Presentation by Maurice Blackburn head of Superannuation John Berrill to the Association of Superannuation Funds of Australia (ASFA) National Conference, Melbourne, 2014. View John's profile: http://www.mauriceblackburn.com.au/our-people/lawyers/john-berrill/

1. THE RISE OF THE ASSET OWNER
John Berrill
Maurice Blackburn Lawyers

2. 1. Introduction – matters for discussion
• The investment in and influencing of assets by Trustees, fund
members and others.
• Trustees’ legal obligations.
• What factors can be taken into account with investments.
• Balancing the interests of members and other stakeholders.
• Rights to information, documentation and reasons for decisions.
• Complaint and appeal rights.

3. 2. What are Trustees legal obligations?
• Legal obligations arise from:
• The trust deed or rules.
• Common Law or equity.
• The Superannuation Industry (Supervision) Act 1993 (SIS Act)
and the Superannuation Industry (Supervision) Regulations
1994.
• Other legislation e.g. the Income Tax Assessment Act 1936
and 1997, the Corporations Act 2001 and various State and
Territory trust laws.

4. 2. What are Trustees legal obligations?
• General legal principles:
• Trustees must act in accordance with the terms of the fund rules and the
law.
• If there is doubt as to the interpretation of Trustee obligations or if a
Trustee wishes to depart from or amend a trust deed, they can apply to a
court for directions.
• Breaches of the rules or statutes can attract civil or criminal penalties,
loss of concessional tax status and law suits from members or
beneficiaries.

5. 3. Trustee duties and standards
• The SIS Act includes:
• Section 52 – codifies duties and standards implied into fund governing
rules including to:
– Act fairly and honestly.
– Exercise the skill, care and diligence of an ordinary prudent person.
– Act in the best interests of beneficiaries.
– Formulate, document, give effect to and regularly review investment
strategies.

6. 3. Trustee duties and standards
• Section 62 – the sole purpose test - requires Trustees to maintain a fund
solely for one or more core purposes, which can be in conjunction with one or
more ancillary purposes:
– Core purposes include the provision of benefits on retirement or death.
– Ancillary purposes include the provision of benefits from the termination of
employment, cessation of work due to ill health and reversionary benefits to
Legal Personal Representatives or dependants, or any other purposes approved
by APRA.
– Other ancillary purposes that have been approved by APRA include hardship
benefits and demutualisation benefits.
• Section 101 – requires Trustees to establish inquiries and complaints
processes and to comply with Superannuation Complaints Tribunal (SCT)
decisions.

7. 3. Trustee duties and standards
• Superannuation Legislation Amendment (Trustee Obligations and
Prudential Standards) Act 2012:
• Following the Cooper Review amendments to the SIS Act introduced
enhanced obligations on Trustees including:
– To give priority to the interests of beneficiaries over other persons’ interests.
– Exercise due diligence in developing, offering and regularly reviewing investment
options.
– Must have regard to the availability of reliable valuation information, the
expected tax consequences and costs of investment strategies.
– Must formulate, give effect to and regularly review risk management strategies.
– If offering choice options, must ensure that the investment options allow for
adequate diversification.

8. 3. Trustee duties and standards
• Trustees of Registrable Superannuation Entities must exercise
the care and skill of a prudent superannuation Trustee – as
opposed to the less specialised test of an ordinary prudent
person.
• This enhanced test does not apply to Trustees of self-managed
superannuation funds.

9. 4. Investment Rules
• General duty:
• To invest members’ monies to maximise the benefits payable to members on
retirement (accumulation funds); or
• To keep the fund solvent such that it can meet the benefits potentially
payable to members (defined benefit funds).
• Statutory requirements:
• The SIS Act and Regulations prescribe minimum standards and restrictions on
investments to ensure best practice for compliance with the sole purpose of
providing for members’ retirements and maximising their retirement
benefits.
• The Trustee must formulate, document and implement an investment
strategy.

10. 4. Investment Rules
• Investment strategy:
• Must be documented.
• Must have regard to the circumstances of the fund and specific
conditions such as the profile of the membership, risk and payment
issues etc.
• Should allow for diversification.
• Should be reviewed regularly.
• The requirements are nonetheless quite broad and allow
significant flexibilities for a Trustee to take into account various
factors in facilitating an investment strategy.

11. 4. Investment Rules
• Accordingly, Trustees could take into account other factors such
as:
• Potential long term returns and not just short to medium term returns.
• Industry or member workplace factors which could affect the
employment of members and/or the ongoing viability of investments.
• Public opinion and political factors which could improve or adversely
affect a fund’s public standing which could in turn impact on membership
and member confidence etc.
• Environmental, social, moral and ethical factors which could affect public
standing as well as future investment returns.

12. 4. Investment Rules
• Future policy concerns involving the above factors which could impact on
future membership – although query the extent to which Trustees can
take into account the interests of future members over existing
members, some or all of whom may not be members at some future
point in time.
• Whether any particular factors or investments are consistent with the
sole purpose test will vary and depend on the circumstances of a
particular fund.

