POWERED BY MOMENTUM MEDIA
(April-2003) Whose surplus is it, anyway?
In situations involving the reorganisation of defined benefit funds, there is sometimes a perception that an employer sponsor is entitled to any fund surplus, as it is the employer that is responsible for funding the benefits. However, in a recent decision by the Superannuation Complaints Tribunal (SCT), three members of a defined benefits super fund were held to be entitled to a share of the fund’s surplus following the reorganisation of their employer and the transfer of their benefits to a successor fund.
The complainants initially received a notice on behalf of the fund’s trustee indicating they were entitled to an “equitable share of the plan” to be calculated by an actuary based on their years of service, final average salary and a factor dependant on their category of membership.
However, in calculating the benefits payable to the complainants, the actuary did not follow the method initially advised. Instead, she determined the exit benefit using a discounted accrued retirement benefit (DARB) method. The actuary described the DARB method as “the amount members would have received at retirement based on service to date, discounted for the difference between their present age and their retiring age.”
Importantly, Rule 7.4 of the fund’s trust deed stated: “If the member is leaving the service as a result of retrenchment or reorganisation of the company, the amount payable under this rule shall be the amount calculated by an actuary as being the member’s equitable share of the plan if the member remained in the service.”
The complainants sought a review of the trustees’ decision as to what constitutes “an equitable share of the plan”, alleging that the method used by the actuary reduced their benefits by $11,000, $11,000 and $26,500, respectively.
The SCT held that the calculation by the actuary was not fair and reasonable as she applied a formula in the calculation of the benefits that did not accord with the definition of “plan” in the trust deed. The SCT noted that the word “plan” was a defined term in the deed and should be used in the defined sense where it appears in Rule 7.4. That is, it included “contributions... and all other monies from time to time received and held by, or on account of, the trustee... and the investments... for the time being, representing the same and all income derived therefrom.”
According to the SCT, as the “surplus” was money held on account of the trustee as the result of income earned from investments, it followed that in the calculation of a member’s “equitable share of the plan”, the surplus should be included.
The SCT’s decision reinforces the fact that, ultimately, it is the specific provisions of the fund’s trust deed that determine how any surplus should be dealt with. Moreover, if the trust deed does not define “an equitable share of the fund”, it appears from this decision that the discounted present value method should not be used to determine it.
Although the SCT’s decision is subject to appeal, it still serves as a warning to employers, trustees and members involved in fund reorganisations, especially given that retrenchment programs (possibly associated with a takeover) are a common trigger for generating actuarial surpluses in defined benefit funds.
Members entitled to HIH fund surplus
Recently in HIH Superannuation Pty Limited [2003] NSWSC 65, the NSW Supreme Court approved a scheme for distributing the fund’s $36 million surplus to its members, despite an objection from one class of fund members including former senior executives of HIH. The court was satisfied that the distribution plan was in accordance with the trustee’s duties. The evidence clearly showed that the trustee had turned its mind diligently and thoughtfully to the relevant considerations and had taken and acted in accordance with independent legal and actuarial advice.
The court also held that the trust deed did not prevent the augmentation of benefits in respect of people who had already ceased employment or had been paid a death or disability benefit and ceased to be a member. Furthermore, the court found that former members were still classified as “beneficiaries” under the fund’s rules despite already having received a benefit payment.
Important dates — May 2003
May 13, 2003 — federal budget
May 14, 2003 — RBL reporting to ATO — reportable benefits paid during April 2003
May 15, 2003
n Final lodgment and payment date for 2002 income tax returns for all other taxable super funds;
n Superannuation and termination payments surcharge assessments issued.
— Stuart Jones is a tax writer at the Australian Tax Practice. E-mail: [email protected]
AUTHOR
Zilla Efrat
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