPPL, the Fund, the Trust, changes in the regulatory environment since 1985, the structure and quantum of the proposed risk reserves and risk charges and the attitude of HPPL’s shareholders.
An affidavit by HPPL’s Group Executive, Risk, Compliance and Legal Mark Abramovich was tendered (sworn on 12 November 2021). Mr Abramovich gave evidence about risk management undertaken by HPPL, liability (or lack of liability) for conduct by IIFPL and SSPL in respect of Intrust Super and Statewide Super respectively before their (prospective) mergers and notifications of the application in this matter to third parties.
Oral evidence was given by Catherine Nance, an actuary and a partner of PwC. Ms Nance specialises in the superannuation industry. An affidavit by Ms Nance was tendered (sworn on 12 November 2021). Two reports to HPPL by PwC, authored by Ms Nance and Nathan Bonarius (a fellow actuary and Director at PwC), dated September 2021 (together with a draft of one of those reports) were tendered.
Oral evidence was given by Sean Lindsay, an employee of insurance broker IFS Insurance Solutions Pty Limited. Two affidavits by Mr Lindsay (affirmed on 25 October and 12 November 2021) were tendered. Mr Lindsay gave evidence concerning HPPL’s insurance policies, the insurance market, the availability and terms of insurance cover for superannuation trustees and, to a limited extent, captive insurance arrangements.
Oral evidence was given by Angela Emslie AM, a professional company director. An affidavit by Ms Emslie (affirmed on 11 October 2021) was tendered. Ms Emslie is a director of several for-profit, not-for-profit and government owned organisations, was formerly a director of the trustees of Health Employees Superannuation Trust Australia, CareSuper, Vision Super and VicSuper and was formerly a director and president of the Australian Institute of Superannuation Trustees. She expressed her opinion on the ability of HPPL to attract directors if the proposed risk charges are or are not introduced.
Oral evidence was given by Geoffrey Sanders, the solicitor for MSPL as trustee of Maritime Super. He gave evidence that MSPL is aware of the detail of the proposed risk charges and is commercially satisfied with the proposed structure and quantum.
Various documents, primarily comprising business records of the Trustee or the Fund or Trust, were tendered by HPPL (as exhibits to affidavits or independently) and by Mr Blackwell.
Several items of evidence were confidential and were the subject of evidence received in closed court in order to preserve that confidentiality.
Power to vary the Trust Deed
Section 59C of Trustee Act 1936 (SA) (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.
This Court’s jurisdiction to entertain an application to vary a trust is conditioned on satisfaction of three[26] prerequisites:
·the existence of a trust;[27]
·an application by a trustee of the trust or person with an interest in property held on trust;[28] and
·the interests of all actual and potential beneficiaries being represented in the proceeding.[29]
[26] 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 there is no suggestion that this applies in the present case and it can be ignored.
[27] Implicit in section 59C.
[28] Subsection 59C(1).
[29] Subsection 59C(2).
This Court’s power to vary a trust is conditioned on satisfaction of six prerequisites:
·there is good reason to make the variation;[30]
·the variation is in the interests of beneficiaries;[31]
·the variation will not result in one class of beneficiaries being unfairly advantaged to the prejudice of another class;[32]
·the variation accords as far as reasonably practicable with the spirit of the trust;[33]
·the variation will not disturb the trust beyond what is necessary to give effect to the reasons for the variation;[34] and
·the application is not substantially motivated by a desire to avoid or reduce the incidence of tax.[35]
[30] 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 beneficiaries”.
[31] Section 59C(3)(b). It may be that the second and third prerequisites Are a single composite prerequisite, but it is convenient to treat them separately.
[32] Section 59C(3)(b).
[33] Section 59C(3)(d).
[34] Section 59C(3)(c).
[35] Section 59C(3)(a).
The meaning of these prerequisites was articulated in some detail in Retail Employees Superannuation Pty Ltd v Pain,[36] which I adopt.
[36] [2016] SASC 121, (2016) 115 ACSR 1 at [160]-[180].
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.
Conditions of jurisdiction
The three conditions for jurisdiction under section 59C of the Trustee Act are satisfied. The applicant is the trustee of the Fund and the Trust, which are trusts, and Mr Blackwell represents the interests of all actual and potential beneficiaries of the Fund and the Trust.
None of the prerequisites relates to any connection between the subject trust and South Australia. The Court has jurisdiction to entertain an application even if there is no connection between a trust and South Australia.[37]
[37] 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; Retail Employees Superannuation Pty Ltd v Pain (2016) 115 ACSR 1 at [181]-[182] per Blue 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.[38]
[38] 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; Retail Employees Superannuation Pty Ltd v Pain (2016) 115 ACSR 1 at [182] per Blue J.
As at June 2021, there were over 90,000 members of the Fund in South Australia, who each have an interest in the Trust as well. There is a real and substantial connection with South Australia. There is no improper purpose in HPPL bringing the application in South Australia. The application should be entertained.
The proposed amendments
The application as initially framed was for the insertion of a new clause 19.2A into the Trust’s Trust Deed to provide:
19.2A Risk Premium Charge
(1)Subject to sub-clause 19.2A(2) the Trustee is entitled to charge a fee to hold on its own account against the risk of acting as trustee of the Trust (Risk Premium Charge).
(2) The Trustee may determine the amount of the Risk Premium Charge and the manner and times at which it will be deducted from the assets of the Trust subject to:
(a)     such determination being made in the best financial interests of Unitholders of the Trust;
(b)     such determination being fair and equitable as between classes of Unitholders of the Trust, and as between Unitholders within a class; and
(c) the amount of Risk Premium Charge charged in respect of a financial year, not exceeding an amount of 0.35% per annum of the Risk SUM in that financial year.
(3)     The Trustee may determine to:
(a)     reduce or suspend the charging of the Risk Premium Charge in relation to the Trust as a whole, or a class or classes of Unitholders, or a particular Unitholder or Unitholders, for such period as it determines; and/or
(b)     apply any amount held in the Trust from time to time against prior charges of the Risk Premium Charge by way of refund or rebate in relation to the Trust as a whole, or a class or classes of Unitholders, or a particular Unitholder or Unitholders,
provided this is in the best financial interests of the Unitholders of the Trust, and is fair and equitable as between classes of Unitholders of the Trust, and as between Unitholders within a class.
(4)The Trustee must reduce or suspend the charging of the Risk Premium Charge, in relation to the Trust as a whole, or a class or classes of Unitholders, or a particular Unitholder or Unitholders as the Trustee considers appropriate, if and to the extent to which the Trustee is:
(a)     directed or requested to do so in writing by a Regulator, including pursuant to any prudential standard made under the SIS Act; or
(b)     ordered to do so by a court, pursuant to a proceeding in which the Trustee is a party.
(5)     The Trustee must notify Unitholders:
(a)     of the maximum amount of the Risk Premium Charge that may be charged (including by reference to a percentage per annum of the Risk SUM in a financial year); and
(b)     at least annually, of the amount of the Risk Premium Charge:
(i)    charged directly to a Unitholder's account; or
(ii)     otherwise, indirectly borne by the Unitholder (for example, by being deducted from the value of the Unitholder's investments or paid out of Trust reserves).
(6) For the avoidance of doubt the payment of the Risk Premium Charge under this clause 19.2A is treated as the payment of a Trust Liability and does not limit the Trustee’s right to reimbursement under clauses 19.1 and 19.2 or the Trustee’s right of indemnity under clause 20.
In this clause 19.2A:
Risk SUM means an amount that is determined as follows:
(i)determine the Risk NAV at the end of each calendar month over the relevant financial year; and
(ii)add up all the amounts determined at (i) above and divide by 12. The result is the Risk SUM.
