Re Legal Super Pty Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL COURT

COMMERCIAL LIST

S CI 2022 04286

IN THE MATTER of an Application by Legal Super Pty Ltd (ABN 37 004 455 789) (in its capacity as trustee for Legalsuper (ABN 60 346 078 879))

LEGAL SUPER PTY LTD (ABN 37 004 455 789) (IN ITS CAPACITY AS TRUSTEE FOR LEGALSUPER (ABN 60 346 078 879))

Plaintiff

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JUDGE:	Lyons J
WHERE HELD:	Melbourne
DATE OF HEARING:	28 February and 16 August 2023
DATE OF JUDGMENT:	20 September 2023
CASE MAY BE CITED AS:	Re Legal Super Pty Ltd
MEDIUM NEUTRAL CITATION:	[2023] VSC 545

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EQUITY – Judicial advice – Supreme Court (General Civil Procedure) Rules 2015 (Vic) r 54.02 – Whether trustee justified in amending trust deed to add discretionary power to charge a fee for provision of services to the fund – Whether proposed amendment is within power to amend in the trust deed – Whether trustee would not be acting improperly in amending trust deed – Superannuation Industry (Supervision) Act 1993 (Cth) ss 56(2) and 57(2) – Advice provided.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Ms C Harris KC with Mr L Molesworth	Mills Oakley
Appearing as amicus curiae appointed by the Court	Ms G Crafti	Clyde & Co
For the Australian Prudential Regulation Authority (appearing as amicus curiae)	Mr B Doyle KC with Mr D Allen	APRA

HIS HONOUR:

1. INTRODUCTION AND SUMMARY

This proceeding relates to the superannuation fund known as Legalsuper (ABN 60 346 078 879) (the Fund). The Fund is a regulated superannuation fund within the meaning of s 19 of the Superannuation Industry (Supervision) Act 1993 (Cth) (the SIS Act). The Fund was established by a deed of trust dated 6 March 1989 with the current terms of the trust deed consolidated by a deed of consolidation dated 4 July 2016 (the Trust Deed).

The plaintiff is the trustee of the Fund (the plaintiff or the Trustee). The Trustee seeks judicial advice from the Court pursuant to r 54.02 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) (Rules). The principal issue on which advice is sought is whether the Trustee is justified in exercising its powers under cl 50.2 of the Trust Deed to amend the Trust Deed in a way that gives the Trustee the power to determine a fee payable from the Fund for acting as trustee and which the Trustee determines is fair and reasonable (proposed amendment). The need for such a fee (and the purpose of the proposed amendment) arises as a result of:

(1) the fact that to date, like many industry superannuation fund trustees, the Trustee has not charged fees for services and has not built up any capital reserve to meet liabilities that may be imposed on the Trustee or its directors; and

(2) amendments to ss 56(2) and 57(2) of the SIS Act (which came into effect on 1 January 2022) (the SIS amendments) which impose restrictions on the indemnification of trustees and their directors from trust assets for certain liabilities.

Most relevantly, the restrictions on indemnification under the SIS amendments apply to:

(1) criminal, civil or administrative penalties incurred by a trustee in relation to a contravention of a law of the Commonwealth; or

(2) an amount payable under an infringement notice given to a trustee under a law of the Commonwealth,

(a statutory liability or statutory liabilities).

This issue is of some importance to members of the Fund (the Members), the Trustee and its directors. At present the capital of the plaintiff is $16. As a result, the imposition of any statutory liability after 1 January 2022 may cause the plaintiff to be insolvent with the result that it could no longer remain as trustee: the amount of any such liability may be substantial. Further, any statutory liability might expose the directors of the Trustee to personal liability for which they may not be able to claim indemnity. This may result in the resignation of one or more of the current directors and the inability to obtain suitably qualified replacements.

For the purpose of assisting the Court in addressing this issue, the Australian Prudential Regulation Authority (APRA), an independent statutory body which, relevantly, supervises superannuation funds (other than self-managed funds), appeared as Amicus Curiae. Further, in light of the fact that none of the Members were joined as parties to proceeding, I determined to appoint Ms Gabi Crafti of counsel as an Amicus Curiae (the Amicus) to critically review the material of the plaintiff in order to assist the Court in determining whether it is appropriate for the Court to give the judicial advice sought and to draw to the Court’s attention any matters which might tend against giving that advice. I wish to record the great assistance I have received from the material and submissions of those appearing, in particular the Amicus.

I heard argument over two days on 28 February and 16 August 2023. In the course of argument two principal issues arose. The first issue is whether the proposed amendment is within the power to amend the Trust Deed contained in cl 50.2 (the power issue). The power issue involved considering the construction (i.e. meaning and effect) of that clause. The second issue is whether the Court could be satisfied that, in exercising the power to introduce the proposed amendment, the Trustee was not acting improperly (the propriety issue).

In determining this application, I am conscious that I have not been asked for a declaration as to the proper construction of cl 50.2 but whether the Trustee is justified in exercising its power in the circumstances to make the proposed amendment. Further, I am conscious that I have been asked to advise on the exercise of the amendment power and not the subsequent exercise of the fee charging power arising by reason of the proposed amendment. Nevertheless, in providing the advice sought, it has been necessary to consider the purpose or intention of the proposed amendment and the way in which the fee charging power is likely to be exercised. Both of these matters were the subject of evidence and submissions before me.

As to the power issue, there were differences between the Trustee on one hand, and the Amicus and APRA on the other, as to the proper construction of cl 50.2. As to the propriety issue, the Amicus and APRA were satisfied that in exercising the power to introduce the amendment, the Trustee was not acting improperly. However, APRA submitted that the plaintiff should alter its constitution to specify that its object is to act as trustee of the Fund.

For the reasons that follow, I have determined that I should give the Trustee the judicial advice it seeks.

The Trustee originally relied on five affidavits in support of its application:

(1) an affidavit of Andrew James Proebstl (the Chief Executive Officer of the Trustee from January 2003 to early November 2022) sworn 20 October 2022;

(2) three affidavits of Mark Albert Bland (the primary solicitor for the Trustee who has 20 years’ experience working in superannuation and financial services) affirmed 21 October 2022, 22 February 2023 and 23 February 2023; and

(3) two affidavits of Trevin John Erichsen (the Chief Operating Officer and, from early November 2022, the interim Chief Executive Officer of the Trustee) sworn 16 December 2022 and 3 February 2023.

At the conclusion of argument at the first hearing on 28 February 2023, the Trustee indicated it wished to file further material. As a result the Trustee relied upon two further affidavits of Mr Erichsen sworn 20 April 2023 and 11 August 2023 at the second hearing.

The Trustee claimed that a number of the exhibits to these affidavits were confidential and sought orders that these exhibits, or relevant parts thereof, be kept confidential pursuant to r 28A.06 of the Rules. I made interim confidentiality orders in respect of limited parts of the affidavit material and exhibits for the purpose of the hearings. I informed the parties that I would make final orders in relation to confidentiality following the delivery of these reasons. I circulated a draft of these reasons to the parties to ensure they do not disclose confidential information of the Trustee.

2. THE POWER TO AMEND AND THE PROPOSED AMENDMENT

The power to amend is contained in cl 50.2 of the Trust Deed (the amendment power). It provides:

The Trustee may by deed or resolution amend, add to, delete or replace all or any of the provisions of this Deed (including this Clause) as the Trustee sees fit and any such amendment, addition, deletion or replacement shall take effect on the date such deed or resolution is executed or made or such earlier or later date as is specified therein for that purpose PROVIDED THAT no amendment, addition, deletion or replacement made pursuant to this sub-clause shall take effect in respect of a Member or Beneficiary without that person’s consent (whether given before on or after the date such deed or resolution is executed or made) UNLESS:
(a) in the opinion of the Trustee such amendment, addition, deletion or replacement will not reduce the amount of the benefits presently or prospectively payable in respect of such Member or Beneficiary to the extent that such benefits have accrued in respect of the period prior to the date such deed or resolution is executed or made to the extent that such benefits are secured by the assets of the Fund as at such date; or
(b) such persons (if any) as are required by the Superannuation Law to consent to such amendment addition deletion or replacement, give their consent in order to comply with any relevant requirement of the Superannuation Law, whether such consent is given on or after the said date; or
(c) the relevant Regulator approves such amendment, addition, deletion or replacement.

