The recent REST Industry Fund legal case is fascinating for a number of reasons. First, the case concerns a $34 billion fund with 1.9 million members. Second, the case arose because of doubts as to whether more than 40 trust deed amendments made over a period of 25 years infringed the restrictions on the amendment power and therefore could be invalid. Third, the court recognised that it is possible for the interests of a not-for-profit trustee to conflict with the interest of the members of non-for-profit superannuation fund.  While the affected amendments are themselves not inappropriate or improper, they were mainly driven legislative changes since 1994 – and in particular the MySuper changes. Any reasonably informed fund member would have approved the amendments.

However, the trustee felt sufficiently concerned to seek the assistance of the court – in this case the Supreme Court of South Australia – for the court to authorise a number of changes to the original trust deed and to modify the amendment power – to effectively validate the amendments by means of the court’s statutory power to authorise variations to trusts under s59C of the Trustee Act 1936.

The fundamental cause of the uncertainty was the text of the restrictions to the amendment power. The trust deed establishing the fund was drafted in 1987 and, it seems, the restrictions on the amendment power were based upon a precedent from a defined benefit fund. The REST fund was initially an accumulation fund (in later years, defined benefit sub-plans were added). Unfortunately, the restrictions on the amendment power have given rise to a number of uncertainties that affected the validity of the amendments.

In exercising the power conferred by s59C to approve the variations, the court was required to consider the variations solely from the perspective of the interests of the beneficiaries – that is, the members. The REST trustee argued that a combination of the statutory provisions of the SIS Act and the trustee’s obligation to exercise its powers in a fiduciary manner were sufficient to protect the interests of the members.

The court disagreed, noting that while the trustee does not earn remuneration and therefore has no financial interest of its own “such a trustee has an organisational interest that may involve motivations such as ambition for expansion or desire for an easy work life. That organisational interest might conflict with the interest of the beneficiaries. For example, it is human nature that officers and staff of a trustee may have personal ambitions fostered by growth when growth for its own sake might not necessarily be in the interests of the beneficiaries. Similarly, it is human nature that officers and staff of a trustee may have a preference to keep matters simple and easy when a different structure might be in the interests of the members”. (para 191).

The existence of an “agency interest” of non-for-profit trustees is recognised in the SIS Act by the obligation imposed on trustees of funds offering MySuper products as to annually consider whether there is insufficient scale to be competitive (s29VN(b)).

The “agency interest problem” abounds in many structures and organisations – whether commercial companies (director/employee interest v shareholder interest, or universities (staff interest v student interest).

By way of contrast, SMSFs have a “not-for-profit” trustee but no agency issue, as the beneficiaries of the SMSF are trustees or directors of the corporate trustee.

Finally, it is interesting to speculate how many other industry funds are in similar position to REST and which were established using a similar precedent trust deed. Possibly the REST case is only the first example of an industry fund seeking Court approved variations of their trust deed to retrospectively valid deed changes.  [2016] SASC 121.

Michael Hallinan is special counsel with Townsends Business & Corporate Lawyers and Fellow of the Taxation Institute of Australia.

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