Risk NAV means the net value of the Trust Property determined by the Trustee after subtracting all Trust Liabilities from the total value of all property and other assets of the Trust.
Mr Blackwell in his written submissions before the hearing suggested that, if (contrary to his primary submissions) the Trust’s Trust Deed were to be varied to insert a new clause 19.2A, the Fund’s Trust Deed should also be varied by inserting a new clause 4.11 in commensurate terms. This was, he submitted, because there was doubt whether the existing provisions of the Fund’s Trust Deed empower the Trustee to charge a Risk Charge and also because it is desirable that, if a Risk Charge is to be charged to the Fund, it be governed by provisions contained in the Fund’s Trust Deed rather than left at large. In due course HPPL adopted Mr Blackwell’s suggestion and sought an additional order varying the Fund’s Trust Deed by inserting a new clause 4.11 in commensurate terms to the terms of proposed new clause 19.2A.
In addition, progressively over the course of the hearing, as a result of modifications proposed by HPPL or Mr Blackwell or suggestions made or views expressed by me, HPPL substantially amended the wording of proposed new clauses 19.2A and 4.11
The final form of new clause 19.2A of the Trust’s Trust Deed proposed by HPPL was as follows:
19.2A Risk Premium Charge
(1)Subject to sub-clauses 19.2A(2) and (3), the Trustee is entitled to charge an annual fee to hold on its own account against the risk of acting as trustee of the Trust (Risk Premium Charge) which, will be an amount equal to 0.06% of the NAV on the last day of the previous financial year.
(2)The Risk Premium Charge will be deducted from the assets of the Trust in the manner and at the times as determined by the Trustee from time to time, and will be paid to the Trustee, subject to:
(a)     such determination being made in the best financial interests of Unitholders of the Trust; and
(b)     such determination being fair and equitable as between classes of Unitholders of the Trust, and as between Unitholders within a class.
(3)A deduction of Risk Premium Charge under clause 19.2A(2) may only be made to the extent that at the date of the deduction, the balance of the Risk Premium Reserve, does not exceed:
(a)     0.15% of the RSE NAV on the last day of the previous financial year; or
(b) such amount, if any, as may be required by or under the Corporations Act 2001 (Cth) or the Superannuation Industry (Supervision) Act 1993 (Cth) requires, or as a Regulator directs the Trustee to hold as Risk Premium Reserve;
whichever is greater.
(4)     The Trustee may determine to:
(a)     despite anything in this clause 19.2A, reduce, waive, postpone or suspend the charging of the Risk Premium Charge (or any part of it) in relation to the Trust as a whole, or a class or classes of Unitholders, or a particular Unitholder or Unitholders, for such period as it determines; and/or
(b)     accept any refund or rebate of the Risk Premium Charge in relation to the Trust as a whole, or a class or classes of Unitholders, or a particular Unitholder or Unitholders;
provided this is in the best financial interests of the Unitholders of the Trust, and is fair and equitable as between classes of Unitholders of the Trust, and as between Unitholders within a class.
(5)The Trustee must reduce or suspend the charging of the Risk Premium Charge, in relation to the Trust as a whole, or a class or classes of Unitholders, or a particular Unitholder or Unitholders as the Trustee considers appropriate, if and to the extent to which the Trustee is:
(a)     directed to do so in writing by a Regulator, including pursuant to any prudential standard made under the SIS Act; or
(b)     ordered to do so by a court, pursuant to a proceeding in which the Trustee is a party.
(6)The Trustee must notify Unitholders at least annually, of the amount of the Risk Premium Charge:
(a)     charged directly to a Unitholder's account; or
(b)     otherwise, indirectly borne by the Unitholder (for example, by being deducted from the value of the Unitholder's investments or paid out of Trust reserves).
(7)     The Trustee must make available to Unitholders, at least annually, information on
(a)     the balance of the Risk Premium Reserve as at the end of the previous financial year;
(b)     net earnings (if any) on the Risk Premium Reserve over the previous financial year;
(c)     any payments made into the Risk Premium Reserve in the previous financial year; and
(d)     any payments made from the Risk Premium Reserve in the previous financial year.
(8)For the avoidance of doubt the payment of the Risk Premium Charge under this clause 19.2A is treated as the payment of a Trust Liability and does not limit the Trustee’s right to reimbursement under clauses 19.1 and 19.2 or the Trustee’s right of indemnity under clause 20.
In this clause 19.2A:
NAV means the net value of the Trust Property determined by the Trustee after subtracting all Trust Liabilities from the total value of all property and other assets of the Trust.
Risk Premium Reserve means the net tangible assets held by the Trustee in its personal capacity, and not as trustee of the Trust, against the risk of acting as trustee of the Trust and other RSEs.
RSE means a registrable superannuation entity under the SIS Act.
RSE NAV means the NAV of the Trust and the net value of the assets less liabilities of any other RSE for which the Trustee acts as trustee, without any double counting.

Clause 1.1 defines the word “Regulator”, which is used in proposed clause 19A.2 as follows:
Regulatormeans the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), the Australian Taxation Office (ATO), the Commissioner of Taxation, the Australian Transaction Reports and Analysis Centre (AUSTRAC) or their successors, State Revenue Offices of each Australian State or Territory or such other regulatory body responsible for administering the laws or any other rules governing superannuation or the availability of income tax concessions to superannuation entities.
The final form of new clause 4.11 of the Fund’s Trust Deed proposed by HPPL was as follows:
4.11 Risk Premium Charge
(1)Subject to sub-clauses 4.11(2) and (3), the Trustee is entitled to charge an annual fee to hold on its own account against the risk of acting as trustee of the Fund (Risk Premium Charge) which, will be an amount equal to 0.06% of the NAV on the last day of the previous financial year.
(2)The Risk Premium Charge will be deducted from the assets of the Fund in the manner and at the times as determined by the Trustee from time to time, and will be paid to the Trustee, subject to:
(a)     such determination being made in the best financial interests of beneficiaries of the Fund; and
(b)     such determination being fair and equitable as between classes of beneficiaries of the Fund, and as between beneficiaries within a class.
(3)A deduction of Risk Premium Charge under clause 4.11(2) may only be made to the extent that at the date of the deduction, the balance of the Risk Premium Reserve does not exceed:
(a)     0.15% of the RSE NAV on the last day of the previous financial year; or
(b) such amount, if any, as may be required by or under the Corporations Act 2001 (Cth) or the Superannuation Industry (Supervision) Act 1993 (Cth) requires, or as a Regulator directs the Trustee to hold as Risk Premium Reserve;
whichever is greater.
(4)     The Trustee may determine to:
(a)     despite anything in this clause 4.11, reduce, waive, postpone or suspend the charging of the Risk Premium Charge (or any part of it) in relation to the Fund as a whole, or a class or classes of beneficiaries, or a particular beneficiary, for such period as it determines; and/or
(b)     accept any refund or rebate of the Risk Premium Charge in relation to the Fund as a whole, or a class or classes of beneficiaries, or a particular beneficiary;
provided this is in the best financial interests of the beneficiaries of the Fund, and is fair and equitable as between classes of beneficiaries of the Fund, and as between beneficiaries within a class.
(5)The Trustee must reduce or suspend the charging of the Risk Premium Charge, in relation to the Fund as a whole, or a class or classes of beneficiaries, or a particular beneficiary as the Trustee considers appropriate, if and to the extent to which the Trustee is:
(a)     directed to do so in writing by a Regulator, including pursuant to any prudential standard made under the SIS Act; or
(b)     ordered to do so by a court, pursuant to a proceeding in which the Trustee is a party.
