In brief

  • Beck v Colonial Staff Super Pty Ltd & Ors [2015] NSWSC 723 stands for the legal proposition that a trustee cannot currently amend a provision of a deed where the variation has the effect of reducing the financial value of the benefits potentially receivable by one or more members.
  • The decision in Beck has enormous ramifications for deed amendments of defined benefit funds, past and present. There is now a risk that amendments to defined benefit trust deeds (not only in the future but also in the past including in predecessor funds) may be considered void on the basis that the relevant amendment power has not be validly exercised as the amendment was in breach of the restriction on adversely altering a member’s accrued benefits.
  • We have identified what we believe are serious flaws in the reasoning sufficient to suggest that, with respect, the outcome in the case is wrong. We believe this is inconsistent with authority such as Auspine Staff Superannuation Pty Ltd v Henderson [2006] FCA 1281. We also note that a number of relevant decisions, including some of the NSW Supreme Court, were not addressed in the judgment.
  • It is in some ways similar to the case of Asgard Capital Management Ltd v Maher [2003] FCAFC 156, as the first instance decision in that case effectively changed the law until it was overturned on appeal.

Background

This case concerned a dispute between Mr Peter Beck, who was the CEO of CBA’s CommInsure arm until 2005 and Colonial Staff Superannuation Pty Limited (CSS), the Commonwealth Bank Officers Superannuation Corporation (CBOSC) and Commonwealth Bank of Australia (CBA).

Mr Beck:

  • was employed for 24 years first by Colonial Mutual Limited (Colonial), and then by CBA after it acquired Colonial in June 2000 and his employment was terminated prior to him reaching the age of 55,
  • was a defined benefit member in various superannuation funds for Colonial employees (as there were a series of successor fund transfers as the superannuation arrangements for Colonial employees were restructured) and was finally transferred (on a successor fund transfer basis) into the Commonwealth Bank Officers Superannuation Fund on 3 October 2003, and
  • an actuary by profession, was extremely focused and concerned with his superannuation fund and benefits over the years.

Mr Beck’s contentions relate to a trust deed amendment done in December 1996 by CSS (as the trustee of the relevant Colonial superannuation fund). A provision was deleted that provided that if a member was not entitled to any other benefit (ie they have not reached the age of 55) and had a long period of contributory service then the trustee might at its discretion and with the consent of the principal employer pay a further sum that does not exceed the member’s reserve value (as determined by the trustee after considering the advice of the actuary of the superannuation fund) at the date that the member ceased employment. CSS amended the relevant trust deed to remove this discretionary benefit in order to comply with Commonwealth age discrimination legislation.

The amendment power that CSS exercised required the written consent of the member unless the value of the benefits accrued in respect of any member prior to the effective date of the amendment is not detrimentally affected.

Slattery J found that CSS had breached regulation 13.16 of the Superannuation Industry (Supervision) Regulations 1994 (Cth) (SIS Regulations) which prevents any amendment of a fund’s trust deed that adversely alters a beneficiary's right or claim to accrued benefits or their amount.

Accrued benefits

The definition of the phrase ‘accrued benefits’ was clearly at the heart of the case. There is established authority, including the Full Federal Court decisions of Auspine and Asgard that the phrase accrued benefits connotes ‘a benefit in which the beneficiary has an absolute interest’1, a formulation that is repeated in SIS Regulation 9.27.

The deleted provision entitled the beneficiary to have the trustee consider whether, in ‘exceptional circumstances’ (and usually only where the member has had a long period of service to the company), the trustee may, with the approval of the principal employer, pay a further sum of money to the member.

In our view, such a decision is most appropriately characterised as an exercise of ‘discretion’. As the High Court in Finch v Telstra Super Pty Ltd (2010) 271 ALR 236 emphasised, this type of decision is to be distinguished from other types of decisions in which the trustee is applying facts that it has collected to a set of criteria.