In these reasons, I will refer to:

(1) the clause in cl 50.2 commencing ‘PROVIDED THAT’ and ending ‘or made’ as the proviso; and

(2) to each of the exceptions in cl 50.2(a)-(c) as exception (a), (b) and (c) respectively.

The Trustee proposes to exercise the amendment power to amend cl 3.10(d) of the Trust Deed. Clause 3.10 is headed ‘Remuneration of the Trustee’. Clause 3.10(a) provides:

As compensation for services rendered in relation to the Fund, the Trustee will be paid fees from the Fund in such amounts, and at such intervals, as may be determined in accordance with this Clause 3.10.

Clause 3.10(b) then provides for the fees which the Trustee will be entitled to receive in respect of each director of the Trustee (other than an independent director). Clause 3.10(c) then provides for the fees which the Trustee will be entitled to receive in respect of each independent director of the Trustee.

Clause 3.10(d) currently provides:

Any remuneration or fees paid to the Trustee pursuant to this Clause 3.10 will be deemed to be an expense of the Fund.

The Trustee seeks to delete cl 3.10(d) of the Trust Deed and replace it with the following clause:

The Trustee may determine from time to time that a fee is to be payable to the Trustee from the Fund for acting as the Trustee of the Fund. The amount of that fee must be an amount which the Trustee determines is fair and reasonable.

i.e. the proposed amendment.

The proposed amendment forms part of a proposed course of action in response to the SIS amendments, which can be summarised as follows:

(1) the intention and purpose of the proposed amendment is to charge a fee (Trustee Fee) to build up a fund called the ‘Trustee Resilience Reserve’ (Resilience Reserve) in order to meet any statutory liabilities which are unable to be indemnified from the assets of the Fund by reason of the SIS amendments;

(2) it is intended that the Trustee Fee be paid from the surplus in the account for Fund reserves as established by cll 7.1 to 7.4 of the Trust Deed (General Reserve) and in particular the Administration Reserve sub-account (Administration Reserve) rather than from the accounts of Members;

(3) the funds in the Resilience Reserve will be an asset of the Trustee and not the Fund in order to avoid any inconsistency with the SIS amendments and the Resilience Reserve will be governed by a Trustee Resilience Policy (TR Policy).

As a consequence, the Trustee seeks judicial advice under r 54.02 of the Rules in respect of the following question:

In the circumstances, Legal Super Pty Ltd as trustee of legalsuper is justified in exercising its powers under clause 50.2 of the trust deed dated 4 July 2016 to amend the trust deed in the manner set out at pages 494 to 498 of “Exhibit AJP-1” to the affidavit of Andrew James Proebstl sworn 20 October 2022 and filed in the proceeding [i.e. the proposed amendment].

There have been a number of judicial advice applications in the last two years arising from the passing of the SIS amendments (the SIS Act decisions).[1] Relevantly, I delivered two reasons for judgment in the application relating to Care Super. I set out an analysis of the SIS Act and other relevant legislation in section 5 of Re Care Super.[2] I refer to and repeat that section for the purpose of these reasons and hereafter will use the terms defined in them.
[1]Including Re Q Super Board [2021] QSC 276; Re HEST Australia Ltd (2021) 66 VR 338 (‘Re HEST’); Re Care Super Pty Ltd [2021] VSC 805 (‘Re Care Super’); Re Care Super (No 2) [2021] VSC 854 (‘Re Care Super No 2’); Application By Maritime Super Pty Ltd atf Maritime Super [2021] NSWSC 1614 (‘Maritime Super’); Application by Motor Trades Association of Australia Superannuation Limited atf Spirit Super [2021] NSWSC 1672; Australian Super Pty Ltd v McMillan [2021] SASC 147.
[2]Re Care Super (n 1) [45]-[56] (Lyons J).

The SIS Act decisions are of assistance in a number of ways for the purpose of this proceeding. First, they set out the nature of judicial advice applications. In this regard I refer to section 3 of my reasons in Re Care Super.[3] I will adopt the definitions set out in that section in these reasons. Second, the SIS Act decisions set out the factors which the Court should take into account in determining whether to provide such judicial advice. I refer again to section 3 of Re Care Super. Third, the SIS Act decisions record the consistent view of a number of judges (including this judge) that the trustee of a superannuation fund may be justified, under its remuneration clause, to determine a fee for services by reference to, among other considerations, a risk of a statutory liability in light of the SIS amendments. This is notwithstanding that the SIS amendments have the effect of rendering void any provision of a Trust Deed which would permit, among other things, indemnification from the Fund of a trustee or a director of the trustee against any such statutory liability.
[3]Re Care Super (n 1) [21]-[33] (Lyons J).

The SIS Act decisions also provide guidance as to how the relevant factors may be applied in an application to amend a trust deed to give the trustee the power to charge a fee. Relevantly, in the case of a trustee governed by the SIS Act, this includes, in the context of the propriety issue, that the exercise was not inconsistent with the relevant covenants in s 52 of the SIS Act (i.e. the s 52 covenants).[4]
[4] Relevantly: (1) the covenant in s 52(2)(b) of the SIS Act; in summary, to exercise the same degree of care, skill and diligence and as a prudent superannuation trustee would exercise (the diligence covenant); (2) the covenant in s 52(2)(c) of the SIS Act, namely to perform the trustee’s duties and exercise the trustee’s powers in the best financial interests of the beneficiaries (the best financial interests covenant); and (3) the covenants in s 52(2)(d) of the SIS Act; in summary, where there is a conflict between the duties and/or interests of a beneficiary and the duties and/or interest of the trustee to give priority to the duties and/or interest of the beneficiaries and to ensure that the interests of the beneficiaries are not adversely affected by the conflict (the conflict covenants).

3. OVERVIEW OF THE FUND AND ITS OPERATIONS
3.1 The Fund

As noted above, the Fund was established on 6 March 1989. The plaintiff, which is the Fund’s trustee, is a proprietary company limited by shares. It is a holder of a Registrable Superannuation Entity licence under s 29D of the SIS Act and an Australian Financial Services licence under s 911A of the Corporations Act 2001 (Cth) (the Corporations Act). The Fund currently has approximately 41,500 Members across Australia including approximately 27,000 Members in the ‘MySuper Balanced’ option. Most of the Members work or have worked in the legal services industry in Australia, though persons from outside the legal services industry are accepted as Members.

On the evidence before me, the Fund is currently an accumulation fund, where a Member’s entitlements depend solely on contributions made by or on behalf of that Member, the performance of the Fund and the fees charged: thus it is the Member who bears the risk of market fluctuations. As a result, a member’s account balance in an accumulation fund is calculated and fluctuates daily depending on Fund performance and on the rules of the Fund for calculating and allocating surpluses and deficits between members. However, it appears that in the past, the Fund operated at least in part as a defined benefits fund i.e. where a member is entitled to a calculated amount irrespective of the value of the Fund at any given time: thus a member is ‘insulated’ from market movements. In this way, under a defined benefits plan, a member’s entitlements are ‘effectively’ guaranteed by their respective employers. The Fund does not currently offer defined benefits or defined benefits products.

I note in passing that Mr Erichsen gave evidence as to (1) the eight categories of Members under the Trust Deed (of which four categories are ‘inactive’) and (2) the six kinds of benefits under the Trust (‘lump sum benefits’, ‘pension benefits’, ‘death benefits’, ‘early release benefits’, ‘employer sponsored vested benefits’ and ‘family law member account split’). However, he deposed that there are currently no employer sponsored vested benefits.

Like many modern superannuation funds, the Fund adopts a unitised investment structure (cl 12.A of the Trust Deed). Put simply, unitisation means that the underlying assets of the Fund (i.e. the investment portfolio) are notionally apportioned into ‘units’ that correspond precisely with Members’ accounts (and holdings in the General Reserve). As Members’ accounts and the General Reserve are unitised (i.e. recorded as 'units' of the Fund) any dollar amounts to be credited to or debited from these accounts must also be expressed as units. This conversion is calculated by reference to the unit price, which ensures that Members’ account balances are calculated based on the fair value of the underlying assets.

