In the past, penalties have sometimes been imposed on companies which act as superannuation trustees, for breaching the law in carrying out their duties or being in breach of trust. If the trustees do not have any significant assets of their own, which is often the case, the penalties have been paid by the members of the fund by the trustee paying the penalty out of the fund assets.
An important change to superannuation law occurred on 1 January, 2022, when an alteration to section 56 of the Superannuation Industry (Supervision) Act (the SIS Act) took effect. That amendment prohibits trustees of superannuation funds from paying any penalty, that is imposed on the trustee, out of members’ money in the fund. The amendment was made to protect members against paying a penalty that is imposed on their trustee because of the trustee breaching Commonwealth law or committing a breach of trust.
The QSuper superannuation fund is a large fund with many members. The trustee previously did not receive any remuneration for acting as trustee but wanted to amend its trust deed to permit it to be remunerated out of the fund assets. The trustee sought the approval of the court to the amendments because of its conflict of interest in approving the amendments.
The court’s judgement in Re QSuper Board  QSC 276 given on 27 October, 2021 is an important decision on whether a court should approve amendments to a trust deed which have the effect of a trustee, which is not entitled to remuneration from the fund, being able to pay itself remuneration from the fund to, amongst other things, build up a reserve of its own.
A purpose in creating its own reserve, is that the trustee could use the reserve to pay any penalty that is imposed on it which it could not pay directly out of fund assets because of the prohibition in section 56. A penalty is generally imposed om trustees because of an action or inaction that has a detrimental effect on members. Therefore, if a penalty is directly or indirectly paid out members’ funds, members are doubly disadvantaged and the trustee will have suffered no detriment for its actions.
In this case, the Supreme Court of Queensland ordered that the trustee could agree to proposed amendments to the QSuper trust deed which permit the trustee to pay itself remuneration out of the fund assets, thus enabling it to build up a reserve out of which it can any future penalty that is imposed on it.
It could be argued that the court, by granting the trustee’s application, in effect permits the trustee to do indirectly that which it could not do directly, which is to pay any penalty imposed on it out of fund assets.
However, the reasoning of the court was that the QSuper trustee did not have any significant assets of its own and if a penalty is imposed on it which it has to pay itself, it would become insolvent if it does not have sufficient funds to pay the penalty.
An issue for the court in determining whether to approve the proposed amendment was, was it in the best financial interests of the QSuper members, as required by the SIS Act?
In the judgement, it is said that a relatively broad and practical approach should be adopted when assessing whether this type of proposed amendment is in the best financial interests of beneficiaries. The judge said that that the court should consider the interests of present and future beneficiaries and have regard to the commercial and practical realities of the superannuation industry generally. The judge added that, ultimately, the relevant enquiry for the court is not whether the decision to consent to the amendment is in the best financial interests of the members but rather whether it is reasonably justifiable on that basis.
Best financial interest
In assessing whether the best interests test has been met, it is questionable whether a trustee has to consider future members in making a decision. An alternative and better view is that any decision of a trustee must be in the best financial interest of those who are members at the time of the decision.
The amendment proposed was that the trustee be entitled to be paid such reasonable remuneration as determined by the trustee. Some issues that arise in relation to the proposed amendment are:
- Why is it in the best financial interests of the members to permit an amendment which allows the trustee to be paid reasonable remuneration from the members’ funds, thereby depleting them, when the trustee wasn’t previously entitled to be so paid?
- Should the trustee be permitted to receive remuneration to create a reserve to meet any penalty imposed on it as a result of its own delinquent conduct?
- Should the trustee be permitted to indirectly do that which it is unable to do directly, by being able to pay a penalty out of members’ funds through receiving remuneration paid for by the members to create a reserve out of which penalties can be paid?
- If the reason the penalty is being imposed is because the trustee has acted to the detriment of the members, why should the members have to indirectly pay the penalty, when they have already suffered from the trustee’s actions?
- From the members' perspective, the effect on their member accounts is that any penalties are still paid by them and, in fact, the position is worse than it was before the legislative change because their account balances are reduced by the annual fee paid to the trustee and there may be no penalty for the trustee to pay whereas under the previous arrangement, the members would only pay if a penalty was imposed on the trustee, which is rare.
- Should the trustee be entitled to charge any amount that it regards as reasonable or should there be a limit to what it can charge?
The court dealt, in part, with the issues involved in relation to the best financial interests duty in the following way in its judgement:
“It is clearly in the best financial interests of members of the QSuper Scheme that the QSuper Board take steps to ensure the due and proper administration of the QSuper Fund. One important aspect of the due and proper administration of the QSuper Fund involves protecting against any risk of its trustee becoming insolvent.”
Contrary to the court’s decision on this point, it is well arguable that it is not in members’ best financial interests for them to incur an expense when the purpose in incurring it is to protect the trustee from becoming insolvent as a result of incurring a penalty for being in breach of its obligations to the members or because the trustee contravened a Commonwealth law.
