Australian industry superannuation funds, including industry giants AustralianSuper and Cbus, have been quietly amending their trust deeds to comply with the new Section 56 law which came into force on January 1 this year.
The funds are being low key on what levies they will have to charge members to build up their own “trustee risk reserves” to pay for any fines incurred by trustees and trustee directors for breaches of Commonwealth law.
But a recent decision in the South Australian Supreme Court, approving AustralianSuper’s application to amend its trust deed, is providing insights into what other super funds may be thinking. The decision allowed Australian Super to impose an annual risk fee on its members of 0.015 per cent of fund assets which, in its case, would be the equivalent of around $35 million.
The new law is an amendment to Section 56 of the Superannuation Industry (Supervision) Act of 1993 which governs the operation of the super fund industry.
While it’s an adjustment that didn’t change the law as much as some have suggested according to governance and litigation expert and associate professor at UNSW, Dr Scott Donald, it “brought the issue to everyone’s attention” and put a very complex legal issue under the spotlight.
The federal House Economics committee held a public hearing on Thursday, February 10, listening to evidence from the Australian Prudential Regulation Authority (APRA), the Australian Securities & Investments Commission (ASIC), Treasury, and Donald on the issue. Committee chair Jason Falinski MP said in a statement the hearing was necessary because the amendments to section 56 were designed to “protect the funds of members by preventing trustees from using these funds to pay for fines incurred by their own actions. However, there have been wide reports of superannuation funds seeking judicial opinions to contravene this provision”.
At time of publication the committee had yet to report back or make recommendations while awaiting the answers to questions and evidence that needed to be produced on notice.
Problems for trustees
The legal change was introduced as part of the Federal Government’s response to the Hayne Royal Commission into misconduct in the Banking, Superannuation and Financial Services Industry which was tabled in February 2019, although the amendment itself was not part of the Royal Commission’s recommendations.
The new section of the Financial Sector Reform (Hayne Royal Commission Response) legislation of 2020 changes the Superannuation Industry (Supervision) Act of 1993 to make super fund trustees personally liable for breaches of Commonwealth law.
The change, which came into effect in January this year, impacts directly on the not-for-profit sector where funds traditionally have not built up reserves or capital of their own, paying out all profits to members in the shape of returns.
It has thrown up problems for trustees of not-for-profit funds who now find themselves personally liable to pay penalties including small administrative penalties from regulatory authorities such as the Australian Prudential Regulation Authority (APRA).
Most superfunds appear to be having no trouble getting state supreme courts to amend their trust deeds to allow them to reimburse the directors and trustees for the fees they are now liable for.
Each fund is different
But each fund is now considering their own position on the need to levy members to build up a fund to cover any fines incurred by trustees. The impact of the new law will be different on each fund and its members depending on the specifics of their trust deeds and the amount of funds they already have built up in reserves.
An AustralianSuper spokesperson told Investment Magazine that “recent technical change(s) in the law” had required the adjustment to its trust deed.
“[But] Members will not pay any additional fees as a result of the court decision because [the fund] has already built up a reserve which can cover these costs for the immediate future. The court decision has given the fund the ability to charge a trustee fee if required in the future,” he said.
A spokesperson for construction industry super fund, Cbus, said: “Our matter reached a positive conclusion”.
“Funds have taken prudent and cautious steps to make sure we are complying with the appropriate laws.”
“Our court decision has come through and our trust deed has changed,” Laura Wright, the chief executive of NGS Super, said of her fund.
While each fund is in a slightly different circumstance, the decision in the South Australian Supreme Court by Justice Malcolm Blue provides an insight into how it will affect other industry funds and may well become a template for other funds to follow.
The court allowed AustralianSuper to amend its trust deed under a formula proposed by AustralianSuper itself. The fund’s application was not opposed by APRA which registered itself as an “interested party” in the case. The judgement noted that AustralianSuper, the trustee of the largest super fund in the country, only had a share capital of $12.
“If AustralianSuper were to become insolvent, it would be unable to continue as a trustee of the fund,” it said.
“At present, the imposition on the trustees of any penalty in excess of $12 would render it insolvent and potentially give rise to grave consequences for beneficiaries,” Justice Blue said.
The judge noted that AustralianSuper and trustees of other cooperative funds have faced the risk of insolvency since the original superannuation supervision act of 1993 because of the limited capital of their funds and the fact that fund trustees have always been subject to fees which the fund is not liable to pay for.
“However, the risk and potential quantum of imposition of a penalty has gradually increased since 1993, with a marked acceleration since the Hayne Commission,” he noted.
“The scope of the non-indemnifiable penalties will be very substantially increased in respect of liabilities imposed on or after January 1, 2022.”
Guarding against risk of insolvency
Hostplus also went to the Supreme Court of South Australia which issued orders on Christmas eve last year. According to the fund’s CEO, David Elia, the orders, amongst other things, inserted new clauses into the trust deeds.
“The court approved amendments… that it would be in the members’ best financial interests for the company as trustee, to charge each trust an annual risk premium charge to guard against the risk of insolvency,” he said.
“The company will levy a trustee fee on fund members equal to… 1.65 basis points in the first year on each member’s account balance to establish the risk premium reserve. This new fee will be disclosed on the fund’s product disclosure statements as a trustee fee and categorised as an administration fee and cost, as required by law,” he said.
“The Company will [also] levy a trustee fee on Pooled Superannuation Trust (PST) investors equal to… 1.55 basis points in the first year. The PST has two wholesale investors, Hostplus Superannuation Fund and Maritime Super, and approximately 960 Self-Managed Super Funds that utilise our Self-Managed Invest product.
“By 31 December, 2022, it is expected that the company will have accumulated $28.25 million, of which $10.27 million of members’ money is estimated to be paid to the ATO… in the form of income tax and GST and the remaining amount of $17.98 million will be held in the Risk Premium Reserve to be held against the risk of acting as trustee.”