Superannuation Update October 2009

General update

Federal Parliament update

Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009

On 9 September, the House of Representatives passed the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009¹ without amendment. The Bill has now moved to the Senate for consideration.

As stated by the Explanatory Memorandum², this Bill proposes to introduce a requirement to obtain shareholder approval for termination benefits for company directors and executives which exceed one year’s average base salary.

The Minister for Financial Services, Superannuation & Corporate Law has also released the final Regulations³ and Explanatory Statement⁴ in relation to these proposed reforms. According to the media release⁵, the Regulations define ‘base salary’, clarify the types of benefits that are subject to shareholder approval and prescribe when a retirement benefit is given. Any superannuation contribution that is paid during the relevant period and is not dependent on the satisfaction of a performance condition is included in base salary.

The Regulations specify that the following items, amongst others, are not included as a termination benefit for the purposes of shareholder approval:

• A payment from a defined benefits superannuation scheme that was in existence when this Regulation commences. A benefit from an accumulation scheme is not expressly exempted.
• A ‘genuine superannuation contribution’ that is paid by an employer or employee on or after the Regulation commences. ‘Genuine superannuation contribution’ is not defined. The Explanatory Statement states ‘Ultimately, the courts will determine whether certain types of superannuation contributions are genuine. However, it is reasonable to expect that contributions made from base salary as part of a salary sacrifice arrangement would be considered genuine. In addition, contributions made by employers relating to their obligations under the Superannuation Guarantee (Administration) Act 1992 (Cth) would also be considered genuine. The Regulations are not intended to capture earnings on genuine superannuation contributions.’
• A payment from a ‘prescribed superannuation fund’ due to death or incapacity. The definition of ‘prescribed superannuation fund’ is unchanged from the existing law.
• ‘Genuine accrued benefits’ that are payable under a law within the meaning of section 200H. This means a ‘benefit given by a person if failure to give the benefit would constitute a contravention of a law in force in Australia (otherwise than because of breach of contract or breach of trust)’. The examples provided in the Regulations are a payment of annual leave, long service leave or sick leave.

While the Regulations have been sent to the Ministerial Council for Corporations for their approval, there remain some questions regarding the practical implications of the current draft Regulations, particularly in their application to accumulation schemes and accumulation benefits paid from defined benefit schemes.

Superannuation Legislation Amendment (Lost Members’ Superannuation Accounts) Bill 2009

Treasury has released⁶ draft legislation⁷ and explanatory material⁸ to implement the government’s budget announcement that superannuation providers will be required to transfer to the Commonwealth lost accounts which have balances less than $200 as well as those accounts which have been inactive for a period of five years where there are insufficient records to identify the owner.

Under the proposal, the trustee of a superannuation fund must report details of each lost member’s account to the Commissioner of Taxation who will maintain a Lost Members’ Register.

The explanatory material states that there are ‘no additional obligations on superannuation providers to attempt to locate lost members before the reporting and payment to the Commissioner under these changes’.

Submissions on the draft legislation were due by 25 September 2009.

Cooper Super System Review

The Review Panel of the government's Review into the governance, efficiency, structure and operation of Australia's superannuation system has announced details of a ‘three-phased consultation’ approach, including a consultation timetable.

According to the media release⁹, and the Review’s Scoping Paper¹⁰, the review of the superannuation system will be done in three phases, addressing governance, operation, efficiency and structure. Each phase will involve:

• the release of an Issues Paper
• approximately six-to-eight weeks for interested parties to make submissions in response to the Issues Paper, and
• the release of the Panel's preliminary recommendations after it has considered the submissions.

The final report is to be delivered to the government by 30 June 2010.

The Review Panel has released the Phase One: Governance – Issues Paper¹¹ which raises a number of questions on issues including trustee knowledge, skills and training, conflicts in outsourcing, accountability to members and the composition of boards of trustees. Submissions were due by 16 October 2009 and preliminary recommendations will be released in early December.

The Phase Two: Operation and Efficiency Issues Paper¹² on operation and efficiency was released on 16 October 2009.

Short selling

The Minister for Financial Services, Superannuation & Corporate Law has released draft regulations¹³ and commentary material¹⁴ in relation to the disclosure of short selling information under the Corporations Amendment (Short Selling) Act 2008 (Cth).

