Modernising death benefit nominations – the untapped potential of trustee consent

Introduction

Death benefit distribution has long presented superannuation trustees with a dilemma. SIS binding death benefit nominations^[1] (SIS BDBNs) are hard to make, prone to lapsing without being confirmed or remade and there can be unfairness with the death benefit distribution when the member’s personal circumstance change before their death. The death benefit distribution being at the discretion of the trustee can take longer and be more costly to administer.

Offering two imperfect solutions, each with their own limitations, does not produce an optimal outcome. It remains difficult for members to keep nominations current as circumstances change - whether relationships break down, new dependants are born, or family violence emerges. And where the outcome would be plainly unjust, the right of trustees to intervene remains uncertain.

There is a third way. Binding nominations made with trustee consent under section 59(1)(a) of the SIS Act (Deed Binding BDBNs^[2]) offer an alternative framework that trustees can design, adjust, and modernise within their governing rules. However, only approximately 6% of members have made Deed Binding BDBNs.^[3]

The Australian Government’s consultation on preventing perpetrators from accessing victims’ superannuation death benefits recognises this pathway as part of the solution.^[4] Legislative reform is welcome - it would apply more broadly and provide greater certainty - but the industry need not wait. This paper considers what is possible with binding nominations made under the governing rules of the superannuation fund that are consented to by the trustee under section 59(1)(a) of the SIS Act as well as the importance of an operationally efficient transition to Deed Binding BDBNs.

Nomination pathways

The distribution of death benefits among eligible recipients is a discretionary trustee decision. Generally, a trustee cannot be directed as to the exercise of its discretion - save for exceptions permitted by statute or the trust governing rules. For a superannuation trustee, section 59 of the SIS Act prohibits the governing rules permitting a discretion to be exercisable by other persons, subject to certain exceptions.

The result is that there are five potential death benefit distribution pathways.^[5] Three of those pathways allow a member to determine how their death benefit will be distributed:

1. Statutory Notice Route: The nomination works as a statutory notice under section 59(1A) of the SIS Act, with SIS Regulation 6.17A supplying the relevant informational, form and execution requirements, including a three-year expiry period.
2. Trustee Consent Route: The member’s nomination is treated as something that would otherwise engage section 59(1), but it is permitted if the governing rules permitting the nomination requires trustee consent under section 59(1)(a) of the SIS Act.
3. No Discretion Route: This is where the trust deed does not give the trustee any discretion to exercise as to the distribution of the death benefit. We have seen this used in circumstances including:
   1. historically, to prescribe a specified distribution of a death benefit if at the date of the member’s death their family circumstances fell into certain categories, although we no longer see this used, presumably because trustees realise that members will have a wide variety of types of family units;
   2. for the automatic reversion of pensions; and
   3. to ensure that a receiving trustee under a successor fund transfer follows prior SIS BDBNs made to the trustee of a transferring fund.

Section 59(1) of the SIS Act is not breached as there is no discretion left for the trustee to exercise. Because the direction is given by a beneficiary and relates to a benefit payment, it does not contravene section 58 of the SIS Act.^[6]

Deed Binding BDBNs – a creature of the governing rules

Unlike SIS BDBNs - whose requirements are hard-wired in the SIS Regulations – Deed Binding BDBNs are a creature of the governing rules. This distinction has significant practical implications. The framework is largely in the hands of the trustee, that consistently with their fiduciary, trustee and statutory duties can design, adjust, and refine the nomination process through the governing rules, provided that the governing rules require trustee consent to the nomination, which enlivens the exception in section 59(1)(a) of the SIS Act.

The ‘governing rules’ of a superannuation fund include any rules, written or unwritten, that govern the establishment or operation of the fund.^[7] APRA have stated that it considers:

‘Governing rules will always include the trust deed or other constituent instrument and any rules attached to the trust deed or other instrument together with any further rules which are made pursuant to such instrument.’^[8]

The definition encompasses the trust deed along with rules made pursuant to the trust deed which may also include documents such as guidelines and member communications if the trust deed provisions empower the trustee to prescribe certain matters in those documents. Because Deed Binding BDBNs derive their authority from this multi-layered framework, trustees can deliberately allocate different elements of the nomination process to different layers, each offering a different degree of permanence and flexibility:

1. Trust deed: prescribes the broad framework - the right to nominate, eligible beneficiaries, and basic validity requirements. Changes require a trust deed amendment, so this layer should be drafted at a high level of generality.
2. Internal policies and guidelines (for example, product rules): are made pursuant to a power under the trust deed and govern the operational detail - timing and process for consent decisions, criteria for granting or refusing consent, and circumstances for the withdrawal of consent. This layer can be updated by the trustee without amending the trust deed, allowing rapid response to emerging risks.
3. Member communications: inform members about the nomination process, consent outcomes, and events affecting their nomination. This layer is the most agile - trustees can refine messaging and disclosure as member needs and regulatory expectations evolve.

