Superannuation Update - 18 December 2012
Financial Services eBulletin - 18 December 2012
In this edition of Superannuation Update, we discuss five key aspects of the Superannuation Legislation Amendment (Further Measures) Bill 2012, which was released by Treasury in October 2012 and is the fourth tranche of "Stronger Super" legislation.
The Stronger Super reforms aim to make superannuation fund trustees and their directors more accountable and responsible in their management of superannuation funds. In our "Business of being a trustee" section, we summarise the key new and amended duties for trustees and directors, as well as give some comments on the heightened potential for liability to be imposed on trustees and directors.
This issue's case note looks at a trustee's duty to make enquiries, following the recent decision in Alcoa of Australia Retirement Plan Pty Ltd v Frost  VSCA 238.
We also bring you news in brief from your Lander & Rogers Financial Services Team.
- Tranche 4 Stronger Super Legislation
- Business of being a trustee: stronger super and new trustee duties
- Case note: Trustee's duty to make enquiries
- Landers news
- Further information
The Superannuation Legislation Amendment (Further Measures) Bill 2012 (Bill) was released by Treasury in October 2012. It is the fourth tranche of "Stronger Super" legislation, with the first three tranches now having passed through all stages of Parliament and received Royal Assent:
- Superannuation Legislation Amendment (MySuper Core Provisions) Act 2012 (First Tranche);
- Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Act 2012 (Second Tranche); and
- Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Act 2012 (Third Tranche).
The Bill contains the following five key aspects which we address in this article:
- some improvement for directors in the provisions concerning director liability;
- some changes to APRA's broad powers to issue infringement notices;
- voiding of tied service provider provisions in trust deeds;
- compelling trustees to provide reasons for decisions in certain cases; and
- an important change to the wording regarding the contributions which are required to be directed to a MySuper product.
In the Second Tranche, there are two significant provisions affecting directors:
- One is section 29VO of the Superannuation Industry (Supervision) Act 1993 (SIS Act) which requires each director of a corporate super fund trustee that includes a MySuper product to exercise a reasonable degree of care and diligence to ensure that the trustee carries out its obligations in SIS Act section 29VN. Section 29VN contains the "enhanced" trustee duties for MySuper products (eg, promoting the financial interests of the beneficiaries).
- The other is section 52A of the SIS Act which contains a set of covenants that apply to each director. For example, one covenant requires each director to perform their duties and to exercise their powers in the best interests of the fund's beneficiaries.
A person who suffers loss or damage as a result of a trustee's or a director's conduct which contravened the duties and covenants in these new SIS Act sections 29VO and 52A "may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention".
The combination of these provisions in the Second Tranche caused concern among directors regarding a potential increase in actions taken against them directly.
Several submissions were made to Treasury regarding this potential problem and, as a partial concession, some changes were included in the Bill. The changes require that before an action may be brought against a director, the leave of the Court must be sought. In deciding whether to grant an application for leave, the Court is required to take into account whether:
- the applicant is acting in good faith; and
- there is a "serious question to be tried".
Although direct actions can still be brought against directors, there should be some comfort in the fact that the Court's leave must first be obtained. This should at least prevent frivolous and vexatious matters proceeding directly against directors.
In addition, the defence in section 55(5) of the SIS Act (as amended in the Second Tranche) has been slightly amended by the Bill as a result of submissions that it was a practically useless defence. The section (as proposed to be amended) provides that:
"It is a defence to an action for loss or damage suffered by a person as a result of the making of an investment by or on behalf of a trustee of a superannuation entity if the defendant establishes that the defendant has complied with all of the covenants referred to in sections 52 to 53 and prescribed under section 54A, and all of the obligations referred to in sections 29VN and 29VO, that apply to the defendant in relation to the investment each act, or failure to act, that resulted in the loss or damage."
Despite the slight amendments, it is still the case that before the defence can be relied upon, the director would need to positively establish compliance with every single covenant and obligation that was relevant to the act or omission giving rise to the loss or damage. In our view, it appears that it would be impossible for a director to produce evidence of compliance with each relevant SIS Act covenant and obligation. For example, if a "normal" investment turned out to produce negative returns, it is not clear how a director would positively establish and provide evidence that he or she promoted the financial interests of the beneficiaries, notwithstanding that the investment was properly made under the trustee's investment strategy.
APRA's power to issue infringement notices
The Bill introduces a new Part 22 into the SIS Act giving APRA power to issue infringement notices. It is intended that APRA will use this power for "minor and straightforward" breaches of the SIS Act. Twenty-two provisions of the SIS Act are specified as being "subject to an infringement notice". However, the regulations may also specify other SIS Act sections or regulations that are to be subject to an infringement notice, and there is no limitation as to the types of provisions which could be specified.