According to the media release,¹⁵ the draft regulations require:

• The reporting of covered short selling transactions to market operators. The market operators will aggregate and release the information to the public on the following business day. 
• The reporting of short positions by short sellers to ASIC. ASIC will aggregate and release the information to the public four business days after the positions are taken.

The reporting of short positions will commence on 1 April 2010.

The Minister stated that the disclosure timetable ‘was determined to be the most liberal approach that was consistent with maintaining market integrity’. He noted that the ‘Government has completed its consideration of the policy issues associated with the regulations but is seeking comments from stakeholders on a range of technical issues (outlined in the commentary material) by 23 October 2009 with a view to having the regulations considered by the Executive Council in November 2009’.

The government has also indicated that it will review these arrangements 12 months after the commencement of the new reporting requirements.

End of relief regarding disclosure of Financial Ombudsman Service

The Financial Ombudsman Service has reminded¹⁶ affected members that ASIC’s relief for Product Disclosure Statements and Financial Services Guides expired on 30 September.

ASIC had granted relief to Financial Ombudsman Service members that were previously members of the Banking and Financial Services Ombudsman, the Insurance Ombudsman Service or the Financial Industry Complaints Service which allowed those members to continue to use PDSs and FSGs printed before 1 July 2008 that did not include information about the Financial Ombudsman Service, subject to certain conditions.

Illegal early access schemes

ASIC has appealed to trustees of superannuation funds and to their members to help limit illegal early access to superannuation benefits.

According to the media release,¹⁷ ASIC is ‘asking people to be wary of promoters who are falsely promoting and convincing them to access their super early’.

ASIC has published a brochure¹⁸ to warn people about the dangers of illegal schemes to take money out of superannuation and is encouraging trustees to distribute the consumer brochure to their members along with their annual periodic statements or with other member communications.

ASIC has also noted that it has prepared a briefing for the major superannuation industry associations which provides information about illegal schemes to take money out of superannuation, identification of the schemes and tips to minimize the risk of fraud.

Recent case law

Webb v Teeling [2009] FCA 1094

This Federal Court of Australia decision involved a review of a Superannuation Complaints Tribunal decision regarding the distribution of the death benefit of the late Christopher Webb.

The most legally noteworthy aspect of this case involved the possible distribution of part of the death benefit to Christopher Webb’s mother, Olive Webb.

In September 2007, the trustee had made a preliminary decision regarding the distribution of Christopher Webb’s death benefit and had determined to pay Olive Webb $250,000. Following a complaint to the trustee regarding the trustee’s preliminary determination from Ms Teeling (a financial dependant who claimed to be Mr Webb’s de facto partner), Olive Webb died on 20 October 2007. The trustee confirmed its original determination regarding payment of the death benefit. A complaint was made to the Superannuation Complaints Tribunal by Ms Teeling.

The Tribunal set aside the trustee’s decision and substituted its own, determining that the estate of Olive Webb should receive no benefit. The Tribunal stated that a payment to Olive’s estate would not be a payment ‘to or for the benefit of the Dependants’ as required by the trust deed and the Superannuation Industry (Supervision) Act 1993 (Cth). The Federal Court held that the question as to whether or not Olive was a dependant of Christopher’s was to be determined as at the date of Christopher’s death. However, given Olive Webb was deceased at the time of the trustee’s final determination, the trustee did not have the power to make a payment to the estate of Olive under SIS Regulation 6.22 which limits payments of a member’s death benefit to the member’s legal personal representative and one or more of the member’s dependants. Further, it was not fair or reasonable to pay part of Christopher’s death benefit to his deceased mother’s estate.

The Tribunal had redistributed the amount which was to have been paid to Olive’s estate. The Tribunal had also adjusted the relative proportion received by each of the other dependants overall to reflect the ‘likelihood and quantum of future financial support’ each beneficiary would have received had Christopher not died.

Mr Webb’s daughter, Rebecca Webb, appealed the Tribunal’s decision on many grounds, including that the Tribunal had erred in finding that Olive Webb was not Mr Webb’s dependant by reason of her death on 20 October 2007. The appeal to the Federal Court was dismissed.

Cuesuper Pty Ltd [2009] NSWSC 981

The plaintiff in this case was the trustee of the superannuation fund Cuesuper.

When Cuesuper was established in 1970 it had 60 members. Cuesuper has since grown to more than 6,800 members and $288 million assets under management.