(6)The Trustee must notify beneficiaries at least annually, of the amount of the Risk Premium Charge:
(a)     charged directly to a beneficiary's account; or
(b)     otherwise, indirectly borne by the beneficiary (for example, by being deducted from the value of the beneficiary's investments or paid out of Fund reserves).
(7)     The Trustee must make available to beneficiaries, at least annually, information on
(a)     the balance of the Risk Premium Reserve as at the end of the previous financial year;
(b)     net earnings (if any) on the Risk Premium Reserve over the previous financial year;
(c)     any payments made into the Risk Premium Reserve in the previous financial year; and
(d)     any payments made from the Risk Premium Reserve in the previous financial year.
(8)For the avoidance of doubt the payment of the Risk Premium Charge under this clause 4.11 is treated as the payment of a Fund Expense and does not limit the Trustee’s right to reimbursement under clause 4.8 or the Trustee’s right of indemnity under clause 5.2.
In this clause 4.11:
NAV means the net value of the Fund determined by the Trustee after subtracting all Fund Expenses from the total value of all property and other assets of the Fund.
Risk Premium Reserve means the net tangible assets held by the Trustee in its personal capacity, and not as trustee of the Fund, against the risk of acting as trustee of the Fund and other RSEs.
RSE means a registrable superannuation entity under the SIS Act.
RSE NAV means the NAV of the Fund and the net value of the assets less liabilities of any other RSE for which the Trustee acts as trustee, without any double-counting.
If the amendments were made, the Board of Directors of HPPL proposed to adopt a Risk Premium Reserve Policy. As a result of modifications to the Trust Deeds, submissions by Mr Blackwell or suggestions made by me, HPPL substantially amended the wording of the proposed policy and produced a revised policy near the end of the hearing (the Policy).
The Policy provides that it is to be reviewed at least annually. It can be amended or rescinded at any time by the Board.
The Policy provides for the creation of a Risk Premium Reserve (the Risk Reserve) in the accounts of HPPL. It provides that the purpose of the Risk Reserve is to cover non-indemnified liabilities where they properly relate to the risks of HPPL acting as trustee of the Fund and the Trust.
The Policy provides that the Board will determine a Risk Premium Target Amount (the Target Amount) of the Risk Reserve. The Policy provides for a methodology to be adopted to set the Target Amount in terms of methodology adopted by PwC in its reports. The Policy provides that the initial Target Amount is $53.9 million as recommended by Ms Nance (see [143] below), which represents 0.078 percent of the combined net assets (avoiding double counting) (consolidated net assets) of the Fund and the Trust. It provides for payments by the Trust and the Fund to HPPL of additional amounts totalling $30.8 million to cover GST and income tax payable on the Risk Charge (called a Risk Premium Levy in the document). This gives a total amount grossed up for GST and income tax of $84.8 million.
The Policy provides for annual Risk Charges of one third of the Target Amount grossed up for GST and income tax payable over three years (representing $28.3 million per annum). The Policy provides for the Target Amount to be reviewed by the Board at least every three years.
The Policy provides for a cap on the amount standing to the credit of the Risk Reserve of 150 per cent of the Target Amount.
The Policy provides that the Risk Reserve may only be applied by HPPL with the authority of the Board.
Rationale for the proposed amendments
The background to the proposed introduction of the Risk Charges is that HPPL only has share capital of $600 and after 1 January 2022 it would not be able to be indemnified by the Fund or the Trust against a liability for a fine or civil or administrative penalty or amount payable under an infringement notice under Commonwealth legislation (collectively a penalty). The rationale for the proposed introduction of the Risk Charges is that the Trustee of the Fund and the Trust would become insolvent if it were to incur a penalty in any significant amount.
If HPPL were to become insolvent, it would be unable to continue as trustee of the Fund or the Trust. Section 120(2) of the Supervision Act defines a “disqualified person” amongst others as a company in respect of which a receiver, manager, administrator or provisional liquidator has been appointed or which is being wound up. Section 126K prohibits a disqualified person from acting as a trustee of a superannuation entity. Sections 133 and 134 empower APRA to remove a disqualified person as trustee of a superannuation entity and appoint a replacement trustee to act as trustee until the vacancy is filled.
At first sight, it might be thought that it would be relatively easy for HPPL to be replaced with an alternative trustee of the Fund or the Trust. However, the evidence establishes that this is not the case and that there would be a very substantial cost and detriment to the Fund and the Trust, and therefore to the members of the Fund and the Trust, in that event.
If HPPL were unable to continue as Trustee of the Fund or the Trust, theoretically there would be two alternatives. First, the appointment of a replacement trustee to take over as the long term trustee of the Fund and the Trust. Secondly, a merger of the Fund with another superannuation fund under the control of a short term replacement trustee and a dismantling of the Trust.
Any replacement trustee (whether long term or short term) would be required to hold an AFS Licence from ASIC and an RSE Licence from APRA. APRA would be unlikely to appoint or license a replacement trustee that had the same directors as a trustee that had become a disqualified person. That power has never been exercised in respect of a large superannuation fund of the order of the Fund or the Trust. Any trustee appointed by APRA would only be an acting trustee in the short term and it would still be necessary to procure a long term replacement trustee if the first alternative could be pursued. Any acting trustee appointed by APRA would charge substantial fees.
Although trustees of existing superannuation funds do not necessarily have significant capital or financial support from their shareholders, it appears likely that a replacement trustee would be required to have substantial capital or financial guarantees in order to obtain an RSE Licence. This would have to be provided in some form by the Fund and the Trust, either by directly providing the capital (see below) or by paying fees of the type proposed by HPPL to create such capital. Even if a replacement trustee could be procured without substantial capital, that trustee would run the same risk of insolvency as would have been run by (and hypothetically materialised for) HPPL. On the evidence adduced before me, it appears unlikely that a long term replacement trustee could be procured in respect of a superannuation fund of the size of the Fund and the Trust.
Ms Nance gave evidence that, even if a long term replacement trustee could be procured to take over as trustee of the Fund, there would be very substantial costs incurred by the Fund. Ms Nance estimated that the direct costs incurred by the Fund and the Trust in this scenario would be approximately $17 million per annum.
Ms Nance gave evidence that, in the second scenario, the direct costs to the Fund and the Trust would be between $86 million and $224 million. In addition to these costs, there would be a potential loss of value of the assets of the Fund and the Trust.
Amounts of proposed Risk Charge and Risk Reserve
Personnel of HPPL (Mr Tassone and HPPL’s Head of Risk and Financial Crime Sunita Toraty) compiled a list of legislative provisions that impose a Commonwealth penalty. They identified 565 such provisions and identified the maximum penalty that might be imposed under each such provision. The provisions principally comprised provisions of the Corporations Act and Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act), the Supervision Act and the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth).
Mr Tassone and Ms Toraty assigned a probability of HPPL breaching each provision during any given year (breach probability) of low (one per cent), moderate (two per cent) or high (five per cent). They assigned one of three levels of penalties being imposed (penalty levels) being low (five per cent), moderate (20 per cent) or high (50 per cent) of the maximum penalty that might be imposed under the legislation (maximum penalty). The assignments were explained by Mr Tassone. The allocation of the percentages to low, moderate or high probabilities of breach and levels of penalty was done by Ms Nance.
Ms Nance applied a scaling factor in respect of certain penalties where the amount of the penalty is based on the number of times something was not done. This applied to approximately one quarter of the total penalties considered. The scaling factor was three, which entailed multiplying the penalty level otherwise determined by three.
