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(May-2003) HIH case opens door wider for benficiaries
Readers may be surprised to learn that at least one part of the HIH insurance group was apparently in surplus when the group collapsed in spectacular circumstances two years ago. This was the HIH Insurance Group Staff Superannuation Fund, which at the time, was left with an apparent actuarial surplus. Exactly how much of a surplus is not recorded, but it was significant enough for the trustee of the fund to go to court seeking directions about a proposed plan of distribution. The case raised a number of questions relevant to superannuation law generally, including who may be a ‘beneficiary’ and the effect of a direction by an employer to a trustee.
The court took a very broad view of the term ‘beneficiary’. It also decided that the fund's rules dealing with giving directions to the trustee, although drafted in a roundabout way (as is not uncommon), were nonetheless valid and did not breach the SIS prohibition against rules allowing other persons to direct the trustee in the exercise of the trustee's powers.
Beneficiary
The question of who may be a beneficiary arose because the plan of distribution proposed to distribute the surplus, in many if not most cases, to persons who had already been paid all of their normal entitlements from the fund, whether because of termination of their service or some other triggering event.
It must be remembered that the circumstances were not those of the normal fund whose membership is subject to turnover as employees come and go, while the fund is expected to continue indefinitely. This fund had a limited life. The employers were in liquidation and nearly all employees had ceased to be employed.
But a final distribution of surplus would have to be in accordance with the rules of the fund. One of those rules spoke of a power to augment the benefit of “any member or other beneficiary”. ‘Member’ was defined in such a way as to exclude anyone who had received all of his or her entitlements from the fund or whose entitlement to benefits had been terminated.
So a person who had already received all of his or her normal entitlements could hardly be a member still. The question therefore was whether such a person was an “other beneficiary”.
The court observed that, according to law, a current member of a fund cannot point to any particular money as being held on trust for the member. At least until the member’s benefits actually become payable, the most he or she has is a right to have the fund administered properly according to the rules and the law. When a person’s entitlements fall due for payment and are paid, that person has been paid a benefit out of the fund, and can be said to be a beneficiary. The concept of ‘beneficiary’ is not confined to a person who stands to receive something in the future if and when events crystallising some entitlement come to pass.
For these reasons, the rules allowed not only an increase, as and when paid, of sums to be paid as benefits in the future in respect of cessation of employment and other triggering events, but also retrospective increase, by way of payment supplement, in benefits already paid to persons, whether those persons were “members” or “other beneficiaries”.
Direction by employer to trustee
The SIS Act specifically prohibits the rules of a fund from allowing any other person to direct the trustee in the exercise of any of the trustee’s powers under the rules. For this reason, the fund’s rules contained both a clause allowing the principal employer to direct the trustee to augment the benefit of any member or other beneficiary, and a clause, presumably inserted following the passage of the SIS Act, which said that if any rule was invalid because it subjected the trustee to direction by another person, the trustee’s consent would be required to give the direction. This sort of ‘patching’ of fund rules in the wake of the SIS Act is not uncommon.
The problem in this case was that the formulation of the plan of distribution amounted to a direction to the trustee by the principal employer (now represented by the liquidators). The trustee argued in court that the combined effect of the rules described above was to put the trustee in a position where, if it consented to the giving of the direction, it would be both empowered and required to give effect to the direction by increasing the benefits of eligible members in such a way as would implement the scheme of enhancements set out in the direction.
The court was puzzled as to why the rules did not simply allow the trustee to augment benefits if the principal employer so requested and the trustee so agreed. That would not have conflicted with the SIS Act and would have been a direct and straightforward stipulation. Be that as it may, the combined effect of the actual rules was the same, and the trustee did, in principle, have power to augment benefits in the manner “requested” by the employer.
The court believed that, on the evidence, the trustee had considered every relevant factor and had not acted in bad faith when formulating the plan. Its decision could not be faulted or attacked.
— Brian Egan is a freelance commentator on superannuation, tax and corporations law matters, and a principal of Sirius Information Services.
AUTHOR
Zilla Efrat
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