One important consequence of a finding that the deleted provision is a discretion is that the individual does not have a currently vested or even realised property interest until the discretion has been exercised in his or her favour (Gartside v IRC [1968] AC 553). The individual only has a right to be considered (see also Re Coram (1992) 109 ALR 353). With respect, that limited right cannot be regarded as a benefit because it is open for the trustee to exercise its discretion against the individual.

This is consistent with the decision in Auspine, where the court held that the possibility that the trustee might make a discretionary payment could not on any view be regarded as an accrued benefit.2

This is consistent with the previous iteration of SIS Regulation 13.16 as it appeared in the Occupational Superannuation Standards Regulations 1987 (Cth) (OSSA Regulations) where the equivalent provision (in relation to a defined benefit) is expressed in terms of the value of a benefit that is or may become payable in the period before the amendment of the trust deed has taken place.

Our view on this is reinforced by the decision in Gas Fuel Corporation v Fitzmaurice (1991) 22 ATR 10. Pertinently for present purposes, the court in that case found that the formulation ‘benefit then provided’ in a superannuation funds trust deed included ‘both accrued benefits and benefits…which might accrue in the future’ (ie future benefits).3 This highlights the distinction between:

  • a benefit which has accrued in the sense of crystallised, but not necessarily vested, and
  • a benefit which has not crystallised and in fact is dependent on the exercise of a discretion in favour of the relevant person.

This is also consistent with the decision of Asea Brown Boveri Superannuation Fund v Asea Brown Boveri Pty Ltd [1999] 1 VR 144, in which the Court held that provisions for future benefits, or contingent benefits or benefits expectant upon future eventualities are ‘secured benefits’4, a category considered to be broader than ‘accrued’ benefits (see BHLSPF Pty Ltd v Brashs Pty Ltd (2001) 8 VR 602; [2001] VSC 512 which must be contrasted with the term ‘accrued benefits’).

It is submitted that this distinction between accrued benefits (in the sense of crystallised, but not yet vested benefits) and benefits which have not yet crystallised and are dependent on a discretion is a crucial one. Allied to this is the fact that the term ‘accrued benefits’ is used in the SIS Regulation 13.16 and has a long legislative history as well as industry usage; most significantly in the context of actuarial evaluations of defined benefits funds. In our experience it is not used to refer to discretionary benefits of the type considered.

Interplay of SIS Regulations 9.27 and 13.16, and potential entitlements

His Honour stated that ‘[t]here is much to be said for interpreting ‘accrued benefits’ in SIS Regulation 13.16 in the same way for defined benefit schemes as in SIS Regulation 9.27’. SIS Regulation 9.27 provides that ‘accrued benefits’ means, for the purpose of Division 9.5 of the SIS Regulations, ‘the benefits to which the member has an absolute or potential entitlement at the valuation date on account of the length of time the member has been a member of the fund or sub- fund’. Division 9.5 concerns the requirements for an actuarial investigation of defined benefit funds involving analysis of, amongst other matters, the asset valuation, the fund’s solvency (ie whether the assets are sufficient to meet the liabilities in respect of ‘accrued benefits’ and the 3 year funding obligation of an employer (which is to be determined at the valuation date and the likely future position of the fund during the next 3 years based on the actuary’s reasonable assumption). Accordingly, it is prudent for this purpose for the ‘accrued benefits’ of a member to be considered to include potential entitlements in the future for the purpose of determining a fund’s solvency.

SIS Regulation 13.16 provides that a ‘beneficiary’s right or claim to accrued benefits, and the amount of those accrued benefits, must not be altered adversely to the beneficiary’. As it is not in Division 9.5 we consider it is clear that the definition in Division 9.5 should not be used. In addition, SIS Regulation 13.16 is designed to prevent a trustee from taking away something that the member has already earned in contrast to Division 9.5 where it is prudent for accrued benefits to be given a more expansive definition. This suggests that ‘accrued benefits’ in SIS Regulation 13.16 should be given a narrower interpretation (and exclude future potential entitlements).