Ms Nance in respect of each legislative provision multiplied the maximum penalty by the breach probability, the penalty level and, where applicable, the scaling factor to give a dollar figure for each penalty. She then summed totals for the legislative provisions. This resulted in a total amount of $10.9 million for any given year.
A separate and independent assessment was made in respect of taxation penalties. Taxation penalties were divided into tax shortfall penalties (where the penalty applied is a percentage of the shortpaid taxation, depending on whether the conduct is intentional, reckless or negligent) and operational tax penalties (where the penalty is for late lodgement or reporting errors). Mr Tassone and Ms Toraty assigned a penalty level for tax shortfall penalties based on negligence and assigned a moderate probability of HPPL incurring each of these two types of penalties. Ms Nance then calculated a likely cost of taxation penalties totalling $1.2 million for any given year.
The total of the non-tax and tax penalty assessments was $12.1 million.
In respect of non-tax penalties, the figure of $10.9 million was calculated based on a distribution of actual breaches being equal to the assessed probability of breaches and a distribution of actual penalties being equal to the assessed penalty level for the breaches. Obviously, the distribution of actual breaches and actual penalties could be higher or lower than the assessed probabilities and penalty levels although, all other things being equal, it may be expected that higher incidences would be offset by lower incidences. The figure of $10.9 million assumes such an offsetting and accordingly Ms Nance said that it may be described as being on the 50^th percentile.
Ms Nance made alternative calculations based on percentiles ranging from the 70^th percentile to the 99^th percentile, that is assuming increasingly pessimistic distributions of actual breaches and penalties compared to HPPL’s assessment. These calculations gave adjusted figures of $14 million for the 70^th percentile up to $35 million for the 99^th percentile.
The calculations referred to in the previous paragraphs relating to non-tax penalties were made on the assumption that there is no correlation between outcomes, that is, that the probability of incurring one type of penalty is independent of the probability of incurring another type of penalty.
Ms Nance also made an alternative assumption that there is a correlation between outcomes such that the probability of incurring one type of penalty is higher, to the extent of 33 per cent, if another type of penalty is incurred. These calculations gave adjusted figures of $14 million for the 70^th percentile up to $48 million for the 99^th percentile.
In relation to tax penalties, Ms Nance calculated an alternative cost, based on more pessimistic assessments involving higher probabilities of incurring tax penalties and higher tax shortfalls. This gave a total of $5.8 million in any given year.
The overall result of the most pessimistic assessments for non-tax and tax penalties was $53.9 million in any given year. Ms Nance recommended that HPPL create a Risk Reserve of $53.9 million by charging to the Trust and/or the Fund a Risk Charge. On the assumption that net assets are $70 billion, this equated to 0.078 per cent of consolidated net assets.
Ms Nance proceeded on the basis that the Risk Charge would represent income taxable in the hands of HPPL, taxable at the rate of 30 per cent, and it would also represent revenue on which HPPL would be required to pay goods and services tax (GST) at the rate of 10 per cent. Ms Nance calculated that a gross Risk Charge of $84.7 million would need to be charged by HPPL to the Trust and/or the Fund in order to produce funds of $53.9 million net of GST and income tax.
The application in this matter initially proposed a cap of the Risk Charge of a percentage of net assets of the Trust. HPPL intended to rely on existing provisions in the Fund’s Trust Deed to authorise charging of a Risk Charge to the Fund and proposed when doing so to grant a rebate in favour of the Fund of amounts paid by way of Risk Charge by the Trust referable to members of the Fund (such that the Risk Charge charged to the Fund would represent approximately one per cent of the Risk Charge charged to the Trust). However, I during the hearing expressed the view that there should be a cap on the Risk Charge of a percentage of consolidated net assets of the Trust and the Fund for each trust and there should also be a cap on the balance of the Risk Reserve of a percentage of consolidated net assets of the Trust and the Fund.
Legality of the proposed amendment
Mr Blackwell contends that, if the proposed amendments are made, they would be rendered void by subsections 56(2) and 57(2) of the Supervision Act. The Trustee and APRA take issue with that contention.
If the proposed amendments were rendered void by subsections 56(2) and 57(2) of the Supervision Act, it would be inappropriate to exercise the power conferred by section 59C of the Trustee Act. It is therefore necessary to determine the proper construction of subsection 56(2) of the Supervision Act. It is common ground that the same construction should be given in this respect to subsection 57(2) as is given to subsection 56(2).
Construction of sections 56(2) and 57(2)
Section 56, as amended with effect from 1 January 2022 provides:
56 Indemnification of trustee from assets of entity
(1)Subject to subsections (2) and (2A), a provision in the governing rules of a superannuation entity is void if:
(a)     it purports to preclude a trustee of the entity from being indemnified out of the assets of the entity in respect of any liability incurred while acting as trustee of the entity; or
(b)     it limits the amount of such an indemnity.
(2)A provision in the governing rules of a superannuation entity is void in so far as it would have the effect of exempting a trustee of the entity from, or indemnifying a trustee of the entity against:
(a)     liability for breach of trust if the trustee:
(i)fails to act honestly in a matter concerning the entity; or
(ii)intentionally or recklessly fails to exercise, in relation to a matter affecting the entity, the degree of care and diligence that the trustee was required to exercise; or
(b)     liability for an amount of a criminal, civil or administrative penalty incurred by the trustee of the entity in relation to a contravention of a law of the Commonwealth (including this Act); or
(c)     the payment of any amount payable under an infringement notice (however described) given under a law of the Commonwealth (including this Act); or
(d)     liability for the costs of undertaking a course of education in compliance with an education direction (within the meaning of this Act).
(2A)A provision in the governing rules of a registrable superannuation entity is void in so far as it would have the effect of allowing a trustee of the entity:
(a)     to indemnify itself out of the assets of the entity for any amount expended out of capital of the trustee managed and maintained by the trustee to cover the operational risk of the entity; or
(b)     to indemnify itself out of any assets of the entity that do not form part of a reserve maintained for the purpose of covering the operational risk relating to the entity, any amount that relates to that risk, without first exhausting the reserve and any other financial resources managed and maintained by the trustee to cover the risk.
(3)Nothing in the governing rules of a superannuation entity prohibits a trustee of the entity from seeking advice from any person in respect of any matter relating to performance of the duties or the exercise of the powers of a trustee. A provision in the governing rules that purports to preclude a trustee of the entity from being indemnified out of assets of the entity in respect of the cost of obtaining such advice, or to limit the amount of such an indemnity, is void.

Given the mandatory operation of section 99G of the Supervision Act and the relatively minimal effect on other members of the subsidisation of low balance members, payment out of the Administration Reserve to this limited extent will not result in one class of beneficiaries being unfairly advantaged to the prejudice of another class
I am satisfied that the variation order under section 59C of the Trustee Act proposed to be made will not result in one class of beneficiaries being unfairly advantaged to the prejudice of another class, having regard to the above considerations.
However, the potential for change, including the potential that APRA might issue potential standards addressing the manner in which a fee charged for the purpose of building financial resilience should be borne as between members is an additional reason why the terms of a variation should be limited (in addition to the reasons given at [247] to [248] below).
Allocation between Trust and Fund
HPPL’s original proposal (as explained above) was that the Risk Charge be borne almost exclusively by the Trust such that the Target Amount of $84.7 million would be borne as to $83.7 million by the Trust and $1.0 million by the Fund. This was to be achieved by a discount being given to the Fund of the amount of the Risk Charge imposed against the Trust in respect of Fund members so that the only Risk Charge borne by the Fund would be an amount referable to investments held by Choice Plus members in the Choiceplus investment option. HPPL proposed that the risk charge referable to investments held by Choice Plus members in the Choiceplus investment option would be paid out of the Administration Reserve in respect of a component attributable to the Choiceplus investment option.