This layered architecture gives trustees the foundational stability in the trust deed, operational flexibility in policies and guidelines, and communication agility at the member interface. Unlike the statutory framework, which requires legislative amendment to adapt, trustees can recalibrate their Deed Binding BDBN framework as risks, technologies, and member expectations evolve.

The industry has recognised this potential, but implementation remains narrow. Most trustees offering Deed Binding BDBNs have used the framework primarily to provide non-lapsing nominations, avoiding the three-year expiry period prescribed for SIS BDBNs. This is a valid use case, but it captures only a fraction of what the layered architecture makes possible. The sections that follow explore three dimensions of this broader potential:

1. easing formality requirements;
2. modernising administrative controls; and
3. permitting substantive protections against changed circumstances.

Easing formality requirements

The prevailing view is that the making of a binding death benefit nomination is not a testamentary act requiring compliance with the formalities prescribed by wills legislation.^[9] A nomination of the beneficiary to take under the trust is a right conferred by the governing rules of the trust, operating within the trust structure. As such, trustees are not bound to replicate will-like formalities when designing the nomination processes.

Yet the formality requirements under SIS Regulation 6.17A(6) - which prescribe the conditions for a valid SIS BDBN, including that the notice must be signed and witnessed by two uninterested individuals - largely mirror the formalities for a valid will. But the critical balancing element was left out: the remedial ‘dispensing power’ that allows courts to give effect to a testator’s clear intention despite technical defects was not carried over. A nomination that fails the prescribed formalities under the SIS Regulations simply cannot bind the trustee.

ASIC has observed that most members do not have binding nominations in place, with non-binding nominations being more popular - likely due to the relative ease of making them online without witnesses.^[10] The formality requirements under SIS Regulation 6.17A(6) raise the bar for members seeking to make their wishes binding. This has particular consequences for victims of domestic and family violence: where a member cannot execute a valid binding nomination despite wishing to financially exclude their partner, their death benefit may default to the trustee’s discretion, under which the partner may be well-positioned to receive payment as a spouse and/or financial dependant.^[11]

There is scope for reform, as the formality requirements in SIS Regulation 6.17A(6) do not exhaustively prescribe the formalities that may render a nomination binding on the trustee.

First, there is uncertainty as to the precise effect of the formality requirements on SIS BDBNs. In Rest v Pain [2016] SASC 121 (Rest v Pain), Blue J analysed the construction of SIS Regulation 6.17A and concluded that the only clearly prescribed statutory condition for a valid section 59(1A) notice may be the ‘information requirement’ under SIS Regulations 6.17A(2)-(3) - that the trustee must give to the member information that the trustee reasonably believes the member reasonably needs to understand the right to require the trustee to provide the benefits.^[12] On this construction, the conditions in SIS Regulations 6.17A(4)-(7) (including the formality requirements and the three-year lapse rule) operate as operating standards under section 31 rather than conditions of validity under section 59(1A). This would leave open the possibility that a trustee might honour a notice that does not satisfy every condition in SIS Regulations 6.17A(4)-(7). Nevertheless, given the uncertainty and the real risk that a court might reach a different conclusion in a contested claim, in practice almost all trustees require a SIS BDBN to comply with SIS Regulations 6.17A(4)-(7) to ensure validity of SIS BDBNs is beyond doubt.

Second, and more critically, SIS Regulation 6.17A does not apply to Deed Binding BDBNs permitted under the governing rules under section 59(1)(a) of the SIS Act. This provides trustees with considerable flexibility to tailor the conditions - including the information and witnessing requirements they deem appropriate. Industry practice is already evolving in this direction, and a diversity of approaches has emerged: some funds have adopted fully digital, witness-free processes; others require fund-specific digital authentication; and some retain traditional paper forms with two witnesses. This reflects the inherent flexibility of Deed Binding BDBNs, where trustees are able to recalibrate the formality requirements as risks and technologies evolve.

Modernising administrative controls

While will-like formalities are not mandatory for Deed Binding BDBNs, the protective functions they serve shed light on the risks trustees should guard against in this closely analogous process: undue influence, coercion, lack of capacity, identity fraud, and document fabrication. These risks are heightened in situations involving elder abuse and family violence, where a vulnerable member may be pressured by a family member or carer to make a nomination that does not reflect their true wishes.

Lighter-touch nomination processes may raise concerns about lowering barriers against fraud and coercion. But the traditional formality requirements, now more than 25 years old, offer no guarantee against these risks either. What matters is not whether the old formalities are retained, but whether the substitute safeguards - better suited to contemporary circumstances - can achieve equivalent or greater protection.