Advertising and sponsorship expenses
One such issue is that, for many years, trustees of the large superannuation funds have, either directly or indirectly, been expending large amounts of members’ money on advertising, promotions and sponsorships to promote their fund to the public. A recent figure provided by APRA is that the funds spent $423 million in this way in a year, which is money that could have been better spent by improving the service to members, which, in some instances, has been badly lacking.
The effect of the legislation that governs trustees is that those amounts can only be spent if it is in the best financial interests of the current members to do so, that being the fundamental obligation of trustees under the legislation.
Regrettably, the regulators, APRA and ASIC, have not been enforcing the law in relation to this expenditure. That is because the expenditure is only in the members’ best financial interests if the trustees can demonstrate that the fees earned from new members joining the fund as a result of the expenditure reduces the fees imposed on the existing members or otherwise benefits them in a particular financial way. Trustees, generally, cannot prove that that is the case in their fund.
Sponsorships are particularly questionable as to whether the money spent on them is in the members’ best financial interests because it is claimed that they are more of benefit to the fund’s executives in being able to attend functions and sporting events as a sponsor.
Another form of expenditure that is questionable is that some industry funds make payments of members’ money to trade unions. Other than payment of directors’ fees to the unions who provide directors to the trustee board, it is not apparent how such payments are in the best financial interests of the current members.
Where members’ money is spent in a way that is not in their financial interests, it is a breach of the law and the regulators should be enforcing it, but they haven’t been.
Also, trustees and directors of trustees could be exposing themselves to personal liability to the members if any member brings a claim against the trustee or the directors for breaching the legislative requirements by, for example, failing to act in their best financial interests or failing to exercise the care, skill or diligence required of a trustee or trustee director, by incorrectly or inappropriately spending members’ money. The liability could be very substantial.
Penalties imposed on trustees
A separate issue with the superannuation system is that penalties have sometimes been imposed on companies which act as trustees of the large superannuation funds, for breaching the law or failing to properly carry out their duties to the members. If the trustees do not have any significant assets of their own, which is generally the case with industry funds, the penalties were, prior to 2022, often paid by the members of the fund by the trustee paying the penalty out of the assets of the superannuation fund i.e. the members’ assets.
An important change to the superannuation legislation occurred on 1 January 2022. That amendment prohibits trustees of superannuation funds from paying any penalty that is imposed on the trustee out of members’ money in the fund. The amendment was made to protect members against paying a penalty that is imposed on their trustee because of the trustee breaching the law or doing something that wasn’t in members’ interests.
Members should not, of course, have to pay a penalty that is imposed on their trustee for such breaches. It is the trustee who should bear the financial consequences of its own failures, such as acting contrary to its members’ interests.
Nevertheless, after this legislation was passed, a number of trustees of large industry funds made applications to the courts to be permitted to amend the trust deeds governing their funds to permit the trustee to charge fees to the members’ accounts to enable the trustees to establish reserves out of which the trustee could pay any penalty imposed on it. The consequence of the applications was that money would be taken out of the members’ assets or earnings in the fund to establish the reserves so that the members would, in effect, pay any penalties imposed on the trustee.
Such applications to the courts were made by the trustees of QSuper, NGS Super, Maritime Super, Local Government Super, Cbus, CareSuper and AustralianSuper. The applications were granted by the various state courts to which the applications were made, thus permitting the trustees of those funds to debit fees to members accounts to create the reserves from which any penalty imposed on the trustee could be paid. (Some other trustees already had the power to create such reserves.) It was made clear to the courts by the trustees that that was the purpose of the applications, so the intent was not hidden.
In determining whether to grant the applications made by the trustees, the courts had to determine whether granting them was in the best financial interests of the members and the courts, in these cases, took the view that it was in the members’ interests to grant them. The reasoning of the courts was it is in the members’ interests for the trustee not to be made insolvent by having to pay a penalty, without having the funds to do so.
Contrary to the courts’ decisions on this point, it is well arguable that it is not in members’ best financial interests for them to incur an expense when the purpose in incurring it is to protect the trustee from becoming insolvent as a result of incurring a penalty for being in breach of its obligations to the members or because the trustee contravened the law. If a trustee goes into liquidation as a result of becoming insolvent, that is not an outcome which justifies a decision that that is not in the members’ best financial interests, as a replacement trustee can readily be appointed. It is not unusual for a trustee to be replaced by another.
It could be argued that the courts, by granting the trustees’ applications, in effect permit a trustee to do indirectly that which it could not do directly, which is, after the 2022 change of legislation, to pay any penalty imposed on it out of fund assets.
However, in view of the courts’ decisions, it will require legislation to override the effect of them. It is appropriate that that be done to avoid the members being penalised twice by, in effect, paying the penalties for trustees’ wrongdoing in committing actions that are very often to the detriment of the members.
In the absence of such legislation, the regulators are acting contrary to members’ interests by imposing penalties in a way that the members, rather than the trustees, in effect, pay the penalties, and where the regulators know that that will be the case.
A solution is that the regulators should not be imposing, or asking the courts to impose, penalties on trustees where the regulators know that the penalties will effectively be paid by the members. When penalties levied on trustees are paid by the members, the regulators are acting contrary to the best financial interests of the members, whose interests the regulators are supposed to be protecting.
An argument that imposing penalties in these circumstances is no different to penalties imposed on companies is misconceived because the penalty is paid by the company which has transgressed and not by the shareholders whereas in industry superannuation funds, in particular, penalties are paid out of reserves that are created out of money that would otherwise have been credited to members’ accounts. It is, therefore, the members who suffer, not the trustee that has been in breach of its obligations.
Compensating members
A similar problem exists in relation to compensating members who suffer a detriment because of something done or not done by the trustee. Trustees sometimes compensate members when required to do so by decisions made by courts, the Australian Financial Complaints Authority or the regulators or because trustees voluntarily compensate members for losses. If the trustee does not have funds of its own, it’s the members of the fund who pay the compensation by it being debited directly to their accounts or by their accounts being debited with, or their earnings being reduced by, amounts transferred to reserves from which compensation is paid.
Bizarrely, the effect is that affected members contribute to the payment of their own compensation by their accounts or earnings being debited to meet compensation payments..
Conclusion
The issues referred to in this article demonstrate that there are some serious deficiencies in the administration of the superannuation system. They need to be addressed, including by the regulators who are enforcing the law.
Noel Davis, retired barrister, former member of the Superannuation Complaints Tribunal, author of the legal text The Law of Superannuation in Australia.