The Chair of APRA will determine which APRA staff members, called "infringement officers", will have power to issue infringement notices.
An infringement officer may give an infringement notice for an alleged contravention if the officer has "reasonable grounds" to believe that a person has contravened a relevant SIS Act provision. The infringement notice must contain brief details of the alleged contravention, such as the provision allegedly breached and the time, day and place of the alleged contravention. Arguably, more details may be required by the person who is subject to the notice in order to determine whether to pay the fine or have the matter heard by the Court.
The penalty which would apply under an infringement notice is 20% of the maximum penalty that a Court could impose for the relevant contravention.
Once an infringement notice is paid, any liability of the person for the offence is taken to be discharged, and the person is not regarded as having admitted guilt or liability or having been convicted of an offence.
However, the amount payable in relation to the infringement notice will not be able to be indemnified from the assets of the fund, which appears to be a harsh result, particularly for not-for-profit trustees.
Tied service provider provisions
Under other new sections of the SIS Act proposed by the Bill, any provisions in a fund's governing rules that require the trustee to use a specified service provider, investment entity or financial product will be void. The intention behind the amendments is to "restore" a trustee's discretion to enter into relevant arrangements in the best interests of members.
There are some drafting issues with the new sections; for example, they void provisions which confer on the trustee a discretion to use a tied service provider, whereas to be consistent with the stated intention the provision should only be void to the extent that the trustee is compelled to use a tied service provider.
The amendments will not require termination of existing arrangements with tied service providers which were required under the fund's governing rules prior to the new sections coming into effect. However, those tied arrangements would not be expected to be renewed at the end of their current term unless renewal was in members' best interests (eg, because of cost).
Reasons for decision
The Bill proposes that section 101 of the SIS Act be amended to insert an obligation for trustees to provide reasons for decisions in certain circumstances. If the complaint is in relation to a death benefit, the complainant must be given written reasons for the trustee's decision. For other complaints, the complainant may request written reasons for the trustee's decision. Where required or requested, the trustee must provide the reasons within 28 days.
In relation to non-death benefit complaints, there is no time period specified in the Bill within which the request for reasons must be given (although we expect that this omission will be fixed when the Bill is introduced).
In a related set of changes, the Superannuation (Resolution of Complaints) Act 1993 is to be amended to provide that the period for a complainant making a complaint to the Superannuation Complaints Tribunal is generally 6 years after the date that the trustee made the decision. However, if the complaint relates to a disability benefit and the person permanently ceased employment because of that disability before the trustee made its decision, then the complainant has 4 years after the making of the decision to make a complaint to the Tribunal.
Contributions to MySuper products
Chapter 6 of the explanatory memorandum to the Bill describes a large range of relatively minor amendments and consequential matters. Tucked away within the 107 paragraphs of that chapter is an explanation concerning an amendment that at first appears minor but, in fact, is not. It concerns section 29WA of the SIS Act, as proposed by the First Tranche. That section, marked-up below to indicate the changes proposed in the Bill, is as follows:
- This section applies if:
- a person is a member of a regulated superannuation fund; and
- a contribution to the fund is made for the benefit of the person; and
- the person has not given the trustee, or the trustees, of the fund an election a direction in writing that the contribution is to be paid into a specified choice product or choice products invested under one or more specified investment options; or;
- the person has given the trustee, or the trustees, of the fund an election a direction in writing to have that some of the contribution paid into a is to be invested under one or more specified products investment options, but no such election direction has been made in relation to the remainder of the contribution.
- The trustee, or trustees, of the fund must treat any contribution to the fund in relation to which no election has been made direction has been given, and any part of a contribution to the fund in relation to which no election has been made direction has been given, as a contribution to be paid into a MySuper product of the fund.
The explanatory memorandum makes clear that the language is intended to change from being about contributions to a specified choice product to being about contributions directed to specified investment options. Paragraph 5.41 states:
"This amendment clarifies that it is necessary for a member to make a direction to have contributions placed in a particular investment option, and it is not sufficient that the member has joined the fund by selecting one product offered by the fund. This is necessary because a product offered by a superannuation fund is one way in which a member may have joined the fund and does not represent a decision to have contributions made to an investment option other than a MySuper product."