Mr Erichsen deposed as to the unit pricing policy, which governs the process of calculating and applying the unit price to each of the 13 investment options offered by the Fund. Pursuant to the unit pricing policy, the Trustee has outsourced responsibility for calculating the unit price to BNP Paribas Securities Services (BNP). Using the most current information as at close of business on each unit pricing date, BNP calculates the unit price using by determining the value of the underlying assets for each superannuation product.

As at 30 June 2022:

(1) the total assets of the Fund were $5,005,514,192 (compared to $5,061,622,028 as at 30 June 2021);

(2) the total liabilities excluding Member benefits were $65,196,662 (as compared to $110,691,542 as at 30 June 2021);

(3) the net assets available for Member benefits were $4,940,317,530 (compared to $4,950,930,686 as at 30 June 2021);

(4) total Member benefits were $4,925,195,052 (compared to $4,934,037,855 as at 30 June 2021); and

(5) total equity was $15,122,478 (as compared to $16,892,831 as at 30 June 2021) which comprised funds in the General Reserve of $4,138,885 and the Operational Risk Reserve of $10,983,593.

The current share capital of the Trustee comprises eight shares, each of which are fully paid ordinary shares issued at $2. The shares are held in equal proportions by the Law Society of New South Wales and the Law Institute of Victoria. This represents the total share capital of the Trustee of $16.

The Trustee does not derive and has not historically derived any revenue by way of remuneration rendered for services in relation to the Fund. For example, for the financial year ending 30 June 2022, the total revenue of the Trustee derived from activities was equal to the amount of operating expenses incurred by the Trustee for the same period. As at 30 June 2022, the Trustee derived income from ordinary activities totalling $920,804 and incurred operating expenses totalling $920,804. To date, the Trustee has charged the operating expenses as a fee under cl 3.10 and/or cl 3.11. The amounts cover the fees to its directors, liability insurance, and training and development of directors of the Trustee.

3.2 Operation of the Fund

The board of the Trustee (Board) has 10 directors and usually employs around 45 staff, including six senior executives. Each of the directors and senior executives are responsible persons of the Trustee and are subject to APRA’s prudential standard ‘SPS 520 – Fit and Proper’. In addition, the Trustee engages external service providers to provide skills and expertise to assist with operation and management of the Fund.

The Board has established a number of committees to assist it in carrying out its responsibilities in supervising and monitoring the management of the Fund: an Administration & Insurance Committee; an Audit, Risk & Governance Committee; an Investment Committee; and a Remuneration & Nomination Committee. Each committee has its own charter, is comprised of at least three directors of the Trustee (one of whom must be the chair) and regularly reports to the Board.

The Trustee maintains a ‘risk management framework’ which, in substance, provides a set of systems, structures, policies, and processes that guide the Board and staff to identify, assess, manage, mitigate, monitor, and report on all internal and external sources of inherent risk that could have a material impact on the operations of the Trustee, the Fund or the interests of a Member (Risk Management Framework). Further, the Trustee has adopted a number of policies, developed with the assistance of senior management and advisers, to assist in the management of the trust and in minimising risk to the Fund.

3.3 The General Reserve

The Fund has two reserves: the General Reserve and ‘Operational Risk Reserve’. The General Reserve is of relevance given the intention of the Trustee to charge any fees pursuant to the proposed amendment from the General Reserve. On the evidence before me, the Trustee has established three sub-accounts of the General Reserve: the Administration Reserve, the Insurance Reserve and the Investment Reserve. However, it is only the Administration Reserve that has a regular surplus balance, based for the most part on interest earnings. As a result, the Trustee proposes to charge any fees pursuant to the proposed amendment from that Administration Reserve.

At the first hearing on 28 February 2023, the Amicus raised concerns about whether there would be sufficient funds in the General Reserve or the Administration Reserve to meet the proposed Trustee Fee. This is in circumstances where cl 7.4 of the Trust Deed provides, in substance, that if at any balance date or at any other date determined by the Trustee, there is a debit balance in the General Reserve, the Trustee ‘may reduce Members’ accounts in such manner as the Trustee considers fair and equitable, with a corresponding credit being made to the [General] Reserve’. This is of some relevance to the power issue and the propriety issue.

On the evidence before me, there has been volatility in surplus in the General Reserve and the Administrative Reserve. The surplus of the General Reserve has ranged between approximately $4 million and $10 million as at 30 June 2021, 30 June 2022 and February 2023. The closing balance of the Administration Reserve has ranged between approximately $21 million and $2.2 million between May 2021 and February 2023.

Further, at the time of the February hearing, the Trustee had received reports from McGing Advisory & Actuarial in relation to the General Reserve and the proposed Resilience Reserve (the McGing report) and in relation to the General Reserve from Ernst & Young (EY and the EY Report). In light of volatility in the surplus of the General Reserve, the McGing Report recommended that a target should be set for the General Reserve including an overall minimum and maximum target level to allow for variability in the General Reserve, without requiring a review to replenish or distribute the General Reserve. It also recommended that, should the proposed amendment be allowed, and Resilience Reserve established, a replenishment plan should also be adopted to increase the size of the General Reserve (so it is less vulnerable to depletion) and to establish a mechanism to fund an increase in the General Reserve. The EY Report addressed the reasons for the fluctuation in the General Reserve. It recommended that the Trustee establish a benchmark balance for movement in the General Reserve and implement regular reviews of the General Reserve to ensure alignment with that benchmark. Further, it also recommended the establishment of a review process to monitor and investigate fluctuations within the General Reserve.

I will address the steps taken by the Trustee to address these issues further below.

4. REGULATORY CHANGES AND THE PLAINTIFF’S RESPONSE

It is necessary to say something about the possible nature and extent of any such statutory liability as a consequence of the SIS amendments. I do so in a context where the Amicus submitted that this Court may be satisfied that: (1) recent changes to the regulatory environment applying to superannuation funds have led to a material increase in both the operational and financial risk faced by industry fund trustees; and (2) as a result, there is increased exposure for the Trustee and its directors in their personal capacities, as well as a real risk of the Trustee becoming insolvent and being unable to retain appropriate directors and officers. I will now turn to the evidence.

4.1 Regulatory changes

The solicitor for the plaintiff, Mr Bland, has deposed to the possible statutory liabilities which may be imposed on the plaintiff. I accept Mr Bland’s evidence. As at 21 October 2022, this includes civil penalties of up to:

(1) $11.1 million under the Corporations Act;

(2) 100,000 penalty units ($22.2 million) under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth); and

(3) 2,400 penalty units ($532,800) under the SIS Act, including for any serious breach of the covenants deemed to apply under s 52 of the SIS Act.

Some of the civil penalties which may be imposed have only recently been introduced. As is evident above, contravention of the s 52 covenants is subject to civil penalty under the SIS Act. Such a civil penalty may include a monetary penalty under pt 21 div 2 of the SIS Act or a compensation order under pt 21 div 5 of the SIS Act. In the case of a dishonest contravention, it may also give rise to a criminal offence under pt 21 div 3 of the SIS Act. Further, any person who is involved in the contravention of a s 52 covenant may be taken to have contravened that covenant pursuant to s 194 of the SIS Act.

Mr Bland has deposed as to the substance of recent statements by APRA and ASIC which reflect their intention to engage and collaborate, among other things, to facilitate the early detection of prudential and conduct issues and promote a more timely supervisory and enforcement response.

4.2 Consequences for the Trustee and the Fund

The problems faced as a result of the risk of any statutory liability must be considered in the particular circumstances of the Trustee. As noted above,[5] the Trustee has capital of $16. Apart from this cash, the Trustee has no other liquid assets to meet a liability for an amount which it is unable to be indemnified from the Fund. Mr Proebstl gave evidence of the risks faced by the Trustee and the Fund as a result of these matters. I accept that evidence. I do so in a context where the Amicus submitted that the evidence permits the Court to be satisfied that:
[5]See above, [4], [30].

(1) the Trustee has no personal capital, no net assets, no net profit and no other income to meet any statutory liability;

(2) the details of the Trustee’s assessment of these risks (having regard to the independent advice it has received) indicates the Trustee no longer considers it can manage its current level of risk without holding some capital in its personal capacity;

(3) it is not in the financial interests of Members for the Trustee to become insolvent by reason of an inability to meet even a modest civil or administrative penalty; and

(4) in turn, that it is no longer in the best financial interests of the Members for the Trustee to carry on administering the Fund without resources of its own.