This narrow meaning of ‘accrued benefits’ for the purpose of SIS Regulation 13.16 is also supported by the form that the provision took in the OSSA Regulations. Those regulations referred to:

  • in relation to accumulation benefits – a reduction to the amount of a benefit calculated on the basis of contributions to the fund and earnings on those contributions that has accrued or become payable, and
  • in relation to a defined benefit – a reduction in the amount of a benefit that is or may become payable to a member in relation to a period before the amendment.

We note that the Explanatory Memorandum to the predecessor provision in the OSSA Regulations provides that the provision prohibits ‘retrospective reductions in benefits accrued to members of a fund or benefits based on past membership’ (emphasis added).

In relation to Slattery J’s statements that:

  • SIS Regulation 13.16 does not distinguish between a present claim to accrued benefits and future claim to accrued benefits – in our opinion, the history of the regulation and what SIS Regulation 13.16 is designed to achieve indicated that the accrued benefit for a defined is a benefit that has already been earned by service prior to the relevant event and therefore can only be a present claim to an accrued benefit.
  • Unless ‘accrued benefits’ has the same meaning in SIS Regulation 13.16 as it does in Division 9.5 there would be an odd consequence because a trustee of a defined benefit fund could ‘amend the governing rules or otherwise act without legal restraint’ to adversely alter the amount of a beneficiary’s potential entitlements even though the purpose of the actuarial report done for the purpose of Division 9.5 is to ensure the solvency of the fund on the basis of the same potential entitlements – the problems with this position include:
    • the reasoning is circular,
    • these provisions have different purposes and those different purposes explain why accrued benefits must have different meanings, and
    • it is wrong to say that unless accrued benefits includes potential entitlements that a trustee could amend the governing rules without legal restraint because as you are aware there are other legal restraints on a trustee amending the governing rules (eg the best interests duty).

The Trustee’s decision to amend the Trust Deed

We would also argue that Slattery J’s interpretation of the covenant in section 52(2)(c) of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) is inconsistent with established authority. In particular we are concerned that his Honour has misconceived the duty by requiring the trustee to act in the best interests of all members, where ‘all’ is apparently interpreted in the sense of ‘each and every’. As Cowan v Scargill [1985] Ch 270; [1984] 2 All ER 750 makes clear, the duty entrenched by section 52(2)(c) does not mean that the trustee can only act when no member would be worse off by their action. That would render impossible the administration of the trust. Rather the duty is to have regard for the interests of all members, holding the scales impartially between different classes of beneficiaries.5 In that sense it is more appropriate to regard the duty as requiring the trustee to have regard to the interests of the members ‘as a whole’.6  Detriment to one member, even if proved (and we don’t believe it was in Beck, for the reasons outlined above) has to be seen in the light of the totality of advantages and disadvantages accruing across all the fund’s members.

The validity of the amendment of the trust deed pursuant to its amendment power

The trustee purported to exercise its power under the relevant trust deed to remove the deleted provision in order to comply with Commonwealth age discrimination legislation.

His Honour’s conclusion that the amendment power ‘is not engaged by attempts to comply with any State or Commonwealth legislation that might possibly affect a superannuation fund’7 and is instead only engaged by legislation specifically targeted at superannuation funds does not, with respect, seem to accord with his Honour’s adoption of a ‘practical and purposive’ approach to construction of the deed (which is the accepted interpretative approach8). It would leave the trustee in a position in which it could be forced to administer a trust that does not comply with all applicable laws and is unable to amend its trust deed to ensure compliance if doing so would disadvantage even a single member of the superannuation fund.

We believe the correct interpretation of the phrase ‘any other present or future State or Commonwealth laws governing or regulating the operation or maintenance of superannuation funds’ is to read the phrase as referring to any present or future State or Commonwealth laws affecting superannuation funds, regardless of whether the legislation specifically targets superannuation funds.

The authors would like to thank Emily Rumble and Tamanna Islam, Solicitors for their assistance in preparing this article.