MSSL as trustee of Maritime Super had decided to impose its own risk fee on members of Maritime Super and this had been approved by the New South Wales Supreme Court in Application by Maritime Super Pty Ltd atf Maritime Super.[51] That fee is a fee of up to 0.3 per cent of the net assets of the fund for each successive period of three financial years (equivalent to 0.1 per cent per annum). Under HPPL’s original proposal, there would have been a marked difference between the total risk charges borne by members of the Fund and those borne by members of Maritime Super.
[51] [2021] NSWSC 1614.
Members of the Fund (excluding members to the extent that they held the Choiceplus investment option) would have borne the Risk Charge imposed on the Trust at 0.124 per cent of their account balance (over three years) payable to HPPL and would have paid no Risk Charge imposed on the Fund. By contrast, members of Maritime Super would have borne that same Risk Charge imposed on the Trust and in addition would have paid up to 0.30 per cent of their account balance (over three years) payable to MSPL. This would not have been fair and equitable as between those different classes of beneficiaries.
Members of the SMSFs would have borne the same Risk Charge at 0.124 per cent of their account balance (over three years) imposed on the Trust but they would not have needed protection (or the same level of protection) against the insolvency risk of their own trustee because it would be quick and easy for them to replace an insolvent trustee. By contrast members of the Trust need protection against the insolvency risk of their trustee for the reasons given above. Hence members of the Trust would have received a benefit (“free” protection against the insolvency risk of their trust) partially at the expense of members of the SMSFs.
In addition, it was not demonstrated by HPPL that it is practicable or meaningful to determine that any portion of the Fund’s Administration Reserve can be attributed to members holding the Choiceplus investment option. Accordingly, I was not satisfied that the Risk Charge that should be borne by Choice Plus members would not in fact be borne by all members of the Fund such that all other members of the fund would be subsidising the Choice Plus members.
Accordingly, in order to ensure fair and equitable treatment as between different classes of members, it was necessary that each of the Fund and the Trust bear a proportion of the total Risk Charges made by the Trustee.
In recognition of these matters, HPPL amended its proposal to provide for the Fund and the Trust to bear the proposed Risk Charges on the basis of a 50/50 division.
In relation to the ratio of the Risk Charges to be borne as between the Fund and the Trust, if the Trustee were to become insolvent due to imposition of a non-indemnifiable liability, it would have equally adverse effects on beneficiaries of the Fund and the Trust regardless of whether the non-indemnifiable liability were imposed on the Trustee as trustee of the Fund or the Trust. Further, given the hypothetical nature of the non-indemnifiable liabilities that might be imposed, it is difficult to make a clear allocation of such liabilities as between the Fund or the Trust.
In these circumstances, “equity is equality” and the appropriate apportionment of the Risk Charges is 50 per cent to the Trust and 50 per cent to the Fund. This also avoids the subsidisation of Choice Plus members because they would be charged the Risk Charge in respect of the Fund in the same manner as other members.
Given that there are two independent Trust Deeds, the appropriate method of ensuring a 50/50 division is to limit the annual cap and to require, as a condition of making variation orders, an undertaking by HPPL that, subject to liberty to apply, it will exercise its powers and discretions under the new clauses of the Trust Deeds so that, as far as is reasonably practicable for each financial year, the dollar amount of the Risk Charge for the Fund and the Trust will represent 50 per cent and 50 per cent respectively of the total dollar amount of the Risk Charge credited to the Risk Reserve for that financial year.
Conclusion
I am satisfied that the variation orders under section 59C of the Trustee Act proposed to be made in respect of the Fund and the Trust will not result in one class of beneficiaries of the Fund or the Trust being unfairly advantaged to the prejudice of another class of the Fund or the Trust respectively.
Preserving spirit and minimising disturbance
The next prerequisites are that the variation accords 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 for the variation. These two prerequisites can be considered in conjunction.
I accept that the original spirit of the Fund and the Trust was that the Trustee would act gratuitously and would not charge fees to the Fund. For the reasons given above, it is necessary to depart from the original spirit of the Fund and the Trust and the reference in section 59C to according “as far as reasonably practicable” with the spirit of the trust recognises that a variation will often entail some departure from the spirit of the trust.
The proposed amendment would not introduce any profit fee being charged by the Trustee to the Fund or the Trust. It is necessary in the interests of the beneficiaries to vary the Trust Deeds of the Fund and the Trust to allow the charging of a Risk Charge.
These two prerequisites are addressed by having regard to the quantum of the proposed Risk Charge and the terms of the variation addressed below.
Not tax motivated
The final prerequisite is that the application is not substantially motivated by a desire to avoid or reduce the incidence of tax.
This prerequisite is established. There is no suggestion of tax minimisation.
Quantum of Risk Charge
Caps and ceilings
The cap on the quantum of the Risk Charge originally proposed was 0.35 per cent per annum of the net assets of the Trust when it was only proposed to amend the Trust’s Trust Deed. Upon HPPL amending the proposal to amend both the Trust’s Trust Deed and the Fund’s Trust Deed, the proposed cap became 0.35 per cent per annum of the consolidated net assets of the Trust and Fund.
Mr Blackwell submitted that the proposed annual cap is too high. HPPL during the course of the hearing revised the proposed cap for each trust to 0.06 per cent per annum of the consolidated net assets of the Trust and Fund.
As at 30 June 2021 the consolidated net assets of the Trust and Fund were $68.8 billion, which would have resulted on the revised basis in an annual cap for both trusts combined based on 30 June 2021 figures of $83 million. By contrast, the amount proposed in the Policy to be charged annually over the first three years was $28 million.
I address the annual cap below in conjunction with consideration of the monetary ceiling of the Risk Reserve.
HPPL originally submitted that there should not be a monetary ceiling of the Risk Reserve included in the Trust Deeds but rather this should be left to be determined by HPPL and addressed by the Policy. The Policy provides that there be a monetary ceiling of the Risk Reserve of 150 per cent of the Target Amount. On the basis of the initial Target Amount of 0.124 per cent of consolidated net assets of the Fund and the Trust, this equates to 0.186 per cent of consolidated net assets of the Fund and the Trust or $128 million.
Mr Blackwell submitted that the monetary ceilings of the Risk Reserves should be included in the Trust Deeds and that the monetary ceiling proposed in the Policy is too high. HPPL during the course of the hearing amended the proposed new clauses to include monetary ceiling of 0.15 per cent of the consolidated net assets of the Trust and Fund.
As summarised at [108] and following above, HPPL and PwC based the proposed Target Amount percentage on an analysis in relation to approximately 565 non-tax legislative provisions that impose a Commonwealth penalty and a separate analysis in relation to taxation penalties.
On the one hand, this analysis is very pessimistic. Given HPPL’s past record of no penalties at all having been imposed on it over the last 33 years (aside from one infringement notice penalty) and its risk management policies and practices, the collective breach probabilities assigned are unlikely to be reflected in actual experience in the imminent future. Given the vast number of Commonwealth legislative provisions capable of giving rise to a penalty, it becomes artificial to assess the probability of a contravention of each provision and then effectively multiply the average breach probability and penalty by 565 (especially given that many provisions, such as those contained in the Corporations Act and the ASIC Act, are in the alternative to each other). The assessment of penalty levels is also pessimistic. Making the assessment based on the 99th percentile is also pessimistic. Grossing up the Risk Charges for the full amount of income tax and GST is also pessimistic given the prospect of tax deductions and input tax credits for the Fund and the Trust. I observe that the analysis is virtually entirely theoretical because the lack of previous imposition of penalties on HPPL or other trustees of cooperative funds means that there is virtually no empirical data.