On the evidence before me:

(1) the increased scope of the prohibitions on indemnification have the effect of financially exposing the Trustee and its directors in their personal capacity, whilst they are required to continue the same roles, responsibilities and activities in relation to the Fund;

(2) in the absence of being able to capitalise itself or otherwise permitted to rely on an alternative source of funding or indemnification, the Trustee considers it is currently exposed to a real risk that it may become insolvent should a future statutory liability be imposed (with a consequential adverse impact for Members) and will not be able to retain its directors or attract new directors and officers who meet the ‘fit and proper’ requirements;

(3) it is no longer prudent nor in the best financial interests of Members for the Trustee to continue to perform its duties and services as Trustee without holding sufficient capital in its personal capacity from which it can meet any future liabilities which are not permitted to be paid from the Fund;

(4) to the extent that any statutory liability for which the directors cannot be indemnified or could be met (even in part) by the proceeds of a claim under the Trustee’s existing insurance arrangements, there are limitations on the adequacy of those arrangements and the extent to which the Trustee could reasonably rely upon receiving the proceeds of an insurance policy as a source from which it could meet such liabilities; and

(5) further, if the Trustee is not able to adequately indemnify its directors, it is expected that they will not be prepared to continue in their roles.

In submissions, counsel for the Trustee submitted that, should the plaintiff experience an insolvency event by reason of the imposition of a statutory liability, the due and proper administration and management of the Fund would be severely curtailed. On the evidence before me, I am satisfied that:

(1) the insolvency of the Trustee would have a significant impact on Members and the Fund, in particular, an automatic disqualification of the Trustee by APRA, the automatic removal of the Trustee holding office under the Trust Deed and the replacement of the Trustee and/or the amalgamation of the Fund with another fund;

(2) the insolvency of the Trustee would have a significant adverse financial impact on Members and the Fund, and the effect of this financial impact would not be able to be spread over time or differentially as between classes of Members; and

(3) an insolvency event is likely to undermine the confidence of Members in the Fund resulting in Members leaving the Fund as well as an inability to attract new members; it would also lead to reduced future growth of the assets of the Fund or a reduction in the assets of the Fund and a corresponding increase of fees ultimately borne by the remaining Members.

4.3 Steps taken and options considered by the Trustee

In order to address the increased risks of operating the Fund, principally by reasons of the SIS amendments and the increased risk of enforcement by APRA and ASIC, the Trustee has obtained advice from senior and junior counsel, their solicitors, and its tax advisers, PricewaterhouseCoopers Australia (PwC), EY, and Deloitte Australia.

Since within or around January 2021, the Trustee has taken a number of key steps to understand, investigate, manage and mitigate the impact of the increased risks of operating the Fund. In summary, these include:

(1) seeking the advice of external advisors, including commercial-in-confidence actuarial advice and stochastic modelling relating to the Trustee’s capital needs;

(2) reviewing and considering the Trustee’s existing compliance arrangements, including its Risk Management Framework, to identify risks for which the Trustee could potentially be exposed;

(3) reviewing and considering the scope and adequacy of the Trustee’s existing liability insurance arrangements and engaging with its insurance broker on the possibility of increased cover and the viability of captive insurance;

(4) reviewing and assessing the Trustee’s ability to rely on third-party indemnities contained in material outsourced service provider agreements to meet liabilities;

(5) reviewing and assessing the position adopted by the trustees of comparable superannuation funds in response to the SIS amendments, including consideration of APRA’s position in recent applications for judicial advice made by comparable superannuation trustees;

(6) engagement with shareholders and the organisations responsible for nominating ‘Member Directors’, to understand and confirm their preparedness (or otherwise) to contribute additional capital to the Trustee or to indemnify the Trustee for any future liabilities; and

(7) engagement with APRA to identify and address areas of regulatory concern.

The result of this work was reported to the Board in board papers of 6 June 2022, 17 June 2022, 28 July 2022 and 14 September 2022, together with recommendations from management. However, it is appropriate I record that five options were explored by management and considered by the Board in order to capitalise or otherwise indemnify the Trustee against any statutory liability.

4.4 The Trustee’s proposal

On the evidence before me, the Board was satisfied that the options other than the proposed amendment would not provide sufficient mitigation of risk against an insolvency event of the Trustee. I note this is consistent with the submissions of the Amicus that the Court may accept that the Trustee has given due consideration to alternative means of mitigating risk and that its rejection of those means is justifiable and appropriate.

Across numerous meetings held in the last 12 months, the Board has, in substance, resolved the following:

(1) subject to judicial advice, to amend the Trust Deed to include a clear power of the Trustee to determine a fee, which is fair and reasonable, payable to the Trustee (i.e. the proposed amendment) from the assets of the Fund;

(2) the intention and purpose of the proposed fee is to build up a fund called the Trustee Resilience Reserve (i.e. the Resilience Reserve) in order to meet any statutory liabilities which may be imposed and which are unable to be indemnified from the assets of the Fund by reason of the SIS amendments;

(3) the intention is that the fee be paid from the surplus in the General Reserve, and in particular the Administrative Reserve (rather than from the Members’ accounts), as reflected in the proposed amendment to the General Reserve Policy; and

(4) the funds in the Resilience Reserve will be an asset of the Trustee and not the Fund in order to avoid any inconsistency with the SIS amendments and the Resilience Reserve will be governed by a Trustee Resilience Policy (i.e. the TR Policy).

The Board has determined that the proposed amendment is in the best financial interest of Members and is otherwise in accordance with the Trustee’s duties.

The TR Policy, which is intended to guide the exercise of the fee charging power, has not been finalised. However, a detailed draft has been prepared with the assistance of a number of advisers including PwC and approved in principle by the Board (draft TR Policy). In summary, the draft TR Policy provides:

(1) for the setting of an initial amount for the Resilience Reserve and for a target range for the Resilience Reserve,[6] both based on analyses conducted by management, stochastic modelling and actuarial advice;

(2) the Trustee will not impose a Trustee Fee that is likely to result in the Resilience Reserve exceeding the maximum of the target range at the time of payment; and

(3) the Trustee will not pay the Trustee Fee at a time when the Resilience Reserve has reached the maximum of the target range.

[6]This is determined to be 0.10% to 0.16% of Fund assets calculated as at 30 June 2022.

The draft TR Policy requires the funding of the Resilience Reserve, by way of the Trustee Fee, to be disclosed to Members in a significant event notice and it will be included each year in the financial statements and annual report of the Fund. In addition, it will be disclosed to incoming Members in subsequent versions of the Product Disclosure Statement. These disclosures will specify the amount of the Trustee Fee.

The draft TR Policy establishes the following key characteristics of the Resilience Reserve:

(1) The Resilience Reserve (which will be beneficially owned by the Trustee) is intended to ensure that funds are available for contingencies that may require payments by the Trustee to meet a liability for which the Trustee is not permitted to be indemnified from the Fund and other taxation liabilities that are not able to be met lawfully from the Fund;

(2) There are two sources of funding for the Resilience Reserve:

(a) the Trustee Fee, which will be paid from the General Reserve; and
(b) net investment earnings from investment of the Resilience Reserve.

The draft TR Policy does not prescribe a particular amount of any Trustee Fee that the Trustee may charge. Instead, the draft TR Policy, consistent with the proposed amendment, assumes that the Trustee will determine an amount that it considers fair and reasonable. Clause 2.6 of the draft TR Policy sets out matters that the Trustee will consider in determining this amount. There is no prescribed timing or frequency of payments from the General Reserve to the Resilience Reserve. Rather, the Resilience Reserve is to be Funded ‘when required’. As to the total size of the Resilience Reserve, as noted above, the draft TR Policy ‘will not impose’ a Trustee Fee that is ‘likely to result in the [Resilience] Reserve exceeding the maximum of the target range at the time of payment’. Relatedly, and also as noted above, the Trustee will not levy the Trustee Fee at a time when the Resilience Reserve has reached the maximum of the target range.