It appears that this revised approach by Treasury (which is consistent with the approach to accrued default amounts) represents a shift away from the original recommendations of the June 2011 "Super System Review Final Report" regarding the disengaged members who were designed to be protected by MySuper. It is also a shift from the Government's response set out in the September 2011 "Stronger Super Information Pack". For example, in section 2.2 of its response the Government stated that:
"From 1 October 2013, employers must make contributions for employees who have not made a choice of fund to a fund that offers a MySuper product in order to satisfy superannuation guarantee requirements" (emphasis added).
The changed approach will have particular effect for those few funds which do not offer choice of investment option to members because they will not be able to receive any contributions from the commencement of the MySuper regime. This is so even if every single member were to make a positive choice of fund election to have contributions for them made to that fund.
There was a great rush of activity during the last few days of the Parliamentary year, including the introduction of the Fourth Tranche and last-minute amendments to the Third Tranche. Now it is important to absorb the detail of those developments and their implications before further reforms occur in the new year.
It is trite but nevertheless appropriate to anticipate that 2013 is going to be an enormously significant year in terms of continuing changes to superannuation legislation.
The Stronger Super reforms aim to make superannuation fund trustees and their directors more accountable and responsible in their management of superannuation funds. As a result, those reforms have implications for the potential liability of trustees and directors.
Following is a summary of the key new and amended duties for trustees and directors as well as some comments on the heightened potential for liability to be imposed on superannuation fund trustees and directors.
Standard of care
The "prudent person" standard in the SIS Act will be changed and trustees will be subject to a higher standard of care. They will be required to exercise the same degree of care, skill and diligence as a "prudent superannuation trustee". This change aims to bring superannuation fund trustees in line with the standard of care for professional trustees under existing State and Territory legislation.
Superannuation fund trustee duties
There are several new statutory duties for superannuation fund trustees. The true extent of these new duties is yet to be tested and fully defined.
To act fairly in dealing with classes of beneficiaries within the entity and to act fairly in dealing with beneficiaries within a class
This new statutory duty builds upon a trustee's existing common law duty to act fairly and equitably between classes of members. This is an important duty for trustees to bear in mind in establishing arrangements for MySuper and non-MySuper members (for example, in the setting of fees).
To prepare, review and give effect to an insurance strategy and satisfy additional duties with respect to insurance
Trustees will be subject to a new statutory duty to formulate, give effect to and regularly review an insurance strategy, having regard to:
- the types of insurance that are to be offered to beneficiaries (noting that it is proposed that only death, TPD and income protection cover will be permitted to be offered through superannuation funds);
- the level, or levels, of insurance cover to be offered to beneficiaries;
- the basis for the decision to offer or acquire insurance of those kinds, with cover at that level or levels, having regard to the demographic composition of the beneficiaries of the entity; and
- the method by which the insurer is to be determined.
Other new duties in this regard include:
- to consider the cost to all beneficiaries of offering or acquiring insurance of a particular kind or at a particular level. This is to be assessed at the fund level and not the individual member level;
- only to offer or acquire insurance of a particular kind, or at a particular level, if the cost of the insurance does not inappropriately erode the retirement income of beneficiaries; and
- to do everything that is reasonable to pursue an insurance claim on behalf of a beneficiary, if the claim has a reasonable prospect of success. Concern has been raised in relation to the formulation of this duty and the extent to which a trustee needs to "pursue" a claim. Trustees should take some comfort from the reasonableness qualification; that is, it may not be reasonable for a trustee to spend significant amounts to litigate individual claims.
Prudential Standard SPS 250 Insurance in Superannuation provides more detailed information about insurance in superannuation.
To prepare, give effect to and regularly review an investment strategy for the whole fund and each investment option
Currently the SIS Act requires trustees, when developing the fund’s investment strategy, to consider risk, diversity, liquidity and the trustee’s ability to meet liabilities. Under the reforms, trustees will also be required to have regard to additional factors including the availability of valuation information, expected taxation consequences and expected costs.
The proposed changes confirm that trustees need to consider whether the costs of investment are justifiable and will require trustees to arrange and consider regular valuations of all assets, particularly direct or unlisted investments which may be difficult to value.
Trustees will also need to ensure that investment options offered to each beneficiary will allow adequate diversification. The Explanatory Memorandum to the Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Act 2012 (Trustee Obligations Act) states that this will not prevent a trustee from offering investment options that are undiversified if the trustee has formed the view it would be appropriate for members to be able to choose that investment option.
A trustee must at all times have an investment governance framework not only to manage investments but also to protect the interests (and meet the reasonable expectations) of beneficiaries.
Prudential Standard SPS 530 Investment Governance provides more detailed information.