If a trustee goes into liquidation as a result of becoming insolvent, that is not an outcome which justifies a decision that is not in the members’ best financial interests, as a replacement trustee can readily be appointed. It is not unusual for a trustee to be replaced by another.
Another basis on which the court said that the proposed amendment was in the members’ best financial interests was that competent, reputable and experienced individuals are unlikely to be attracted to serve as directors of the trustee if there is an insolvency risk. It is in members’ best financial interests to have competent people on their trustee board and this may be justification for an expense being imposed on members if there is appropriate evidence of directors and would-be directors requiring that there be trustee remuneration so that a reserve can be created from which penalties can be paid.
How much remuneration?
Another issue in the QSuper case was that the proposed trust deed amendment did not specify the amount of the remuneration to be paid. Rather it referred to reasonable remuneration determined by the trustee. Thus, the trustee, if it incurred a significant penalty, could suddenly determine that it be paid a large amount of remuneration sufficient to satisfy payment of the penalty. Nevertheless, the court said that a deed amendment which doesn’t specify the remuneration but refers to reasonable remuneration doesn’t breach the best financial interests obligation.
Contrary to the court’s decision, to allow a trustee to charge whatever amount it regards as being reasonable could well be regarded as not being in members’ best financial interests.
For the reasons stated above, it is arguable that the court’s decision did not give sufficient weight to the members’ best financial interests in ordering that the trustee could approve of this particular amendment to the trust deed governing the fund. However, the reasoning in the QSuper decision has subsequently been applied by the NSW Supreme Court in approving trust deed amendments to allow remuneration to be paid to the trustees of Maritime Super, Spirit Super, NGS Super, Cbus and Local Government Super and by the Victorian Supreme Court for remuneration to be paid to the trustees of Care Super and HESTA and by the South Australian Supreme Court to allow a trustee risk reserve fee to be created in AustralianSuper.
In all these cases, the purpose in making the applications was to enable the trustee to establish reserves from which penalties will be able to be paid, the reserves to be financed by the members. APRA participated in these hearings and it is surprising that it did not more strongly contest the granting by the courts of the trustees’ applications.
There were some earlier cases in which the courts approved trust deed amendments to permit remuneration to be paid to the trustees- Re Queensland Coal & Oil Shale Mining Industry (Superannuation) Fund in 1999, Re Cuesuper Pty Ltd in 2009 and Re Retail Employees Superannuation Pty Ltd in 2013. However, the facts in those earlier cases were different from the current cases. In the earlier cases, the trust deed amendments were required because of a genuine need to pay remuneration to the trustees. In the recent cases, the stated purpose in paying remuneration to the trustees was to create reserves out of which penalties imposed on the trustees (if any) could be paid to circumvent the recent legislative ban on paying penalties directly out of members’ funds.
For the reasons stated in paragraph 5 above, the members are now worse off than they were before the amendments to s56.
There is another issue that arises from the QSuper case.
It is that where an application is made by a trustee to obtain court approval for something the trustee could not otherwise do because, for example, of a conflict of interest, it is usual for the court to appoint one or more members to act as representatives of all of the members to advise the court whether the members agree with what is proposed. That was not done in the QSuper case. Instead, the views of some trade unions, which represent some of the members, were sought and those trade unions did not object to the trustee making the proposed trust deed amendments.
The court said in its judgement that the fund had assets of $120 billion and 620,000 members and that notifying each of the members of what was proposed would involve expense of $275,000 and five weeks would need to be allowed for the members to respond to any notice given to them. Instead, the trade unions and the Australian Prudential Regulation Authority (APRA) were given in advance all the material that was before the court. The court said that the trade unions did not express any objection or concerns in relation to the proposal. APRA appeared before the court represented by senior counsel and made submissions but did not object to the proposal.
In those circumstances, the court said that there was no necessity for the members to be given notice of what was being done.
It is preferable for members to be represented where there is a proposal requiring a court’s decision which impacts on the members’ interests, so that the court, in making its decision, can take account of any contentions that are made on behalf of the members. That is what has happened in other cases.
A provision that is relevant to giving notice to members of any change in circumstances is section 1017B of the Corporations Act. It says that a trustee must give members notice of any material change to a matter that would have been required to be specified in a product disclosure document. If the change is not an increase in fees or charges, the notice has to be given before the change or as soon as practicable after it and within three months or, if the change is an increase in fees or charges, the notice has to be given 30 days before the change takes effect. The purpose of this requirement is to enable a member to take issue with, or take action in relation to, a change that affects the member. This requirement is a reason for members to be notified of a change that affects them before court approval is sought because the appropriate time for the members to take issue with a proposal that they disagree with is in the court proceedings.
Noel Davis is a barrister specialising in superannuation.