On the other hand, given the lack of empirical data, it is difficult to make an alternative assessment of what would be an adequate Risk Charge to provide a sufficient level of assurance against insolvency of the Trustee with its detrimental consequences for the Fund and the Trust. The maximum penalty that can be imposed for some of the non-indemnifiable penalties is extremely high. There is always of course a theoretical (albeit remote) risk of a catastrophic series of contraventions by the Trustee. There is a need to vary the Trust Deed immediately before any useful empirical data can be compiled.
The appropriate course is to vary the Trust Deeds of each of the Fund and the Trust to empower the charging of a Risk Charge to each trust at 0.03 per cent per annum (making a total for both of 0.06 per cent per annum) of the consolidated net assets of the Fund and the Trust but for the time being to limit the monetary ceiling based on a balance in the proposed Risk Reserve of 0.06 per cent of the consolidated net assets of the Fund and the Trust. This will enable HPPL to charge Risk Charges over the next 12 months of the amount that it proposes in the Policy over that period. This will enable the position to be reviewed after 12 months.
In the meantime, the experience of HPPL and of other trustees of cooperative superannuation funds will provide some empirical data on the basis of which the quantum of the Risk Charges and monetary ceiling can be assessed more meaningfully. In addition, the possibility of captive insurance can be explored over that period and it can be ascertained whether the Commonwealth makes any amendments to the regulatory regime (such as those suggested above). HPPL can in due course exercise liberty to apply to seek an increase in the monetary ceiling to the amount that it has proposed or otherwise.
Determination of quantum of fee charged
The question whether the Risk Charges actually charged should be less than 0.03 per cent per annum of the consolidated net assets of the Fund and the Trust for each trust (subject to the ceilings) is a decision to be made by the Trustee.
I accept that the Trustee and its directors will be in a position of potential conflict of duty and interest because their duty to beneficiaries will be to minimise the amount of the Risk Charges and their interest may be perceived to be to maximise it. In this respect, the beneficiary paramountcy covenants imputed by sections 52(2)(d)(i) to (iii) and 52A(2)(d) (i) to (iii) of the Supervision Act will require the Trustee and the board to give paramountcy to beneficiary interests in determining the amount of the Risk Charges. Further, the annual cap and the ceilings will provide explicit constraints on the amount of the Risk Charges.
It would be preferable if all conflicts between duty and interest could be avoided but, as sections 52(2)(d)(i) to (iii) and 52A(2)(d) (i) to (iii) of the Supervision Act recognise, some conflicts are inevitable and must be managed in the best manner reasonably practicable by requiring paramountcy to be given to the interests of the beneficiaries.
Terms of the proposed new clauses
Several issues arise concerning the terms of proposed new clauses 19A.4 and 4.11.
Payment out of Risk Reserve
Under HPPL’s proposal, the question whether an amount standing to the credit of the Risk Reserve in the accounts of HPPL is to be paid out in discharge of a non-indemnifiable penalty would be a decision to be made by HPPL by its board of directors.
Mr Blackwell submits that it would be more appropriate that that decision be made by a third party trustee comprising representatives of the members of the Fund and the Trust (as well perhaps as representatives of the Trustee). He points to the potential conflict of interest of the Trustee in making a decision to discharge its own liability.
I understand and accept the rationale for Mr Blackwell’s suggestion. However, there are several difficulties associated with adopting his suggestion. First, it would be necessary to draft a trust deed defining the trust on which the third party would hold the funds. If it were drafted in terms that recognise that the Fund and the Trust have a prospective interest in the funds, it may result in the application of subsection 56(2) of the Supervision Act and, if not, it would partly defeat the purpose of using a third party trust. Secondly, it would be a complex process for the members to elect member representatives given that the members of the Fund, Maritime Super and the SMSFs number over 1.3 million.
More importantly, it is difficult to conceive of circumstances in which a third party trustee would not choose to pay the penalty imposed on the Trustee because it may be expected that the consequences of non-payment will be more detrimental to the members than the consequences of payment. If payment were not made and the Trustee were placed in insolvency administration, it may be that the Commonwealth would pursue the third party trust for payment.
Overall, payment out of the Risk Reserve should be a matter for the Trustee. This accords with its nature.
HPPL offered to give an undertaking to the Court, as a condition of making variation orders, that unless and until APRA introduces any prudential requirement or there is legislation that specifically governs the quantum of the Risk Reserve or the mechanism for funding of that reserve, it will review on or before 30 June 2023 and on at least a triennial basis thereafter the quantum of the Risk Reserve and Risk Charges charged to the trusts for the purpose of the Trustee continuing to be satisfied that the quantum of the Risk Reserve and the charging of the Risk Charge remain appropriate in light of the risks of acting as trustee or trustee director of the trusts, the financial position of the Trustee and the assets and liabilities of the trusts of which the Trustee is trustee.
Penalties imposed on directors
Mr Blackwell submits that the Trustee should not be permitted to make payments out of the Risk Reserve in discharge of a penalty imposed on a director as opposed to a penalty imposed on the Trustee itself. HPPL submits that this restriction should not be imposed.
Mr Elia in his affidavit said that the board of HPPL is concerned that the inability of HPPL to pay a non-indemnifiable penalty, and the consequent personal exposure of a director of HPPL, would likely hinder its ability to attract high-quality directors. This addressed potential liability of directors for insolvent trading by the company but did not address liability of directors for their own conduct.
Ms Emslie in her affidavit expressed concerns about becoming a director of a superannuation trustee if there were not adequate mitigation in relation to the risks of insolvency of the trustee. However, in her oral evidence, she said that, if the directors were covered by a policy of directors and officers insurance of the type held by HPPL, that would assuage her concerns in respect of her own liability.
Objectively assessed, the risk of a penalty being imposed on a director that is not covered by HPPL’s directors and officers insurance policy and in respect of which HPPL could legally use the Risk Reserve to pay the penalty is very small.
First, no penalty has ever been imposed on a director of HPPL, nor does it appear that any penalty has ever been imposed on a director of a trustee of a cooperative fund.
Secondly, if a regulatory authority decided to bring a criminal or civil penalty proceeding or impose or issue an administrative penalty or infringement notice in respect of a cooperative fund, it is inherently much more likely to issue it against the corporate trustee rather than against a director (either instead of or as well as against the corporate trustee). Proceeding against a corporate trustee is likely to serve the regulatory purpose. In addition, it will usually be easier to establish a contravention by a trustee (in respect of which there may be no mental element or a more easily established mental element) rather than by a director (where not only the physical elements but also a higher level mental element will often have to be established).
Thirdly HPPL would be precluded in any event from paying a penalty imposed on a director if the liability for the penalty did not arise out of good faith. Subsection 199A(2) of the Corporations Act provides:
(2)A company or a related body corporate must not indemnify a person (whether by agreement or by making a payment and whether directly or through an interposed entity) against any of the following liabilities incurred as an officer or auditor of the company:
(a)     a liability owed to the company or a related body corporate;
(b)     a liability for a pecuniary penalty order under section 1317G or a compensation order under section 961M, 1317H, 1317HA, 1317HB, 1317HC or 1317HE;
(c)     a liability that is owed to someone other than the company or a related body corporate and did not arise out of conduct in good faith.
and subsection 199C(2) provides:
(2)Anything that purports to indemnify or insure a person against a liability, or exempt them from a liability, is void to the extent that it contravenes section 199A or 199B.