The ‘guiding principles’ in cl 1.6 of the draft TR Policy include the ‘best financial interests of beneficiaries’, a ‘prudent approach’ and ‘transparency’. Further, this aspect of the draft TR Policy is reflected in other parts of it, namely:

(1) that the assets of the Resilience Reserve are invested to achieve long-term capital growth and maintaining an adequate balance, while remaining appropriate to its expected cash flow requirements and risk profile and maintaining adequate liquidity to meet expenses ‘in order to minimise the cost to members of accumulating and maintaining an appropriately funded [Resilience] Reserve’; and

(2) when determining the amount of the Trustee Fee, the Trustee is to consider the potential for conflict between the Trustee and its directors having a higher reserve of assets and ‘the interests of Fund members in minimising trustee fees or other costs affecting their benefits.’

Pursuant to its terms, the Trustee is able to amend the draft TR Policy as it sees fit. Of course, that would be subject to the fiduciary obligations and s 52 covenants imposed on the Trustee. So too the power to charge a fee must be fair and reasonable in accordance with the terms of the proposed amendment. I note that on 21 September 2022, the Trustee resolved to set a target range for the Resilience Reserve consistent with the advice of PwC as to industry norms.

At the time of the first hearing, the Amicus raised concerns about the capacity of the General Reserve to fund the Trustee Fee for the Resilience Reserve. Since that time, on the evidence before me, the Trustee, with the assistance of its advisers, has continued to draft an implementation plan to build up the General Reserve in order to fund the Resilience Reserve. This has resulted in the adoption of a revised General Reserve Policy which, among other things, sets out a framework for the maintenance, distribution and replenishment of the General Reserve. It also identifies a target balance of the General Reserve as a certain percentage of the net assets of the Fund, determines how the target balance will be set and establishes an updated monitoring and review process, pursuant to which the General Reserve will be monitored against the target balance and target range at least quarterly. The revised General Reserve Policy was approved by the Board on 4 August 2023. In his affidavit sworn 20 April 2023 (i.e. after the first hearing) Mr Erichsen deposed to the Trustee’s intention to charge the Trustee Fee from the Administration Reserve. As noted above,[7] the Administration Reserve is the sub-account within the General Reserve that has a surplus balance. These surplus funds are not specifically pre-allocated to meet the Fund’s actual or forecasted expenses; rather, these funds can be drawn down to meet the Fund’s expenses in accordance with the General Reserve Policy.
[7]See above, [35].

Further, the Trustee has actively undertaken activities for the promotion of the Fund to deliver sustained new member growth (the Growth Initiative), and for the reduction in costs of the Fund (the Expense Reduction Initiative). Additionally, APRA observed that the Trustee could increase its administration fees chargeable pursuant to cl 6.1 of the Trust Deed. The Amicus made submissions to similar effect. During the course of the second hearing, counsel for the Trustee acknowledged that this option was open to the Trustee and noted that the revised General Reserve Policy recognises the Trustee’s ability to charge a fee to Members to recover expenses and costs, which will be held in the General Reserve. It is anticipated that all these initiatives will have the effect of increasing the funds available in the General Reserve (in particular the Administration Reserve) from which the proposed Trustee Fee could be charged without resort to the assets of the Fund available to Members.

Finally, I note that it is not the intention of the Trustee to charge a one-off fee to meet the target range for the Resilience Reserve. Rather, it is the intention of the Trustee to charge a fee which, over a period of years, would meet that target range. In his first affidavit, Mr Erichsen deposed that the intention is to set a framework to build the Resilience Reserve through ‘payments from time to time’ from the General Reserve over a ‘multi-year period’ and set a minimum level of the Resilience Reserve. It is also not the intention of the Trustee to charge a fee if there is no surplus in the Administration Reserve, the result of which would require the Trustee to call on Member funds under cl 7.4 of the Trust Deed.

Further, based on the recommendations of its external advisors, the Trustee currently intends that in the first four years, the Trustee Fee will be subject to a cap of $1 million per year. This is reflected in a draft ‘Proposed Multi-year implementation plan to fund the Trustee Resiliency Reserve’. As this document is in draft form, the amount of the Trustee Fee cap is subject to further review and assessment pending the outcome of this application. In any event, the Trustee will make the final fee decision in light of all other relevant matters, including those contained within the draft TR Policy.

5. THE ISSUES IN THIS PROCEEDING
5.1 Relevant principles and issues

As noted above, there were differences between the Trustee, the Amicus and APRA as to the proper construction of cl 50.2 i.e. the power issue. As to the propriety issue, the Amicus and APRA were satisfied by the time of the second hearing that, in exercising the power to introduce the proposed amendment, the Trustee would not be acting improperly. However, as noted above, APRA submitted that the Trustee should alter its constitution to specify that its object is to act as the trustee of the Fund.

Before addressing the power issue and the propriety issue, it is important to acknowledge what this application does and does not involve.

First, this is an application for judicial advice that the plaintiff as trustee of the Fund is justified in making the proposed amendment in all the circumstances pursuant to cl 50.2. It is not an application for a declaration as to the meaning of cl 50.2. I raised this in the course of argument with counsel. I expressed the view that the Trustee would be justified in making the proposed amendment if I was able to conclude to a reasonable degree of satisfaction that there was a construction of cl 50.2 which was reasonably open that would allow the plaintiff to do so. The corollary is that, if I concluded to a reasonable degree of satisfaction that there was no construction available which would allow the proposed amendment, I would form the view that the plaintiff as trustee would not be justified in making the proposed amendment. None of the parties to the proceeding contended to the contrary.

Second, this application relates to whether the plaintiff as trustee of the Fund is justified in exercising the amendment power to make the proposed amendment. Judicial advice is not sought in respect of the exercise of any fee charging power pursuant to the proposed amendment. That distinction is significant not only for the judicial advice application but more generally in considering the meaning, effect and operation of cl 50.2 which relates to the power to make the proposed amendment and the circumstances in which it will become operative. However, I am conscious that the context or circumstance in which the plaintiff seeks this advice is that the plaintiff is seeking to exercise the amendment power in order to introduce a fee charging power with the intention of charging a fee over time from the General Reserve in order to address the issues raised by reason of the SIS amendments. I will deal with this further below.

Further, it is important to note the principles to be applied in construing cl 50.2 of the Trust Deed. While those principles were not in dispute before me, their application to cl 50.2 was.

First, in construing a commercial agreement, such as a superannuation deed, attention must be paid to the language used in the deed, the commercial circumstances which the deed addresses, the context in which it operates and the object it is intended to secure. The Court must determine what a reasonable person would understand the language used in the deed, and any relevant rules, to mean in their context. The Court should give such a deed a businesslike operation.[8]
[8]FSS Trustee Corporation v Eastaugh [2017] VSCA 218 at [61] (Keogh AJA, Tate and Santamaria JJA agreeing).

Second, while the courts have stated that no special rules apply concerning the interpretation of superannuation deeds, particular aspects of them require the Court to adopt a practical and not detached approach. As Arden LJ (with whom Auld and Waller LJJ agreed) observed in Steven v Bell in the context of a pension scheme:[9]
[9][2002] EWCA Civ 672 [27] quoted in Ansett Australia Ground Staff Superannuation Plan Pty Ltd v Ansett Australia Ltd (2002) 174 FLR 1, 56 (Warren J) (‘Ansett Australia’).

(1) its provisions should be construed ‘so as to give a reasonable and practical effect to the scheme’;

(2) the administration of a pension scheme is a complex matter and ‘it would be crying for the moon to expect the draftsman to have legislated exhaustively for every eventuality’;

(3) it is necessary to ‘test the competing permissible constructions’ of a pension scheme against the consequences they produce in practice; and

(4) if the consequences are ‘impractical or over-restrictive or technical in practice’, that is an indication that some other interpretation is the appropriate one.

Further, in reaching these conclusions, Arden LJ relied upon the statements of Millet J in Re Courage Group’s Pension Schemes regarding the construction of amendment provisions:[10]

[its] provisions should wherever possible be construed so as to give reasonable and practical effect to the scheme, bearing in mind that it has to be operated against a constantly changing commercial background. It is important to avoid unduly fettering the power to amend the provisions of the scheme, thereby preventing the parties from making those changes which may be required by the exigencies of commercial life.
[10][1987] 1 WLR 495, 505 quoted in Ansett Australia (n 9) 56 (‘Re Courage Group’).