Given the change in the fund’s circumstances, the trustee of Cuesuper applied to the New South Wales Supreme Court to amend the fund’s trust deed to provide for remuneration of the trustee. Cuesuper’s trust deed expressly stated that the trustee must not be remunerated.

The trustee’s application was made on the following three bases:

• pursuant to section 81 of the Trustee Act 1925 (NSW) which allows for expenditure by a trustee which in the opinion of the court is expedient
• invoking the inherent jurisdiction of a court of equity to order remuneration of a trustee, and
• a direction that the trustee is justified in amending the trust deed of Cuesuper.

APRA had no objection to the application. Given that APRA did not object to the application and the trustee complied with the equal representation requirements and bearing in mind the cost which would have been associated with notifying the members of the fund, the court did not require joinder of, or notification to, any other party.

The express provision in the trust deed prohibiting remuneration was problematic as amendment of this provision would involve a conflict of interest and duty. However Justice Palmer had ‘no hesitation’ in giving a direction that the trustee was justified in making the amendments on the basis that ‘the proper administration of Cuesuper requires that the [trustee] be appropriately remunerated’.

The business of being a trustee – Trustee decision making

Governance of the superannuation system remains a topical issue.

We thought that it was appropriate to reflect upon some of the recent case law and public debates for reminders of the relevant legal principles in the governance of superannuation funds.

ING Funds Management Ltd v ANZ Nominees Ltd; ING Funds Management Ltd v Professional Associations Superannuation Ltd [2009] NSWSC 243

In our June 2009 Superannuation Update¹⁹ we discussed the decision in the ING Funds Management case. Following is a summary of some of the main governance lessons which arise from that case:

• Don’t ignore the basic requirements of the Corporations Act 2001 (Cth) (Corporations Act) regarding execution of documents.
  
  Section 127 of the Corporations Act provides that a company may execute a document as a deed if the document is expressed to be executed as a deed and is signed without using a common seal by two directors or a director and a company secretary. A company with a common seal may execute a document if the seal is fixed to the document and witnessed by the same people.
  
• Remember that a deed can only be amended by another deed. This point was crucial to the decision in the case.
  
• Focus carefully on the requirements which must be met before a valid amendment can be made to constituent documents. This will require reference to the governing rules of the entity as well as the relevant legislation.
  
  For a managed investment scheme, reference must be made to section 601GC of the Corporations Act which provides that, without a special resolution of the members, a constitution of a registered managed investment scheme can be amended by the responsible entity if the responsible entity ‘reasonably considers the change will not adversely affect members’ rights’.
  
  In the superannuation context, the test to bear in mind is the restriction on altering accrued benefits under Superannuation (Industry) Supervision Regulation 13.16 and also the relevant deed amendment power.
  
• Have evidence of the trustee’s proper consideration of the relevant amendment tests.
  
  In the case, although the minutes recorded the standard to which the responsible entity had to have regard, the judge found that there was absolutely no evidence of the basis on which the responsible entity made its decision or the thinking that led the directors to the baldly stated conclusion that the modification would not adversely affect members’ rights.
  
  To make matters worse, the judge said that had the responsible entity considered the question properly, it would not have been able to make the amendments because it was obvious that freezing redemptions adversely affected a member’s right to turn their units into money. So the court held that it was not possible that a reasonable person would have come to any conclusion other than that the modification would adversely affect members’ rights.

Australian Securities and Investments Commission v Macdonald (No 11) [2009] NSWSC 287 (commonly referred to as the James Hardie case)

As widely reported, the New South Wales Supreme Court handed down an important decision in the series of James Hardie cases in April this year (the 11th decision in the series). It found that the former non-executive directors and executives breached the Corporations Act when making statements to the market in 2001 about the adequacy of asbestos compensation funding. 

In a subsequent media release in August, ASIC stated that the decision provides important guidance on:

• the duties of executives, and 
• the responsibilities of non-executive directors.

