Super Fund Mergers: Have You Considered Your Obligations To Members? - QMV Legal
With the growth of the superannuation industry in the last decade has come a push by regulators for consolidation and exploration of merger opportunities by funds. With merger in most instances comes the transfer of members to a successor fund, which requires that both trustees consider the legal obligations associated with such a transfer.
A successor fund transfer (SFT) is the standard approach to transferring member benefits from one fund into another. While an SFT does not require member consent, it does require that the trustee ensure that the decision to transfer is in members' best interest, the transfer is in line with each trustee's obligation to promote members' financial interest and members are provided with equivalent rights in the successor fund.
In practice this requires that key attributes affecting member benefits of the originating fund be compared to those currently offered in the successor fund and those proposed to be applied to transferring members. Key documents necessary for the comparison include:
-The trust deeds
-All relevant Product Disclosure Statements
-Any applicable insurance policies
Trust Deed
Before considering a transfer of member benefits either in or out of a fund, each trustee must be confident that the contemplated transfer is permitted by each trust deed. Beware of terms that require that the trustee obtain member consent before effectuating a transfer of benefits. The successor fund trust deed will also likely require amending to facilitate the transfer of members and documentation of specific rules applying to those members. Beware of any prohibitions on amending the trust deed.
Best Interests
Once it is determined that the trustees have the power to facilitate the transfer of members via an SFT, trustees must confirm that any decision to transfer member benefits is in the best interests of members. Section 52 and 52A of the SIS Act require the trustee and directors "to perform [their] duties and [their] powers in the best interests of the beneficiaries." But what does best interests really mean and to which beneficiaries does it apply? Does this mean that trustees must ensure that the outcome is bulletproof?
The Productivity Commission Report suggested that there was "a lack of clarity around what is expected of trustees under the best interests' duty in legislation," and that it "should really be about achieving what an informed member might reasonably expect." This statement again does not provide much clarity on what the best interests covenant requires in practice and particularly in an SFT.
This requires us to go back in time to the High Court of England where the seminal case of Cowan v Scargill was decided and Judge Megarry VC outlined his view of the duty of trustees to exercise their powers in the best interests of beneficiaries. Key takeaways from the opinion are:
-Best interests of beneficiaries refers to the interests of present and future beneficiaries;
-The scales must be held impartially between classes of beneficiaries; and
-Best interests are normally beneficiaries' best financial interests.
Fast forward to 2010 and the case of Manglicmot v Commonwealth Bank Officers Superannuation Corporation provided more insight into how the best interests duty should apply in practice. Rein J of the NSW Supreme Court found that the section 52 duty is no stricter a duty than that found in general law and refused to accept "that the trustee is made liable for any outcome which turns out to be unbeneficial to members, even if the original decision which led to that outcome was taken in the best interest of all members in mind." The Justice referred to the best interests duty as one being "concerned with process, not outcome." On appeal Giles JA confirmed Justice Rein's logic.
Now fast forward to 2019 where Jagot J in APRA v Kelaher (the IOOF case) made or agreed with the following statements relevant to the practical application of the best interests duty:
-The duty does not impose a standard of perfection, but rather a decision must be reasonably justifiable as in the best interests of beneficiaries.
-"The relevant question is whether the course of action that was taken was one of the courses of action that may be described as being in the best interests of beneficiaries."
-"It will frequently be the case that there is more than one course of action which may be regarded as being in the best interests of the beneficiaries."
-The test is objective and is to be applied prospectively without hindsight – from the position of the trustee at the time of the decision with reference to the circumstances as they exist when the decision is made and not by reference to subsequent unforeseen events.
The caselaw suggests that so long as the decision-making process is objectively reasonable in considering the current circumstances and the best interests of all beneficiaries then the duty is unlikely to be breached.
Translated to the SFT context, this seems to require the following:
-In assessing whether a transfer of a cohort of members is in their best interests do not overlook the best interests of other existing and future members.
-Carefully consider the implications of the transfer on different classes and cohorts of members. For example, what if one division of transferring members will experience a significant fee deduction as a result of the transfer, but another will experience an increase in fees?
-Focus on the circumstances and information as it exists on the SFT date.
-Document your decision-making process and reasoning for concluding that the transfer is in the best interest of all members, including any additional benefits gained or trade-offs made as a result of the SFT.
-While there is no requirement that the trustee guarantee that an outcome will benefit members, you cannot engage in an SFT that will be to members’ detriment.
Promotion of financial interests
With the enactment of Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Act 2019 in April 2019, each trustee is required to promote the financial interests of its beneficiaries across all products – MySuper and Choice (previously only MySuper). The prescribed annual outcomes assessment requirements include the key components relevant for analysing whether a trustee is promoting the financial interests of members, including:
-A comparison of fees and costs;
-the returns and level of investment risk; and
-An analysis of the appropriateness of options and benefits, investment strategy, insurance strategy, insurance fees, scale, operating costs and the basis for setting fees.
Translated to the SFT context, this seems to require that:
-The results of recent annual member outcomes assessments are reviewed; and
-A comparison of the above-mentioned factors is undertaken to determine whether a transfer of members to the successor fund is consistent with the requirement to promote financial interests.
A line-by-line analysis of the financial impact of the transfer for each member considering administration, investment and insurance fees alongside a product level analysis of the current state and future state of member benefits, including consideration of available investment options and insurance benefits, will give trustees a good indicator of both equivalency and whether financial interests are promoted
Equivalency
By virtue of the very definition of "successor fund transfer" as it is defined in the SIS Regulations, there are two requirements that must be met:
The successor fund must confer on the member equivalent rights to the rights the member had in the original fund in respect of the benefits; and
Before the transfer, the successor trustee and the original trustee must agree that the successor fund will confer on the member equivalent rights to the rights that the member had under the original fund.
In practice, this seems to require the original trustee to:
-Identify the key fund attributes that apply to the transferring members. Suggested topics for consideration include: trustee powers (including the trustee's right to remuneration, ability to increase fees and deduct tax, indemnity and entitlement to reimbursement of expenses); contributions (types and requirements); investments (noting any restrictions that apply); member benefits (payment of benefits methods, preservation requirements, retirement tests, any benefits for which the trustee may have taken out a group insurance policy).
-Compare the key fund attributes to those of the successor fund. In addition to the above suggested topics, a thorough consideration of the product design, investment options, insurance and fees proposed to be applied to transferring members should be considered. Consideration of the discretions granted to the trustee under the Trust Deed is imperative.
Any differences identified through the above process must be discussed between the original and successor trustee to agree on an approach to ensuring that the successor fund will confer equivalent rights. Changes should be documented whether in the successor fund transfer deed and/or in an amendment to the successor fund's trust deed as appropriate.
Regards
Gabriela
Gabriela Pirana– Senior Associate , QMV Legal
QMV Legal provides pragmatic legal advice that considers both the nuance of the law and the commercial and operational objectives of superannuation funds and financial institutions. For further information please telephone our office p +61 3 9620 0707 or submit an online form.
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