5.2 Submissions on the power issue

In section 2 above, I have set out the terms of cl 50.2 and have defined the proviso and the exceptions. I note that exception (a) refers to no reduction to ‘the amount of the benefits presently or prospectively payable in respect of such Member or Beneficiary … to the extent that such benefits have accrued in respect of the period prior to the date such deed or resolution is executed or made to the extent that such benefits are secured by the assets of the Fund as at such date’ which I will refer to as the exception (a) amount or benefit. Although the clause refers to a Member or Beneficiary, for convenience I will just refer to a Member or Members.

In at least part of the argument, counsel referred to the exception (a) benefits as the ‘accrued benefits’. For my part, I did not find this reference helpful given the number of distinct aspects of the definition of the exception (a) benefit which is to apply in respect of a Member, namely:

(1) the amount of the benefits presently or prospectively payable in respect of such a Member, which is qualified by the following clause;

(2) ‘to the extent that such benefits have accrued in respect of the period prior to the date such deed or resolution is executed or made’ (the accrued requirement) which is further qualified by the following clause;

(3) ‘to the extent that such benefits are secured by the assets of the Fund as at such date’ (the secured requirement).

A number of questions or issues as to the construction of cl 50.2 were raised in this application. I will deal with each in turn and set out in summary the submissions of each party appearing before me. At the outset I wish to note that the Trustee highlighted the difference between the exercise of the power to make an amendment (to give the plaintiff as trustee a fee charging power) and the subsequent exercise of that fee charging power.

The first issue is whether the proviso operates so that the proposed amendment requires the consent of each Member before taking effect in respect of that person. In summary, the Trustee submitted it did not. This is because the Trustee construed the words ‘take effect in respect of a Member’ not as meaning ‘to come into operation’, but to mean an amendment which has some direct, identifiable or measurable effect in respect of a Member. On the Trustee’s submission, consent would be required in respect of amendments which ‘of their own force and in substance’ would have an effect on Members: changes to the way Member benefits are defined or to the circumstances in which Members qualify for benefits were proffered as examples. On this construction, the proviso would not require consent for administrative amendments. Further, the Trustee submitted that the proposed amendment did not have a direct ‘effect’ on Members because the proposed amendment will not of its own force have any effect in respect of a Member, with the result that Member consent is not required. The Trustee submitted this construction ought to be adopted given the practical difficulties in obtaining the consent of over 41,000 Members or administering a Fund where amendments applied to some Members, who had consented, but not others who had not consented.

By contrast, the Amicus submitted that on its proper construction, the question was not whether the proviso applied to a particular amendment but whether the amendment, once made ‘take[s] effect in respect of a Member’. The Amicus accepted that an amendment which only affected the rights of some group of Members would not require the consent of other Members not so affected. However, given that the Trustee intends for the new fee charging power to come into operation in respect of all Members, the Amicus submitted that the proposed amendment was not such an amendment. I note that APRA appeared to support this construction.

The second issue is whether, for the purpose of the Trustee forming the relevant opinion at the time of making the amendment (i.e. as to whether the exception (a) benefit of a Member will not be reduced) exception (a) requires consideration merely of the amendment itself or also of the amendment’s consequences, for example, its likely foreseeable impact. In summary, the plaintiff submitted that, to form the opinion that the exception (a) benefit of a Member will not be reduced, exception (a) only requires the Trustee to consider the relevant amendment (the literal construction). The plaintiff submitted that this construction was reasonably open and indeed preferable for several reasons: consistent use of the words ‘such amendment’, the absence of any reference to the need to consider ‘the effect’ in exception (a), the difficulty in determining the meaning of ‘likely foreseeable impact’, and the difficulty in determining the meaning of the exception (a) benefit in the context of the Fund.

The Amicus accepted that the literal construction was reasonably open. However, the Amicus submitted that the preferable and proper construction was that exception (a) requires the Trustee to consider the amendment and the ‘likely foreseeable impact’ of introducing that amendment (the broader construction). First, the Amicus submitted that the language in cl 50.2(a), in particular the words ‘will not’, is directed to forward-looking impact: demanding consideration of the future effect of the proposed amendment, such as the prospective exercise of the fee charging power. Second, the broader construction is more consistent with a purposive construction of exception (a). The clause should be interpreted as protective in nature: it arises where Members will not be asked to give consent, and in light of the fact that Members are not volunteers. Third, the broader interpretation would better align with reg 13.16 of the Superannuation Industry (Supervision Regulations) 1994 (Cth) (the SIS Regulations). Stated briefly, reg 13.16 prevents, subject to certain exceptions, trustees of regulated superannuation funds altering their governing documents, or carrying out any other act in a manner that ‘alter[s] adversely’ a beneficiary’s right or claim to ‘accrued benefits‘ or the amount of those accrued benefits.

I note that the broader construction was also adopted for the most part by APRA, who submitted that exception (a) requires the Trustee at the time of making the amendment to form a view (knowing what it knows about what it intends to do and what is likely to happen as a result) about whether introducing an amendment will not result in a reduction of the exception (a) amount or benefit. In argument before me, counsel for APRA suggested the Trustee’s opinion may need to be formed in respect of the amendment’s ‘natural’ effect, ‘inevitable’ effect, ‘likely’ effect, or ‘natural tendency’.

The third issue is ascertaining the true meaning and nature of the exception (a) amount or benefit. The fourth and related issue is whether there is such an exception (a) amount or benefit in respect of any Members under the Fund. I pause to note that these two issues only arise for consideration if I were to form the view that the literal construction was not reasonably open.

As to the third issue, the Trustee submitted that the language of the accrued requirement and the secured requirement was only consistent with a defined benefit plan with the result that the exception (a) amount or benefit had no application to the Fund as an accumulation fund. As to the secured requirement, the Trustee referred to the ordinary meaning of the word ‘secured’ (which relates to the right to payment secured by some right against particular assets) and cl 2.5 of the Trust Deed which provides that ‘[n]othing in this [Trust] Deed entitles any Member (or any person asserting a claim through or in respect of a Member) to any specific asset of the Fund’. It also referred to regs 13.14 to 13.15A of the SIS Regulations which operate as a limitation on a trustee giving any charge over or in relation to assets of a fund. Thus, in answer to the fourth issue, the Trustee submitted there was no such benefit under the Fund and that, therefore, the Trustee could readily form the opinion that no exception (a) amount or benefit would be reduced by the proposed amendment, even if it was required to consider the future consequences of such amendment.

As to the third issue, APRA made detailed submissions to the effect that it was possible to give meaning to the exception (a) benefit in the context of exception (a) and the Fund. As to the accrued requirement, APRA relied, by way of analogy, on reg 13.16 of the SIS Regulations, which refers to ‘accrued benefits’ and on Shimshon v MLC Nominees Pty Ltd (Shimshon), [11] a case where that regulation had been applied in the context of benefits in an accumulation fund. APRA also relied upon Shimshon in relation to the nature of a prospective entitlement under an accumulation fund to the effect that the fund balance at any time was a prospective entitlement in which the member had a proprietary interest.[12] As to the secured requirement, APRA submitted that the benefits under an accumulation fund are secured because ‘a member’s account balance is “secured” in the sense that the trustee or its custodian holds assets with a fair value equal to the account balances of members’.[13] APRA submitted that in this sense (albeit not a technical sense) amounts in Members’ account balances are ‘secured’. As a result, in answer to the fourth issue, APRA submitted that the account balance of each Member on the date of any amendment was the relevant benefit or amount for the purpose of exception (a).
[11] Shimshon v MLC Nominees Pty Ltd (2021) 66 VR 277 (‘Shimshon’).
[12]Ibid 290, [35] (Sifris and Walker JJA), 334-336, [253]-[263] (Whelan JA).
[13]APRA’s written submissions 9 May 2023 [53].

The Amicus adopted APRA’s submissions in relation to the third and fourth issue.

