The pressure on Cbus from the Senate, or specifically from chair of the Senate Economic References Committee, Coalition Senator Andrew Bragg, did not fade with the holiday season. Following his face-off with Cbus chair and Labor party national president Wayne Swan in November last year, Bragg is now accusing the latter of misleading the Senate over the $94 billion super fund’s trust deed.
In the Senate exchange, Bragg asked if Cbus had “changed its trust deed so it could charge members for future fines”, to which Swan responded that “it hasn’t done anything of the sort, we have reserves in our fund”.
The issue, as Bragg sees it, is that Cbus failed to disclose it did change its trust deed in 2021. This was in response to changes to the Superannuation Industry (Supervision) Act (SIS Act) following the Hayne Royal Commission that prohibited trustees from paying certain costs, like fines and penalties, from fund assets.
Cbus, alongside a slew of other industry super funds, sought trust deed amendments in courts then to allow themselves to essentially pay a service fee to trustees, which the latter can hold onto to cover the costs like fines that funds used to be able to reimburse.
But Cbus’ response was that there were “clear implications” in Bragg’s question that the fund has “changed the trust deed following ASIC’s recently announced legal action [added emphasis] regarding our management of insurance claims and the potential for penalties to arise from it”, which Swan rejected, the fund told The Australian.
Legal opinions are that neither side were specific enough in their statements. Managing partner at superannuation law firm Legal & Prudential Advisors, Jonathan Steffanoni, said “there’s the possibility of misunderstanding between the two, but then there’s also potentially quite a bit of wriggle room in how you interpret what’s being said”.
However, the exact time point at which Cbus changed its trust deed is not the central issue. The issue is that every public conversation about superannuation, even the most esoteric aspect of fund operations such as trust deed amendments, has become extremely politically charged. An issue like this with complex technicalities needs room for nuanced discussion.
Technicalities
This could be around terminology, which could get confusing but is important. Super funds are entrusted with managing Australians’ retirement savings and deserve to be scrutinised, and even hints of misusing or mismanaging “members’ money” will make politicians and regulators see red. But in legal terms, whether it is “member’s money” that’s being used to pay fines under a trust deed arrangement like Cbus’ is complicated.
“The amendments that all of the funds went through allow for the trustee to pay itself a fee, to remunerate itself, and to take some money from the fund and pay it to the trustee in its personal capacity,” Steffanoni said.
“That’s not the same thing as charging from member accounts, there’s a step in between.”
Once the money comes out of the fund, it is no longer technically “members’ money”, Steffanoni said.
Head of superannuation at law firm Gilbert + Tobin and former UniSuper general counsel, Luke Barrett, also highlighted a difference between charging members to pay fines, and trustees charging funds a fee rightfully earned by providing services, which is then potentially used for paying fines.
Before the post-Hayne SIS Act reform, funds used to be able to pay fines out of their operational risk reserve, Barrett said, which was still technically “members’ money”.
“It was a good discipline to require the trustees while operating the funds, while operating within their current disclosed fee levels, to prudently squirrel some money away for a rainy day. But if the rainy day never came, the money was still member money,” Barrett said.
But now the fine needs to be paid from the trustee’s balance sheet, “every fund had to squirrel away money” just in case they received a fine – and some might never receive one, Barrett said.
“You can see there why it [the law reform] was using a sledgehammer to crush a nut,” he said.
Out of the question
These are complex technicalities but without them, trustees would not have the means to access enough funds should a fine occur, which is simply not a viable situation.
Given industry funds’ inability to pay dividends to a shareholder under their respective constitutions, trustees had no reason to retain money on their balance sheet prior to SIS Act change, and in many cases had as little as $100 in capital, Steffanoni said.
“If there were a fine for something, like a late lodgement of change of details to ASIC, and there is a fine of $180, or whatever it is, for many of these trustees that would have meant that if they couldn’t rely on the fund assets, and had less than $100 of trustee capital, they would be technically insolvent,” he said.
If there was a question mark around the solvency of its existing trustee, a fund would urgently need to have an emergency trustee appointed, or undertake an emergency successor fund transfer.
“No member, and surely no politician, would want a substantial superannuation fund operating with a sword of Damocles over its head, where even if a proverbial speeding ticket came in it could bankrupt the whole trustee, because that would be very detrimental to members,” Barrett said.
Both Steffanoni and Barrett said they were confident that most trustees are charging funds prudently, regardless of what trust deed structure they set up to allow for access to capital. Many trustees have set up limits, such as a total funds cap.
But Barrett also argued that “in the modern world, there’s no obligation for trustees to operate funds for free”, and they deserve to be paid just like other service providers, such as investment managers and administrators.
“In other [retail super] segments of the industry, it’s no secret that the funds are operated to generate a profit, and that’s profit that goes to the shareholders in the ultimate parent company,” he said.
“I think it’s fake news to drum it into a controversy that there’s something wrong with a trustee also being a service provider who can charge for their fees.”