ASIC has expressly encouraged the business community to carefully consider the implications of the decision and assess what improvements they can make to their decision-making processes. On this basis and despite the case being very fact specific, we set out below reminders of the significant general principles for directors and executives which can be drawn from the case:

• Remember the duty under Corporations Act section 251A to record minutes of board meetings within one month and the duty to have the minutes signed within a reasonable time after the meeting. This is a strict liability offence.
• For directors who are not physically present at a board meeting but join via telephone or videoconferencing, make sure that they have copies of what is tabled at the meeting or, if the information is not lengthy, that it is read out. Also ensure there are protocols in place so everyone knows what’s expected in a good governance sense for documents tabled at meetings.
• Ensure that there are adequate policies in place regarding the manner in which resolutions are considered and passed at a board meeting.  
• Remember that a director cannot rely on other directors (in the sense of abdicating responsibility) on the basis that other directors are more interested in a particular issue. 
• General counsel have a special role. They can be ‘officers’ for purposes of the standard of care and diligence under section 180 of the Corporations Act. The judge said that the general counsel in this case ‘played a vital role in the board’s deliberations thereby participating in the making of [the relevant] decision’. The court said that it must have been obvious to the general counsel that if the company released a false and misleading statement, there was a legal risk – and guarding against legal risks was at the core of his responsibilities as general counsel.
• Finally, there is a suggestion that directors are required to assess the material before them in the context of all information they have previously received on a particular issue. General counsel, company secretaries and others advising a board in its deliberations should bear this in mind in drafting briefing notes for board meetings.

Government reviews

There is currently a great deal of industry reflection sparked by a number of government reviews, including the Cooper Review into the governance, efficiency, structure and operation of Australia’s superannuation system and the Henry Review into Australia’s future taxation system.

Of particular ongoing interest are the familiar issues of conflicts of interest and who should act as a director of a superannuation trustee company.

We set out below some key thoughts on these issues.

Conflicts of interest

• Australian general law imposes two ‘proscriptive’ duties on a fiduciary (such as a superannuation fund trustee) namely, the duty not to obtain any unauthorised benefit and a duty not to put oneself in a position of conflict of interest. The law in Australia does not impose positive (or prescriptive) legal duties on a fiduciary to act in the interest of the person to whom the duty is owed.
  
  The Superannuation Industry (Supervision) Act 1993 (Cth) is somewhat different to the general law and does not expressly mention conflicts at all. APRA has usually relied on the ‘best interests duty’ in section 52 to provide a ‘hook’ for the conflicts duty. However, unlike the general law with respect to conflicts, section 52(2)(c) is expressed in prescriptive terms; that is, the trustee must ensure that something is done.
  
  The Corporations Act imposes duties on directors of trustee companies - not on the trustee company itself. The directors have a duty to the company and its shareholders; that is, the directors are not to let their personal interests conflict with the financial interests of the company and its shareholders. It is only through the AFS licensing regime that ASIC imposes a proscriptive duty on the company (as opposed to its directors) regarding conflicts and ASIC Regulatory Guide 181 is the result. ASIC has indicated that, in some instances, conflict cannot be remedied by disclosure and in that case, the conflict must be avoided altogether. This is, of course, different than the general law which allows trustees to obtain beneficiaries’ consent to act despite a conflict of interest.
  
  There is much legal complexity in how these obligations all sit together.
  
• APRA has issued a number of draft Prudential Practice Guides (PPGs) in recent months and, while still in draft, we can reasonably conclude that conflicts for trustees and their directors are ‘top of mind’ for APRA.
  
• Draft Prudential Practice Guide (PPG) 521 on conflicts of interest (issued in April 2009) is APRA’s first attempt to deal specifically with conflicts of interest. Following are some interesting points in PPG 521:
  • A conflict of interest may arise merely because a trustee director is also a member of the fund. Given equal representation requirements, this is rather surprising.
  • The ‘best interest duty’ in SIS section 52(2)(c) sets a ‘standard of care’ that trustees must observe. While best interests might be regarded as including the duty of loyalty, and thereby being relevant to a conflicts discussion, it does not amount to a standard of care – which is what the prudent person test in SIS section 52(2)(b) is intended to do.
  • ‘Embedded provisions’ can create a conflicts issue. Embedded provisions occur where the terms of the governing rules require that a certain service provider be used by the trustee – for example, a specified investment manager or insurer. We do not think that this is supported by current law.
    
• In August, APRA issued some additional draft PPGs which are intended to replace the four existing Superannuation Guidance Notes.
  