The fifth issue is whether, in the event that the exception (a) benefit has some application in respect of the Fund, the Trustee would be able to ascertain the amount of that benefit and form the opinion, at the relevant date, that the benefit will not be reduced as a result of the proposed amendment (and/or its effect). In summary, based upon APRA’s analysis to the third and fourth issue, APRA submitted that the Trustee could do so upon the basis that the relevant benefit was the account balance of each Member on the date of the amendment. Further, APRA submitted that on the evidence it was open to the Trustee to form the relevant opinion in exception (a) because: (1) there was a substantial balance in the Administration Reserve; (2) there are active steps in place to monitor and augment that Administration Reserve over time (in addition to increasing current administration fees); and (3) it is not presently intended that the Trustee would charge the Trustee Fee so as to deplete the Administration Reserve. The Amicus adopted APRA’s submissions on the fifth issue.

The Trustee submitted that, if the Court were to form the view that there was a relevant benefit for the purpose of exception (a) and that the exception required the Trustee to form an opinion as to whether the foreseeable impact of the amendment will not reduce that exception (a) benefit, the Trustee was in position to do so. In support of these submissions, counsel for the Trustee relied upon the matters deposed to in the affidavit of Mr Erichsen sworn 20 April 2023. Mr Erichsen relevantly deposed that:

(1) the Trustee ‘can identify at any point in time, benefits which may have accrued, being specific benefits to which a member is entitled, but which has not yet been paid’ and management ‘is able to provide to the Trustee information confirming that any fee charged pursuant to the proposed amendment will not reduce the amount of the benefits presently or prospectively payable to a member to the extent that any benefit may have accrued but not yet been paid’;[14]

(2) at the time of the proposed amendment and at the time of calculating any fee to be paid, ‘it will be possible’ for management to advise the Board definitively that no funds in the Administration Reserve ‘are funds that are required to meet any member benefits to which entitlements have arisen in the period prior to the date of amendment’ because the balance of the Administration Reserve at ‘all and any times represents funds that are not attributable to Members benefits;[15] and

(3) the Trustee will ‘identify any benefits to which a member has become entitled after meeting conditions of entitlement but not yet paid’ by the Fund and provide the Trustee with information confirming that any fee charged pursuant to the proposed amendment ‘will not reduce the amount of any such benefits’.[16]

[14]Affidavit of Trevin Erichsen sworn 20 April 2023, [79].

[15]Ibid [80].

[16]Ibid [107(f)].

The Trustee did not accept the submission of APRA and the Amicus that the relevant exception (a) benefit was Members’ account balances. However, during the second hearing, counsel for the Trustee submitted that the ‘entitlements’ referred to in Mr Erichsen’s affidavit (referenced in sub-paragraph (3) above) are ‘not different in a sense’ from Member account balances, [17] with the result that the Trustee would be able to determine whether any such entitlements will not be reduced by any fee charged pursuant to the proposed amendment.
[17]Transcript of Proceedings, An Application By Legal Super Pty Ltd (ABN 37 004 455 789) (in its capacity as Trustee for legalsuper (ABN 60 346 078 879) (Supreme Court of Victoria, S ECI 2022 04286, Lyons J, 16 August 2023) 283.23 (C.M. Harris KC).

5.4 Clause 50.2

Clause 50.2 is not easy to construe. That is evident from the submissions of the parties before me. But it is important to consider the words of cl 50.2 in the context of the clause as a whole.

First, the opening paragraph of cl 50.2 contains three relevant parts. While I am conscious that the power in cl 50.2 is a power to ‘add, delete or replace’ any provisions of the Trust Deed, for convenience, I will refer to the result of any such addition, deletion or replacement as an ‘amendment’. The first part of cl 50.2 is the Trustee’s general power to amend the provisions of the Trust Deed ‘as it sees fit’. On its face, that is a broad and general power. The second part of cl 50.2 provides that any such amendment ‘shall take effect on the date such deed or resolution is executed or made or such earlier date as is specified therein for that purpose.’ On its face, this second part appears to specify the date upon which the amendment is to take effect i.e. commence operation (the effective date). The third part of cl 50.2 is the proviso. It is important to note that the words ‘take effect’ are used in the second part of cl 50.2 and the proviso.

Clause 50.2 then has three exceptions, being sub-cls 50.2(a)-(c). Based on the structure and language of cl 50.2, I consider that those exceptions are to the proviso. That is to say, sub-cls 50.2(a)-(c) provide three exceptions to the requirement to obtain consent of a Member in the proviso.

First, exception (b) obviates the need for Member consent if ‘such person (if any) as are required by the Superannuation Law to consent to such amendments … given their consent in order to comply with any relevant requirement of the Superannuation Law’ (whether such consent is given before or after the said date). No party submitted that exception (b) had application in this case. Second, exception (c) obviates the need for Member consent if the ‘relevant Regulator approves such amendment’. I was informed in the course of argument that the ‘relevant Regulator’ is APRA or ASIC. I was informed that the consent of APRA was recently sought but APRA does not consider it has the power to provide such consent and in any event the power to consent could only arise after a number of procedural steps required under the applicable regulations had taken place, which no one has suggested have been taken. Third, exception (a) obviates the need for Member consent if, in the opinion of the Trustee at the time of the amendment, such amendment will not reduce the exception (a) benefit of a Member.

5.5 The proviso

As to the proviso, the real issue between the parties appears to be whether the proviso limits in some way the kinds of amendments which require consent of a Member before that amendment takes effect in respect of that Member.

While it is neither necessary nor desirable that I form a conclusive view about the proper construction of the proviso, I prefer a construction of the proviso consistent with the submissions of the Amicus i.e. that it does not limit the kinds of amendments which require consent of a Member before that amendment takes effect in respect of that Member. Indeed, I have real doubts that the construction of the proviso submitted by the Trustee is reasonably open. This is because of the words used in the proviso and the fact that the proviso is subject to the exceptions.

As to the words used, the proviso provides that ‘no amendment … shall take effect in respect of a Member or Beneficiary without that person’s consent’. First, the nature of the amendment is not qualified. Second, the words ‘take effect’ usually mean ‘come into operation’.[18] In my view, that is the preferable meaning of those words in the proviso in the context of the second part of cl 50.2. This is particularly so having regard to the words in parenthesis (‘whether [such consent] given before or after the date such deed or resolution is executed or made’): these words focus on when the amendment comes into operation. In my view the proviso appears to address the question of when an amendment shall take effect in respect of such a Member given that it provides that consent may be given ‘before or after the date such deed or resolution is executed or made’. Thus, it would appear that it was objectively intended that the time at which the amendment is to take effect in respect of a Member, if consent is given, is not the date of consent but the effective date in the second part of cl 50.2.
[18]See, eg, Macquarie Dictionary (online at 7 September 2023) ‘effect’ (def 15); Oxford English Dictionary (online at 7 September 2023) ‘effect’ (def 1.a.).

As noted above,[19] the Trustee submitted that it was necessary to read some sort of limitation into the proviso as it was impractical to obtain Member consent to every kind of amendment in such a large Fund or to have an amendment that applied to some Members who had consented but not others who did not consent. In my view, reading cl 50.2 as a whole, it is the exceptions in cl 50.2(a)-(c) and relevantly exception (a) that limit the kinds of amendments that will in fact require Member consent.
[19]See above, [74].

In any event, adopting the Trustee’s construction (i.e. that the proviso should be construed so that the need to obtain consent only applies to amendments which directly or materially affected the relevant Members or class of Members), I consider that the power to charge a fee is a matter that is likely to directly or materially affect all Members because each Member would become subject to a discretionary fee charging power.

5.5 Exception (a)

As set out above,[20] on its face, exception (a) obviates the need to obtain Member consent if ‘in the opinion of the Trustee such amendment ... will not reduce’ the exception (a) benefit of such a Member. In my view, it is open to the Trustee to take the literal construction of exception (a), namely that the relevant opinion needs to be formed in respect of the amendment and not the likely foreseeable impact of introducing the amendment. This is consistent with the submission of the Amicus that this construction was reasonably open.
[20]See above, [89].

Indeed, in my view, I consider that this is the preferable construction of exception (a). This is for a number of reasons. First, it gives a consistent meaning to the word ‘amendment’ across the whole of cl 50.2: ‘amendment’ in the body of cl 50.2 refers only to the amendment itself. Second, the words of exception (a) do not direct attention to any effect of the amendment, including, relevantly, the likely foreseeable impact. In short, if it was objectively intended at the time the Trust Deed was executed that the effect of the amendment was to form part of the relevant opinion of the Trustees, the drafters of the Trust Deed could and would have made this plain. They did not.