Fourthly, if HPPL would not be precluded by section 199A from paying a penalty, it is likely that the penalty would be covered by HPPL’s directors and officers insurance policy.
On the one hand, these considerations indicate that the retention and attraction of suitably qualified and experienced directors may not be problematic if payment in discharge of a penalty imposed on a director were precluded. On the other hand, these considerations indicate that there is no real potential that large amounts will be paid out of the Risk Reserve on account of penalties being imposed on directors if that is not precluded.
The considerations are finely balanced. However, as in the case of the proposal for a third party trustee to determine payment out of the Risk Reserve, attempting to impose a constraint on payment of a penalty imposed against a director would involve complexity and potentially attract the application of subsection 56(2). An additional consideration is that the Trustee is already invested with the power and responsibility of managing over $70 billion of members’ funds. It is somewhat incongruous not to trust it with the power and responsibility of managing a Risk Reserve comprising a very small fraction of that amount.
On balance, payment out of the Risk Reserve should be a matter for the Trustee. This accords with its nature.
Payments precluded by section 199A of the Corporations Act
Mr Blackwell submits that a provision should be inserted into each of proposed clauses 19A.2 and 4.11 to prohibit the use by the Trustee of moneys received as a result of charging the Risk Charge to pay any non-indemnifiable penalties arising from the Trustee or any director or officer committing any deliberately fraudulent, dishonest or malicious act or any director or officer gaining any personal profit or advantage to which they were not legally entitled.
HPPL submits that such a provision should not be included in the Trust Deeds. HPPL offered to give an undertaking to the Court, as a condition of making variation orders, that the Risk Reserve would not be used to pay a liability incurred by a director or officer of the Trustee to the extent that the Trustee must not indemnify that person under section 199A of the Corporations Act, including where such liability did not arise out of conduct in good faith.
Insofar as the Trustee itself incurs a liability to pay a non-indemnifiable penalty, the beneficiaries of the Trust and the Fund would suffer the same detriment due to the insolvency of the Trustee if the trustee cannot pay the penalty, regardless of whether the Trustee’s liability arose out of deliberately fraudulent, dishonest or malicious conduct. To impose the proposed limitation would defeat the purpose of creation of a Risk Reserve and charging a Risk Charge.
Insofar as a director or officer incurs a liability to pay a non-indemnifiable penalty arising out of deliberately fraudulent, dishonest or malicious conduct, section 199A of the Corporations Act (extracted at [289] above) already precludes payment by the company of a penalty that did not arise out of conduct in good faith. If the penalty arises out of deliberately fraudulent, dishonest or malicious conduct, clearly it would not arise out of conduct in good faith. Given the legislative prohibition, is not necessary to include an additional prohibition in the Trust Deeds.
Insofar as a director or officer incurs a liability to pay a non-indemnifiable penalty arising out of their gaining any personal profit or advantage to which they were not legally entitled, it is difficult to conceive of circumstances in which payment of the penalty would not be precluded by section 199A of the Corporations Act on the basis that the penalty did not arise out of conduct in good faith. In addition, for the reasons given above, including constraints in the Trust Deeds on payment out of the Risk Reserve would entail a risk of attracting the application of subsection 56(2) of the Supervision Act.
On balance, payment out of the Risk Reserve should be a matter for the Trustee.
Constraints on dividends and winding up
New clause 92.1 of the Constitution would prohibit (except on winding up but then subject to clause 93) the distribution, transfer or payment of any income or capital directly or indirectly to or for the benefit of shareholders and new clause 93.4 would prohibit use of the Risk Reserve for the benefit of shareholders, including on a winding up.
New clause 112.1 of the Constitution would prevent any variation of the Constitution that may affect clause 92 or 93.4 except a decision complying with clause 3.2 and approved by all shareholders or otherwise necessary to ensure that HPPL is able to comply with the Relevant Laws.
Clause 112.1 would leave open the possibility of an amendment to the Constitution that would allow payment to shareholders out of the Risk Reserve. I determined that an undertaking should be required from HPPL that no amount of the Risk Reserve will be paid to shareholders by way of dividend, return of capital or otherwise.
Definition of term for consolidated net assets
Under HPPL’s original proposal, the annual cap on the Risk Charge was specified as a percentage of “Risk SUM”, which in turn was defined in terms of “Risk NAV”. Risk NAV was defined to be the net value of the Trust Property after subtracting all Trust Liabilities and Risk SUM was defined to be the average of Risk NAV calculated at the end of each calendar month over the relevant financial year.
Mr Blackwell submitted that the definition of Risk SUM was not practical because it could only be ascertained in retrospect. He proposed an amendment such that it be calculated in respect of the previous financial year. In due course HPPL adopted this suggestion (and also simplified the definition) so that Risk SUM (renamed RSE NAV) is calculated simply on the last day of the previous financial year.
In addition, when it was decided that the Risk Charge should be allocated on a 50/50 basis as between the Fund and the Trust, HPPL redefined RSE NAV so that it refers to the consolidated net assets of the Fund and the Trust.
Information to members
Proposed clause 19A.2(5) of the Trust’s Trust Deed as originally formulated required to the Trustee to notify beneficiaries at least annually of the amount of the Risk Charge charged directly to a beneficiary's account or indirectly borne by beneficiary.
I formed the view that the Trustee should also be required to make available to beneficiaries at least annually information on:
(a)the balance of the Risk Reserve as at the end of the previous financial year;
(b)net earnings (if any) on the Risk Reserve over the previous financial year;
(c)any payments made into the Risk Reserve in the previous financial year;
(d)any payments made from the Risk Reserve in the previous financial year; and
(e)details of the contravention giving rise to the penalty comprising the liability where applicable.
HPPL inserted proposed clause 19.2A(6) of the Trust’s Trust Deed and proposed clause 4.11(6) of the Fund’s Trust Deed to require such annual disclosure of the matters in paragraphs (a) to (d). Such disclosure should also be required of the matter in paragraphs (e).
Discretion
Each of the prerequisites for making a variation order in respect of the Fund and the Trust on the terms sought subject to the changes referred to above is satisfied.
The Trustee has power to amend each Trust Deed, subject to constraints within and outside the Trust Deeds. However, as the proposed amendments involve the charging of a fee by the Trustee to the Fund and the Trust, it is appropriate that the Court determine whether the Trust Deeds should be amended and if so their terms rather than the Trustee (assuming that the Trustee would have power to make these particular amendments, which need not be decided).
It is appropriate to exercise the discretion under section 59C of the Trustee Act to vary the Trust Deeds of the Fund and the Trust.
Conclusion
For the above reasons, I made the following orders:
1Pursuant to s 59C of the Trustee Act 1936 (SA), the trust deed in respect of the Hostplus Pooled Superannuation Trust is varied to insert a new provision in the terms of the document appearing at Annexure A of these orders.
2Pursuant to s 59C of the Trustee Act 1936 (SA), the trust deed in respect of the Hostplus Superannuation Fund is varied to insert a new provision in the terms of the document appearing at Annexure B of these orders.
3Liberty to apply to any party to further vary the Trust Deed.
4The Applicant’s and the Respondent’s costs of the proceeding are to be met by the Applicant from the assets of the Hostplus Superannuation Fund and the Hostplus Pooled Superannuation Trust in equal proportions.
Annexure A
19.2A Risk Premium Charge
(1)Subject to sub-clauses 19.2A(2) and (3), the Trustee is entitled to charge an annual fee to hold on its own account against the risk of acting as trustee of the Trust and other RSEs (Risk Premium Charge) which, will be an amount equal to 0.03% of the RSE NAV on the last day of the previous financial year.