  In the draft PPG on Fitness and Propriety, APRA uses the ‘propriety’ standard to ensure that conflicts of interest are worked into the assessment of a person’s suitability to act as a director of a trustee company. APRA says that in testing a director’s propriety, the trustee must ascertain whether the director has –
  • failed to disclose a conflict of interest
  • failed to disqualify themself because of a conflict of interest
  • inappropriately participated in deliberations relating to a matter in which they had a conflict of interest, or
  • acted in their own interests, or those of a related party (such as an employer), in preference to the interests of the beneficiaries of the fund.
    
    It remains to be seen how this proposal would work in practice.

Who can act as a director of a superannuation trustee?

The draft PPG on Fitness and Propriety states that ‘fitness’ for office will now extend ‘to individual officers a minimum expectation in relation to skills and knowledge equivalent to that previously expressed for the trustee as a whole.’

APRA says that this new approach is because of the increased size and complexity of the industry over the period since implementation of licensing for trustees. This is a major departure from current practice where ‘fitness’ was generally to be assessed on a ‘board-wide’ basis and not with respect to individual directors.

The PPG states that minimum fitness requirements for each director include:

• understanding of and ability to implement section 52 of SIS
• working knowledge of the SIS Act and other prudential requirements, including accounting, auditing and operational process
• basic investment knowledge
• basic knowledge of the elements and application of other RSE licensee and trust law, and
• awareness of areas where additional technical, professional or expert advice should be sought.

APRA says that after the minimum individual fitness requirements have been met, then overall fitness of the trustee can be applied on a collective basis.

When equal representation applies to a fund, APRA suggests that the trustee’s ‘fit and proper policy’ and a summary of the duties of a trustee as encapsulated in the covenants of SIS Act section 52 should be made available to prospective candidates prior to nomination.

APRA considers that having independent directors is one way of ensuring that there is no appearance of bias and that conflicts are less likely to arise. Independent directors can also be selected for their competency so as to ‘round out’ the skill set around the table and to address deficiencies that might exist. While those who use the equal representation model are limited by the SIS Act to one independent director, we are aware that APRA has in the past approved more than one independent director for a board.

Freehills update

• Michael Vrisakis’ article ‘Fund governance: Overriding the trustee mandate’ was published in the Australian Superannuation Law Bulletin Volume 21 Number 3 October 2009.
  
  Another of Michael’s articles ‘Unfair terms legislation and contractual arrangements in trust products’ was published in the Financial Services Newsletter Volume 8 Number 4 September 2009.
  
• Natalie Gullifer has been re-appointed to the ASFA Victorian State Executive Committee for another two-year term.
  
  Natalie has also recently lectured on ‘Taxation of Superannuation’ as part of The University of Melbourne Masters program.
  
  Natalie was also a speaker at the Melbourne Superannuation Lawyers Discussion Group on 5 October, discussing some current issues related to Product Disclosure Statements.
  
• Peggy Haines has undertaken a part-time role as consultant to the Cooper Super System Review.

Endnotes

1. Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009 
2. Explanatory Memorandum to the Corporations Amendment (Improving Accountability on Termination Payments) Bill 2009 
3. Corporations Amendment Regulations 2009
4. Explanatory Statement to the Corporations Amendment Regulations 2009 
5. Media Release, ‘Improving Accountability on Termination Payments – Regulations’ 
6. Treasury – Lost Members’ Superannuation Accounts
7. Exposure Draft - Superannuation Legislation Amendment (Lost Members’ Superannuation Accounts) Bill 2009 
8. Explanatory material -  Exposure Draft - Superannuation Legislation Amendment (Lost Members’ Superannuation Accounts) Bill 2009 
9. Media Release, ‘Super System Review: A Three-Phased Consultation’ 
10. Cooper Super System Review ‘The Scope of the Review. A Three-Phased Consultation’
11. Cooper Super System Review ‘Phase One: Governance Issues Paper 25 August 2009’
12. Cooper Super System Review ‘Phase Two: Operation and Efficiency Issues Paper 16 October 2009’ 
13. Draft Corporations Amendment Regulations 2009 
14. Commentary on Draft Short Selling Regulations 
15. Media Release, ‘Short Selling Disclosure Regulations’ 
16. Financial Ombudsman Service, ASIC relief for PDSs and FSGs
17. Media Release, ‘09-158AD ASIC acts on illegal early access to super’ 
18. ASIC brochure, Illegal early access to super
19. Superannuation Update June 2009

More information

For information regarding possible implications for your business, contact a member of the Superannuation team