The Stronger Super Trustee Obligations Bill (Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Bill 2012) was introduced into Parliament this morning. This is the second of several Bills to introduce the Government’s Stronger Super package.
Limited scope of the changes
The Trustee Obligations Bill is substantially the same as the Exposure Draft and leaves many of the issues raised by industry during the consultation process unresolved. While the changes that have been made are generally welcome, the limited scope of the changes is disappointing. Although the submissions made in relation to the Exposure Draft were not made public, we know that many detailed and considered submissions were made.
Key changes
The key changes from the Exposure Draft are:
Enhanced trustee obligations for MySuper products
The proposed duty to promote the financial interests of the beneficiaries of the fund who hold the MySuper product has been retained, despite the various problems raised by the concepts of “promote” and “financial interests”. However, the requirement to promote, in particular, “net returns” has been clarified to mean returns “after the deduction of fees, costs and taxes”.
The explanatory memorandum (EM) includes the following statement, which may provide some degree of practical comfort but which does not sit entirely easily with the text of the Bill:
While this will lift the standard required of trustees, it is not a requirement that trustees generate certain level of returns. Sustained low returns may indicate a failure to promote the financial interests of beneficiaries, but low returns, on their own, will not necessarily involve a breach of this obligation. The obligation does not imply that members of a MySuper product should be given preference over other members of the fund, for example, by the trustee in allocating investment returns, or in any other way.
The proposed duty to make an annual determination in relation to “scale” has also been retained, although in a modified form. The determination will now relate to whether the interests of MySuper beneficiaries are “disadvantaged” compared to beneficiaries that hold a MySuper product in other funds, due to “insufficient” scale in terms of members or assets. This contrasts with the concept that was in the Exposure Draft, under which scale had to be “sufficient” to “ensure” that the financial interests of MySuper beneficiaries were not disadvantaged.
Additional enhanced obligations for trustees and directors in relation to MySuper products will be able to be made by regulation.
General trustee and director covenants – conflicts
Like the version of the conflicts provision in the Exposure Draft, whole chapters of text books could be dedicated to the meaning of the proposed conflicts provision. There are material differences from the Exposure Draft version.
Gone is the concept of needing to “avoid” a conflict as such. This is probably more consistent with where the general law now sits, at least so far as conflicts of duty and interest are concerned. Also gone is the Exposure Draft approach of endeavouring to list out all conceivable types of conflict, producing overlaps within the list.
The approach in the Bill involves a more generic description of conflicts of interest and duty and of duty and duty. Like the Exposure Draft version, the provision will continue to address a conflict between duty to beneficiaries and interests of associates of the trustee (or director), which will often involve an extension of the general law.
The provision then expands the duties of the trustee (or director) when a conflict exists.
The “priority” concept continues, which is less than desirable in our view but not unexpected. The requirement is to give priority to the duties to and interests of beneficiaries over duties to and interests of other persons. Curiously, there is a question whether the reference to “other persons” includes the trustee or, for the directors’ covenant, the relevant director. Does this mean that where there is a conflict between the duty to beneficiaries and the interests of the trustee or director, the priority requirement does not engage? The EM is of limited assistance on this point.
In addition to priority, there are other matters to be addressed, which the EM states are additional to the general law requirements. Those matters are:
to ensure the duties to the beneficiaries are met despite the conflict;
to ensure that the interests of the beneficiaries are not adversely affected by the conflict;
to comply with prudential standards in relation to conflicts.
“Ensuring” an outcome will set an exacting standard and the test of “not adversely” affecting the interests of beneficiaries will likely prove to have many difficult permutations in practice. The covenant also flags that APRA will likely have more to say through prudential standards (something already flagged in APRA’s Discussion Paper from September 2011).
General trustee and director covenants – other
The proposed text of the duty of care, skill and diligence for trustees and directors has been refined. The new standard will still be, as under the Exposure Draft, the standard of a “prudent superannuation trustee” or a “prudent superannuation entity director” (respectively), but the concept of “morally bound to provide”, which forms part of the existing trustee covenant, will be removed.
The proposed new duty of a trustee to act “fairly” has been retained, but the requirement not to give any beneficiary an “unfair advantage” has been removed.
Conclusion
A fuller description of the contents of the Trustee Obligations Bill is in our previous alert on the Exposure Draft which can be accessed here.