Third, for my part, and notwithstanding the submissions of APRA and the Amicus, I have difficulty in determining the nature and extent of any inquiry as to the effect of any amendment. In my view, the various versions suggested as to the nature of that inquiry submitted by the Amicus and counsel for APRA, as set out in [78] above, indicate that the broader construction is not the preferable one. In my view, a construction of the opening words of exception (a) which requires the Trustee to form a relevant opinion as to the likely foreseeable impact (howsoever described) of introducing the proposed amendment would also be very difficult to apply in practical terms. This is due to the difficulties presented to the Trustee involved with identifying and considering the likely foreseeable impact of introducing an amendment such as the proposed amendment. In making these comments, I am conscious that the relevant opinion must be formed at the time of the amendment, but regard must also be had to the future.

My concerns in this regard are reinforced by the fact that the relevant opinion to be formed is expressed in absolute terms i.e. that the amendment and/or the foreseeable impact of the amendment ‘will not reduce’ the exception (a) benefit, the effect of which would be that the Trustee would not be able to form the relevant opinion if it considered there was even a small possibility that an amendment might reduce the exception (a) benefits. These concerns are consistent with the submission of APRA at the first hearing that such a construction appeared unworkable given the difficulty in setting the limits of any future counterfactual to be considered as the ‘likely foreseeable impact’.However, as noted above in [78], I am conscious that by the second hearing APRA adopted a different position.

Finally, in my view, the literal construction of exception (a) has the consequence of obviating the need to obtain Member consent under the proviso. In light of the principles to be applied to the construction of superannuation trust deeds, set out in [68]-[70] above, the literal reading of exception (a) is the construction which will better enable the Trustee to administer the Fund in a practical manner in light of the changing regulatory landscape; it avoids ‘unduly fettering the power to amend’.[21]
[21]Re Courage Group’s Pension Schemes (n 10) 505 (Millet J).

In light of my conclusion that the literal construction is open and indeed is the preferable construction, I consider that it is neither necessary or desirable in this application that I form a view about whether the exception (a) benefit has meaning in the context of this Fund and if so what that meaning is. As is evident from the submissions, that inquiry raises difficult questions of construction, which go beyond that which falls to be considered in a judicial advice application of this nature, particularly having regard to the confined question before me.

However, I wish to note that I do not consider that the exception (a) benefits ought be disregarded as surplusage because the Fund no longer offers, or has, a defined benefit component. I am conscious that no party made such a submission. Nevertheless, consistent with the ordinary principles of contractual construction, a Court would strive to give the words in the exception (a) benefit some meaning in the context of the Fund as currently constituted. This is particularly so given that it is one of the three exceptions which obviates the need for Member consent and is the only exception within the control of the Trustee. I would only add in this context, that it appears that some assistance may be obtained from reg 13.16, relevantly, the continuing reference to ‘accrued benefits’. Further assistance may be obtained from Shimshon as to the meaning of the accrued requirement and/or the secured requirement in the context of the benefits under the Fund.[22]
[22]See, generally, Shimshon (n 11).

I am conscious that APRA and Amicus submitted that the account balance of each Member is their preferred construction of the meaning of the exception (a) benefit and that it was open for the Trustee, in light of their construction of exception (a), to form the opinion that the exception (a) benefits will not be reduced. Further, while the Trustee did not embrace the submission of the Amicus and APRA that Members’ account balances answered the meaning of the exception (a) benefit, the Trustee nevertheless submitted that it could form the opinion that the likely foreseeable impact of the proposed amendment ‘will not’ be reducing that relevant exception (a) benefit. In light of further evidence filed by the Trustee ahead of the second hearing, each of APRA and the Amicus accepted that the Trustee could form the relevant opinion as described above.

Once again, it is unnecessary for me to form a view about these matters in light of my conclusion that the literal construction is reasonably open and indeed preferable. For my part, and without any criticism, it was not entirely clear to me which benefit under the Fund the Trustee submitted it was able to consider for the purpose of determining whether the proposed amendment will not reduce Member benefits and whether this benefit fell within the exception (a) benefit or amount.

5.6 Conclusions on the power issue

In all these circumstances, I consider that it is open for the Trustee to conclude that, on its proper construction, cl 50.2(a) only requires the Trustee to consider the proposed amendment in forming the relevant opinion. Thus, subject to forming the relevant opinion, the Trustee would be justified in making the proposed amendment and that amendment would take effect with respect to Members and Beneficiaries without the need for their consent. On this construction, it is open to the Trustee to form the relevant opinion, as the proposed amendment of itself could not reduce the exception (a) benefits, however those benefits are construed.

5.7 The propriety issue

As to the propriety issue, I am satisfied that the exercise of the power to make the amendment will not be improper in the relevant sense as it is intended:

(1) to be exercised in good faith;

(2) to be exercised with a real and genuine consideration of the exercise of the power;

(3) to be exercised in accordance with the purpose for which it was conferred; and

(4) not to be exercised for an ulterior purpose.[23]

[23]See, eg, Longboat Holdings Groupno3 v Zacole Pty Ltd [2021] VSC 280, [58]-[60] (Osborne J); Re HEST (n 1) [53]-[54] (Button J).

Further, I am satisfied that the exercise of the power to make the proposed amendment is not inconsistent with the relevant covenants of the SIS Act, in particular the diligence covenant, the best financial interests covenant and the conflict covenants.

In making these findings I am conscious of the difficulties and financial risks to the trustees of industry super funds, such as the plaintiff, as a result of the SIS amendments. Those difficulties and financial risks pose material risk to the funds themselves.[24] In short I am satisfied that the exercise of the power to make the proposed amendment will not be improper in light of the process adopted by the Trustee in deciding upon the proposed amendment and the objective appropriateness of the proposed amendment in light of the other options considered by the Trustee with the assistance of its advisers.[25] Based on the material before me, the proposed amendment is the best option to obviate consequences of the imposition of a statutory liability being imposed on the plaintiff as trustee and also on the Fund.
[24]See above, sections 4.1 and 4.2.
[25]See above, [48].

In this context, I note that it is not the intention of the Trustee to charge the proposed fee as a one-off. Rather, the Trustee is to determine a fee from time-to-time that is fair and reasonable in order to reach the target range for the Resilience Reserve. I refer to the terms of the draft TR Policy set out in section 4.4.

Further and relatedly, I am satisfied that the Trustee has put in place practices and procedures to:

(1) minimise the imposition of any such statutory liabilities;

(2) to ensure that, to the extent that there are concerns that the proposed Trustee Fee may be paid from Members’ funds, the proposed Trustee Fee is payable from the Administration Reserve which is not funded by Members’ funds; and

(3) to ensure that, by reason of regular reviews and ongoing reforms including the Growth Initiative and the Expense Reduction initiative, there are and should remain sufficient funds in the Administration Reserve to charge the proposed Trustee Fee over time to build up the Resilience Reserve.

Finally, for completeness, I consider that it is unnecessary for the Trustee to amend its constitution to specify that the object of the Trustee is to act as trustee of the Fund. I accept the Trustee’s submissions that the restrictions imposed on the Trustee by the SIS Act, SIS Regulations and APRA’s Prudential Standards mean that such an amendment is unnecessary.

5.7 Conclusion

In all these circumstances, I am satisfied that the Trustee is justified in exercising its powers under cl 50.2 of the Trust Deed to amend the Trust Deed to make the proposed amendment. I am also satisfied that the Trustee has been justified in bringing this application and funding the costs of this application from the assets of the Fund and for that purpose indemnifying itself from the assets of the Fund. I will hear the parties on their proposed form of order in this proceeding. I will also hear from the parties in relation to any final orders in respect of the confidential information of the Trustee.
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Citations

Re Legal Super Pty Ltd [2023] VSC 545

Cases Citing This Decision

0

Cases Cited

10

Statutory Material Cited

8

Re QSuper Board [2021] QSC 276

Re Care Super Pty Ltd [2021] VSC 805

Re Care Super Pty Ltd (No 2) [2021] VSC 854

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[2023] VSC 545

20 September 2023