(2)The Risk Premium Charge will be deducted from the assets of the Trust in the manner and at the times as determined by the Trustee from time to time, and will be paid to the Trustee, subject to:
(a)     such determination being made in the best financial interests of Unitholders of the Trust; and
(b)     such determination being fair and equitable as between classes of Unitholders of the Trust, and as between Unitholders within a class.
(3)A deduction of Risk Premium Charge under clause 19.2A(2) may only be made to the extent that at the date of the deduction, the balance of the Risk Premium Reserve, does not exceed:
(a)     0.06% of the RSE NAV on the last day of the previous financial year; or
(b)     such amount, if any, as may be required by or under the Corporations Act 2001 (Cth) or the Superannuation Industry (Supervision) Act 1993 (Cth) requires, or as a Regulator directs the Trustee to hold as Risk Premium Reserve;
whichever is greater.
(4)     The Trustee may determine to:
(a)     despite anything in this clause 19.2A, reduce, waive, postpone or suspend the charging of the Risk Premium Charge (or any part of it) in relation to the Trust as a whole, or a class or classes of Unitholders, or a particular Unitholder or Unitholders, for such period as it determines; and/or
(b)     accept any refund or rebate of the Risk Premium Charge in relation to the Trust as a whole, or a class or classes of Unitholders, or a particular Unitholder or Unitholders;
provided this is in the best financial interests of the Unitholders of the Trust, and is fair and equitable as between classes of Unitholders of the Trust, and as between Unitholders within a class.
(5)The Trustee must reduce or suspend the charging of the Risk Premium Charge, in relation to the Trust as a whole, or a class or classes of Unitholders, or a particular Unitholder or Unitholders as the Trustee considers appropriate, if and to the extent to which the Trustee is:
(a)     directed to do so in writing by a Regulator, including pursuant to any prudential standard made under the SIS Act; or
(b)     ordered to do so by a court, pursuant to a proceeding in which the Trustee is a party.
(6)The Trustee must notify Unitholders at least annually, of the amount of the Risk Premium Charge:
(a)     charged directly to a Unitholder's account; or
(b)     otherwise, indirectly borne by the Unitholder (for example, by being deducted from the value of the Unitholder's investments or paid out of Trust reserves).
(7)     The Trustee must make available to Unitholders, at least annually, information on:
(a)     the balance of the Risk Premium Reserve as at the end of the previous financial year;
(b)     net earnings (if any) on the Risk Premium Reserve over the previous financial year;
(c)     any payments made into the Risk Premium Reserve in the previous financial year;
(d)     any payments made from the Risk Premium Reserve in the previous financial year; and
(e)     details of the contravention giving rise to the penalty comprising the liability where applicable.
(8)For the avoidance of doubt the payment of the Risk Premium Charge under this clause 19.2A is treated as the payment of a Trust Liability and does not limit the Trustee’s right to reimbursement under clauses 19.1 and 19.2 or the Trustee’s right of indemnity under clause 20.
In this clause 19.2A:
"NAV" means the net value of the Trust Property determined by the Trustee after subtracting all Trust Liabilities from the total value of all property and other assets of the Trust.
"Risk Premium Reserve" means the net tangible assets held by the Trustee in its personal capacity, and not as trustee of the Trust, against the risk of acting as trustee of the Trust and other RSEs.
"RSE" means a registrable superannuation entity under the SIS Act.
"RSE NAV" means the NAV of the Trust and the net value of the assets less liabilities of any other RSE for which the Trustee acts as trustee, without any double counting.
Annexure B
4.11 Risk Premium Charge
(1)Subject to sub-clauses 4.11(2) and (3), the Trustee is entitled to charge an annual fee to hold on its own account against the risk of acting as trustee of the Fund and other RSEs (Risk Premium Charge) which will be an amount equal to 0.03% of the RSE NAV on the last day of the previous financial year.
(2)The Risk Premium Charge will be deducted from the assets of the Fund in the manner and at the times as determined by the Trustee from time to time, and will be paid to the Trustee, subject to:
(a)     such determination being made in the best financial interests of beneficiaries of the Fund; and
(b)     such determination being fair and equitable as between classes of beneficiaries of the Fund, and as between beneficiaries within a class.
(3)A deduction of Risk Premium Charge under clause 4.11(2) may only be made to the extent that at the date of the deduction, the balance of the Risk Premium Reserve, does not exceed:
(a)     0.06% of the RSE NAV on the last day of the previous financial year; or
(b)     such amount, if any, as may be required by or under the Corporations Act 2001 (Cth) or the Superannuation Industry (Supervision) Act 1993 (Cth) requires, or as a Regulator directs the Trustee to hold as Risk Premium Reserve;
whichever is greater.
(4)     The Trustee may determine to:
(a)     despite anything in this clause 4.11, reduce, waive, postpone or suspend the charging of the Risk Premium Charge (or any part of it) in relation to the Fund as a whole, or a class or classes of beneficiaries, or a particular beneficiary, for such period as it determines; and/or
(b)     accept any refund or rebate of the Risk Premium Charge in relation to the Fund as a whole, or a class or classes of beneficiaries, or a particular beneficiary;
provided this is in the best financial interests of the beneficiaries of the Fund, and is fair and equitable as between classes of beneficiaries of the Fund, and as between beneficiaries within a class.
(5)The Trustee must reduce or suspend the charging of the Risk Premium Charge, in relation to the Fund as a whole, or a class or classes of beneficiaries, or a particular beneficiary as the Trustee considers appropriate, if and to the extent to which the Trustee is:
(a)     directed to do so in writing by a Regulator, including pursuant to any prudential standard made under the SIS Act; or
(b)     ordered to do so by a court, pursuant to a proceeding in which the Trustee is a party.
(6)The Trustee must notify beneficiaries at least annually, of the amount of the Risk Premium Charge:
(a)     charged directly to a beneficiary 's account; or
(b)     otherwise, indirectly borne by the beneficiary (for example, by being deducted from the value of the beneficiary 's investments or paid out of Fund reserves).
(7)     The Trustee must make available to beneficiaries, at least annually, information on:
(a)     the balance of the Risk Premium Reserve as at the end of the previous financial year;
(b)     net earnings (if any) on the Risk Premium Reserve over the previous financial year;
(c)     any payments made into the Risk Premium Reserve in the previous financial year;
(d)     any payments made from the Risk Premium Reserve in the previous financial year; and
(e)     details of the contravention giving rise to the penalty comprising the liability where applicable.
(8)For the avoidance of doubt the payment of the Risk Premium Charge under this clause 4.11 is treated as the payment of a Fund Expense and does not limit the Trustee’s right to reimbursement under clause 14.8 or the Trustee’s right of indemnity under clause 5.2.
In this clause 4.11:
"NAV" means the net value of the Fund determined by the Trustee after subtracting all Fund Expenses from the total value of all property and other assets of the Fund.
"Risk Premium Reserve" means the net tangible assets held by the Trustee in its personal capacity, and not as trustee of the Fund, against the risk of acting as trustee of the Fund and other RSEs.
"RSE" means a registrable superannuation entity under the SIS Act.
"RSE NAV" means the NAV of the Fund and the net value of the assets less liabilities of any other RSE for which the Trustee acts as trustee, without any double counting.

Fund	Trust	Consolidated
Fund members Choice Plus	$0.8	$0.8
Fund members other	$60.4	$61.9	$61.9
Maritime Super	$6.1	$6.1
SMSFs	$0.2	$0.2
Total	$61.2	$68.2	$69.0

[2022] SASC 59

17 June 2022