13. 5. The Right to Choose Investments
• Many superannuation funds offer members a choice of investments, both as to
risk and type.
• The major exception is MySuper products which must have a single diversified
investment strategy. This can include a lifestyle investment strategy with
different asset allocations for specific life stages.
• Different types of investments may have characteristics or limits such as
sustainable investments, no tobacco-related investments or particular
infrastructure and industry investments.
• Whilst such targeted or limited investments may contraindicate maximising
investment earnings in the short term, they may nevertheless improve portfolio
performance over the long term by accounting for future sustainability and
thereby satisfy the sole purpose of providing benefits upon retirement.

14. 6. The Right/Obligation to Influence
Assets
• Within the boundaries of the sole purposes test, trustees and members can seek
to influence the assets they hold by engagement, further investment and
divestment.
• Indeed it could be said that trustees have a statutory obligation to actively
engage with those that provide the assets they own in their governance and
environmental, social, political and industrial impact and policies.
• To fail to do so may not be consistent with the enhanced obligations to regularly
review investments under the Superannuation Legislation Amendment 2012, at
least from July 2013.

15. 6. The Right/Obligation to Influence
Assets
• The level of such activism will vary depending on the circumstance of each fund.
• A relevant factor will be the resources allocated to monitor and engage with
asset providers - the greater the expense, the less likely it will satisfy the sole
purpose test.

16. 7. Disclosure Obligations
• Corporations Act:
• Section 1017B -
– Trustees are required to give beneficiaries adequate information and documentation to
understand their entitlements including as to investments.
– This could take the form of information/documentation upon which investment decisions
are made and reviewed.
• SIS Act:
• Section 101 –
– Trustees must give reasons for decisions on complaints when requested to do so.
• Superannuation (Resolution of Complaints) Act 1993(SROC Act):
• Sections 24 & 25 –
– If a complaint is lodged to the SCT, a Trustee can be compelled to provide all documentation
relevant to the subject matter of the complaint to the Tribunal who will in turn provide
copies to the complainant(s).

17. 7. Disclosure Obligations
• Courts:
• Trustees who are parties to civil court proceedings can be compelled to
discover all non-privileged documents relevant to the issues in dispute to
the other party(s).
• Trustees could be compelled to provide documents by way of pre-trial
discovery i.e. before civil court proceedings are instituted in order for a
member or other person(s) to determine their entitlements.

18. 8. Complaints
• SIS Act:
• Section 101 –
– Beneficiaries and former members have a right to make inquiries or to lodge
complaints with the Trustees of regulated superannuation funds.
– Trustees are required to take all reasonable steps to put processes in place
to deal with inquiries and complaints within 90 days.

19. 9. Rights to external review
• The Superannuation Complaints Tribunal:
• The SROC Act allows for a person to lodge a complaint against the decision of a
Trustee of a fund to the SCT.
• A decision can include a failure to make a decision.
• A person must have previously lodged a Section 101 Complaint with the Trustee.
• The SCT cannot deal with certain complaints, including those relating to the
management of the fund as a whole – this may include the setting of an
investment strategy.
• The SCT can overturn, vary or remit a Trustee’s decision if the decision was unfair
or unreasonable in its operation to the complainant.
• There is a right of appeal from a SCT decision to the Federal Court on a question
of law.

20. 9. Rights to external review
• Courts:
• Members, beneficiaries or other parties may sue Trustees in the civil
courts seeking:
– Equitable remedies such as declarations, directions or damages.
– Damages for losses as a result of breaches of covenants imputed under
Section 52 of the SIS Act or.
– Damages for breaches of the enhanced obligations under the
Superannuation Legislation Amendment Act 2012, such as the duty of
reasonable care and diligence.

21. 9. Rights to external review
• In bringing an action for breach of the enhanced obligations, an applicant must first
seek leave of the Court which must be satisfied the action is brought in good faith and
there is a serious question to be tried.
• It is a defence to such an action if the breach was due to a reasonable mistake,
reasonable reliance on information or the breach was outside the Trustee’s control.
• Courts have limited powers of review of Trustee decision.
• This is premised on a historical reluctance of Courts to interfere in the exercise of
discretions by volunteer Trustees to charitable trusts:
• However, some courts have called for law reform in relation to employer – sponsored
superannuation schemes where employees have bargained for superannuation benefits
with the employer or where governments have imposed employment – based statutory
superannuation benefits as a trade-off for wage rises.

22. 9. Rights to external review
• Currently courts will overturn and substitute, vary or remit Trustee decisions if the
Trustee:
• Breached their obligations under the trust deed or under statute.
• Did not act honestly or in good faith.
• Failed to give real and genuine consideration to the questions in dispute.
• Acted for an improper purpose.
• Relied upon an irrelevant consideration.
• Gave reasons for a decision which were not sound (Karger –v- Paul).
• In addition, a Trustee’s decision may be overturned, varied or remitted if no reasonable
Trustee would have made the decision (Telstra Super Pty Ltd –v- Flegeltaub).
• The High Court in Finch –v- Telstra Pty Ltd has left open the question as to whether the
Courts will move to adopt a broader test in line with the fair and reasonable test in the
SROC Act.

23. 9. Rights to external review
• Class actions:
• A class action can be lodged in the Federal Court against a trustee for breach
of trust or statute, including with respect to investment and asset decisions,
if at least 7 members, beneficiaries or other persons can establish a common
issue of law or fact.
• Such proceedings can be lodged on behalf of all members of a closed or open
class of persons with the Court making findings and orders, including for
damages, which bind the trustee and the class.
• Most, but not all, states have class action systems which replicate that of the
Federal Court.