To prepare, review and give effect to a risk management strategy
The requirement to formulate and give effect to a risk management strategy will no longer be an RSE licence requirement but will become a requirement under the SIS Act.
Prudential Standard SPS 220 Risk Management provides more detail.
To manage conflicts of interest and duty
Where a conflict exists, and general law would allow a trustee to proceed despite the conflict, there will now be a number of additional requirements which must be met by a superannuation fund trustee under the SIS Act. Where there is a conflict between the duties of the trustee to the beneficiaries and its duties to other parties, or the interests of the trustee or directors and the interests of the beneficiaries, the trustee will now have a duty:
- to give priority to the duties and interests of the beneficiaries over the duties to and interests of the trustee to other persons;
- to ensure that the duties to the beneficiaries are met despite the conflict;
- to ensure that the interests of the beneficiaries are not adversely affected by any conflict; and
- to comply with the prudential standards in relation to the conflicts.
These new duties will require trustees of superannuation funds to consider a new range of issues when dealing with conflicts and importantly to document these considerations.
Prudential Standard SPS 521 Conflicts of Interest provides more details.
To maintain and manage financial resources to cover operational risk
For the first time, a trustee must develop an operational risk financial reserve to cover losses to members due to operational failures. This reserve can only be used to pay for members' losses and cannot be used for indemnification of the trustee.
Prudential Standard SPS 114 Operational Risk Financial Requirement provides more detailed information. APRA states in FAQ 46 that it would generally expect the reserve to be in the order of 0.25% of the fund's assets.
Enhanced trustee obligations for MySuper products
Trustees who provide MySuper products will have even greater responsibility to MySuper members.
Promote financial interests of members of a MySuper product
A key component of the duty to promote the financial interests of MySuper members will be the focus on returns to beneficiaries. The Explanatory Memorandum to the Trustee Obligations Act states:
"This requires a trustee to make informed judgments regarding the MySuper product … so that it secures the best financial outcome for these beneficiaries. While this will lift the standard required of trustees, it is not a requirement that trustees generate certain level of returns ... low returns, on their own, will not necessarily involve a breach of this obligation."
Despite the comfort that "low returns, on their own, will not necessarily involve a breach of this obligation", the reference to the obligation to secure the "best financial outcomes" raises fresh concerns that trustees will be judged by outcomes rather than process. This would be an unwelcome development.
Determine on an annual basis that there is sufficient scale to provide a MySuper product
There is a new obligation requiring trustees to consider annually whether the financial interests of the MySuper members are disadvantaged by comparison with other funds due to insufficiency of scale in terms of members (both MySuper and non-MySuper) or assets. The details of the trustee’s method of determining these scale matters must be included in the investment strategy for the MySuper product.
Include in investment strategy an investment return target and level of risk for a MySuper product
A target investment return will need to be included in the trustee's MySuper investment strategy and must be expressed as the expected return over a rolling period of 10 years, updated each year. Trustees are also required to determine the level of investment risk that is appropriate for MySuper members, having regard to the age of members and other relevant factors.
New covenants for directors of corporate trustees
Currently, SIS Act section 52(8) states that a covenant by a corporate trustee operates as a covenant by the trustee's directors. However, the covenants do not directly apply to the trustee's directors.
Under the reforms, covenants will be imposed directly on directors individually, including the following:
- to act honestly;
- to exercise the same degree of care, skill and diligence as a prudent superannuation entity director;
- to act in the best interests of the beneficiaries;
- where there is a conflict of duty or interest, to give priority to beneficiaries and ensure the duties to beneficiaries are met despite the conflict, to ensure the interests of beneficiaries are not adversely affected and to comply with the prudential standards;
- not to enter into a contract or do anything else which would prevent the director or the corporate trustee from properly performing or exercising their functions or powers; and
- to exercise a reasonable degree of care and diligence for the purposes of ensuring that the corporate trustee carries out the SIS Act covenants.
Liability of trustees
Trustees and directors can be held liable to members for loss or damage caused as a result of a breach of these new statutory duties. However, as mentioned in the previous article in this Update, under the reforms, a person who has suffered a loss due to a director’s contravention of duties under the SIS Act would be required to seek leave from a Court before bringing an action against an individual director. Hopefully, this would limit vexatious actions against directors as a Court would consider whether the member is acting in good faith and whether there is a serious question to be tried before granting leave to bring such an action.
