Superannuation funds have a duty to act in their members’ best financial interest, writes Noel Davis, but widespread examples of bad practices indicate that is not always the case.
Most employees are members of large superannuation funds and many of them would have bigger amounts in their accounts if the trustees of some of those funds had not breached and continued to breach, in one way or another, an important part of superannuation law.
Superannuation legislation has required, since 1993, that trustees of such funds must, in everything they do, act in the best interests of their members. In some instances, they have not always done so and continue not to, to the financial detriment of their members.
Acting in members’ best interests means their financial interests. What else could it mean given that what trustees are doing is looking after members’ money? However, the Commonwealth Government was sufficiently concerned that trustees have not been doing what the existing legislation required, that it recently amended it to state that trustees must act in the best financial interests of members. That amendment was unnecessary given the meaning of best interests, but it does make clear to trustees what they should have been doing all along.
What is not in members’ interests?
In what way have trustees not been acting in members’ best financial interests?
An instance is that in some large funds, particularly those run by large financial institutions, trustees have invested with related companies knowing that the rate of return on members’ money is less than could be obtained by investing elsewhere and have paid premiums on behalf of members for insurance with related companies, knowing that cheaper premiums or better terms and conditions could be obtained from other insurers. It is difficult to see how that has been in the members’ best financial interests, but it is a practice that continues.
Another example is that, a few years ago, the Government was sufficiently concerned about the high fees being charged to members that it introduced the MySuper concept, under which lower fees apply. Employer contributions are required to be credited to a MySuper account for each member, unless the member chooses that contributions be paid into a superannuation product of the member’s choice. As the evidence in court proceedings that were instigated by the Australian Securities and Investments Commission (ASIC) shows, some trustees deliberately took action to cause members to remain in higher fee products rather than them being transferred into the lower fee MySuper. How was that in those members best interests?
Advertising and sponsorship
Another practice that is widespread amongst trustees of large superannuation funds is to apply some of the money that would otherwise be credited to members’ accounts to advertising and to sponsoring organisations. It is commonplace to see TV advertising, for example, by such funds. The argument used by trustees is that that is in members’ best financial interests because it attracts new members to the fund.
The best interests obligation of trustees is to the existing members of the fund. Spending members’ money on advertising and sponsorship can only, therefore, be justified if it benefits the existing members in some way. Therefore, trustees need to be able to demonstrate that spending the money is of benefit to the existing members by them obtaining lower fees or lower insurance premiums or in some other way. The history of such spending is that it has not, in many instances, resulted in lower fees or other benefits for the members.
A recent review by the Australian Prudential Regulation Authority (APRA) of trustee spending concluded that many trustees did not rigorously measure the benefits of marketing and advertising and were unable to demonstrate how sponsorships improved members’ benefits.
According to recent press reports, one industry fund has spent considerable sums on sponsorships of organisations connected with people in its management, which has resulted in APRA ordering the trustee of the fund to cease making sponsorship arrangements and other expenditure that are not in the members’ best interests.
Another instance involving members’ best interests that goes back some time is that the trustee of a large fund deducted 5% from each contribution made to the fund for the members and paid the 5% to financial advisers, which the trustee was entitled to do as it had been disclosed to the members. As the evidence in litigation showed, the financial advisers linked to one member’s account changed a number of times as advisers sold their businesses and that member had no contact with any of them other than the original adviser. Nevertheless, 5% of her contributions, including two large amounts transferred from another superannuation fund, were deducted from her account and paid to those advisers.
But back in 2008, the trustee had decided it would no longer deduct the 5% fee if members complained that there was no longer an adviser providing services to them. However, the trustee didn’t tell the members of its decision, with the consequence that, in in the years up to 2019, the 5% fee continued to be deducted from this member’s contributions and rollovers from other funds.
The trustee obviously concluded, when it made its 2008 decision, that its best interests obligation did not require it to advise the members that the 5% fee would no longer apply if they told the trustee that it was no longer to be paid to a financial adviser.
Insurance in super
Insurance in superannuation funds is a vexed issue. APRA has taken action against insurers in relation to insurance in funds not being paid when it was payable. Such action could also have been directed against trustees in failing to act in members’ best interests by not ensuring that insurance proceeds were paid by their insurers in circumstances when they should have been. Trustees, as the contracting parties with insurers, have an obligation to ensure that insurance benefits are paid when they are required to be paid under the insurance terms.
There are other examples of practices that may not be in members’ best interests such as some investment earnings not being credited to the members’ accounts that generated the earnings and put into reserves instead, with the consequence that when those members leave the fund they do not get back the lost earnings unless they are credited to them out of the reserves, which generally doesn’t happen.
In response to new legislation banning trustees from paying penalties imposed on the trustee out of members’ moneys, a number of industry funds currently have applications before the courts to be permitted to transfer members’ moneys to a reserve to meet any future penalties that are imposed on the trustee and its directors, which may or may not be incurred. If these applications are approved by the courts, those who are members at the time of the transfers to the reserves will be worse off but that won’t be the case for future members who don’t contribute to the reserves. It is questionable whether that is in the best interests of the current members. Nevertheless, the courts may be prepared to grant the applications.
How can things be changed so that trustees always properly apply the best interests obligation in making their decisions and in spending members’ money? The Commonwealth Government has progressively taken steps to endeavour to ensure that that happens, as have the regulators. Nevertheless, instances continue to occur where it is well arguable that the obligation has been breached.
Where that is the case, members can take action through complaints to the Australian Financial Complaints Authority (which has replaced the Superannuation Complaints Tribunal) or through litigation but, given the cost of litigation, class actions by members may be the only practical way of taking issue with trustee decisions that members regard as not being in their best financial interests.
Noel Davis is a barrister specialising in superannuation.