Further, it is proposed that the legal defence available for trustees and directors in court proceedings be extended to include proceedings involving breaches of MySuper obligations. This would mean that trustees and directors would have a defence to a contravention of a MySuper obligation if the contravention was due to reasonable mistake or due to the fault of another and the trustee or director had acted with reasonable caution and exercised appropriate due diligence.
Trustees will need to document clearly their due diligence processes and their consideration of relevant matters in order to be able to show compliance with their SIS Act duties in order to take advantage of the defence in amended section 55(5). Further, as part of their Stronger Super preparations, trustees and directors should review not only their indemnity insurance but also their right to indemnity from the fund .
In its recent decision in Alcoa of Australia Retirement Plan Pty Ltd v Frost  VSCA 238 (Alcoa), the Victorian Court of Appeal has reaffirmed that where trustees are required to exercise a discretion under the relevant trust deed, the trustee is under a positive duty to make inquiries to properly inform itself. A trustee will not be excused by relying solely on the information put before it but, rather, the onus is on the trustee to make the inquiries necessary to make a properly informed decision.
The individual concerned suffered multiple back injuries and ceased work with his employer in December 2006 and applied to the Trustee for a total and permanent disability benefit in July 2009. His application had a statutory declaration and medical reports annexed to it but contained no history of employment or education. Following a request for further evidence of the individual's condition at the time of termination of his employment, the Trustee denied the individual's application for a TPD benefit and, instead, awarded him the less generous, ill-health benefit.
The case was first heard in the County Court which applied the High Court's decision in Finch v Telstra Super Pty Ltd  HCA 36 (Finch). The County Court held that the Trustee was under a duty to undertake a proper and informed consideration of the claim and in doing so, to make further inquiries if the information before it was deficient. The County Court pointed to the absence of information in relation to the individual's qualifications, the deficiency of the information on the individual's condition at the time of termination, and the absence of information from the employer before concluding that the Trustee had insufficient information before it to enable proper and informed consideration of the issues.
On appeal, the Court of Appeal held that where a claim depends on the formation, by the trustee, of an opinion:
"the formation of the opinion is not a "mere discretionary decision". The trustee is under a duty to give "properly informed consideration" to the application…there is a "high duty" on trustees to make such inquiries as they may reasonably consider relevant in order to properly determine the application."
In Finch, the High Court distinguished the 1984 decision in Karger v Paul  VR 161 (relied upon by the Trustee). Had Karger v Paul applied, the exercise of the Trustee's discretion would have been unreviewable by the Court, unless the discretion was exercised improperly. The High Court found that the duty of trustees to properly inform themselves is "more intense" in superannuation trusts than family or charitable settlements and, given their importance, they cannot be immune from judicial control. Relevantly, the High Court held that where the availability of the benefit depended on the trustee forming an opinion, this was not a discretionary matter:
"…in the Deed there was a power to take into account "information, evidence and advice the Trustee may consider relevant", and that power was coupled with a duty to do so."
In Alcoa, the Court of Appeal opined that Finch is, arguably, authority for the limited principle that where a trustee is faced with conflicting information, it is under a duty to seek information to resolve the conflict. The Court held that the claimant does not bear any onus of proof and, accordingly, the Trustee had the responsibility for making inquiries if it is not satisfied with what the claimant has provided. Importantly, the Trustee's onus is not discharged simply by requesting, in general terms, that the claimant provide further information to support his application. As the Trustee must consider the claim properly and genuinely, the Trustee must ensure that it is informed to the extent required for it to make a valid decision.
- Natalie Gullifer's article "Director liability — personal liability for unpaid SG and other reforms" was published in the November issue of the Superannuation Law Bulletin.
- Ruth Stringer has been recognised as a Leader in Financial Services Regulation (Australia) by Chambers Asia Pacific 2013. Chambers is the pre-eminent guide to the legal profession and inclusion in the publication is based on independent research, client feedback and peer review.
- On 23 November, Beth McConnell presented at the Law Council of Australia Rising Stars Corporations Law Workshop in Sydney on APRA's proposed crisis management powers.
- Beth has also been named chair of the Victorian ASFA Legislation Discussion Group for 2013.
- We are delighted to announce a new senior addition to our team in Sydney. Andrew Walker, Senior Associate, is an experienced financial services and funds management lawyer. Andrew joins us from Fidelity Worldwide Investment, where he was Senior Corporate Counsel. Andrew's previous roles included working as a Senior Lawyer with the Australian Securities and Investments Commission.
All information on this site is of a general nature only and is not intended to be relied upon as, nor to be a substitute for, specific legal professional advice. No responsibility for the loss occasioned to any person acting on or refraining from action as a result of any material published can be accepted.