Australia: Section 52(12) – The Forgotten Covenant

Rob Kardashian, Emilio Estevez, Luke Hemsworth, Dannii Minogue, Trevor Chappell. Sometimes it is hard to avoid being overshadowed by more famous, more glamorous siblings.

The covenant in section 52(12) of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) must be feeling that same sense of bewilderment and neglect. Ever since 2019, when it was moved from section 29VN where it held the spotlight as the centrepiece of the enhanced trustee duties in relation to MySuper products, it has receded from focus to the point where few people even remember it is there.¹ The covenant in section 52(12) was not referenced in the recent applications made by the RSEs of profit-for-members funds to amend their deeds in light of the amendment to section 56(2) of the SIS Act. Nor has it been mentioned nor in public discussion about the pressure on RSE licensees to merge 'uncompetitive' funds. It has all been about its section 52(2)(c) sibling.

But RSE licensees should not forget the covenant in section 52(12). Section 52(12) relevantly provides:

It looks, therefore, deceptively like the recently amended covenant in section 52(2) which relevantly provides:

So what of the covenant in section 52(12)? Inevitably, it is first necessary to talk about its older, and more glamorous, sibling.

The rise of section 52(2)(c)

The covenant in section 52(2)(c) has, of course, had a colourful history of its own. Its provenance can be traced back to Sir Robert Megarry VC's decision in the UK pensions case, Cowan v Scargill.² It was then picked up in the ALRC 1992 Report into superannuation, from whence it found its way into the SIS Act in 1993.

Over the following decade the courts had little opportunity to consider the scope and operation of the covenant in section 52(2)(c) directly.³ There were, however, proceedings before the Administrative Appeals Tribunal in which the provenance and substance of the covenant were considered in detail.⁴ Somewhat controversially, the AAT concluded that the administrative law context in which the covenant was being applied in that case severed the interpretive connection between the covenant and its general law antecedent, a proposition disavowed by the court in Manglicmot,⁵ Beck⁶ and Kelaher.⁷

Although considering the general law version of the best interests duty rather than the section 52(2)(c) covenant, the Invensys case in 2006⁸ can be seen as a catalyst for a flurry of speculation over the decade that followed. Contributions by Justice Margaret Stone (extra-curially),⁹ Professor Geraint Thomas,¹⁰ the current author,¹¹ and a number of industry professionals¹² all sought to define the content of the 'open-textured' duty. Leading UK pensions expert, Mr David Pollard, also weighed in, drawing together the accumulation of UK decisions and the Australian commentary.¹³ It was a surprise therefore that the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry observed in early 2019 that:

The arc of the (new) covenant

Section 29VN was enacted in 2012 as part of the Stronger Super reforms. It was at that time specifically directed towards intensifying the duty owed by RSE licensees in respect of the newly-formulated MySuper products. Section 29VN has not been subject to consideration by a court since its enactment,¹⁵ nor, to the knowledge of the author, has APRA or ASIC sought to rely on it in any regulatory action.

Section 29VN was amended in 2019. The statutory requirement to promote the financial interests of members holding MySuper products was transformed into a new covenant by the trustee, expressed in section 52(12). That covenant extended the obligation to holders of Choice products and (by virtue of being a covenant and not simply a statutory duty) became enforceable at the instance of affected members. There has not, to date, been any court consideration of the new covenant.

That said, it is clear that the covenant in section 52(12) is intended to apply broadly to the conduct of the RSE licensee. The reference to investment performance is inclusive, and would seem to be designed to orientate the RSE licensee towards the ultimate goal of the trust – providing a means by which members can efficiently accumulate a financial nest egg for use in retirement – without limiting its application to matters related to the investment strategy formulated by the RSE licensee. So the covenant clearly is intended to apply to the wide variety of tasks and decisions that an RSE licensee undertakes and makes in the course of administering the trust, from processing and accounting for member contributions, selecting insurance providers, negotiating with outsource provides to reporting to members, managing accounting reserves and dealing with regulators. It might also place a positive duty on RSE licensees to identify means of driving down per member costs, such as through fund mergers.

Same, same or different?

Notwithstanding the similarities, there are some obvious differences between the covenants. The first is that the covenant in section 52(12) is energised by the verb 'promote'. This gives the covenant a positive, active flavour that arguably goes somewhat beyond its sibling in section 52(2)(c). The question then becomes, what level of energy and expedition is required of the RSE licensee? The language of the covenant does not provide any assistance. It does not contain familiar conditioning language, such as the 'reasonableness' formula found in key parts of the Corporations Act, or a reference to a peer group standard, such as appears in the covenant in section 52(2)(b) of the SIS Act. Presumably a court would find some limit to the exertion required of an RSE licensee but for the time being we have merely the undertaking to 'promote' the financial interests, however exhausting that might be.

One further divergence is that only the interests of beneficiaries holding MySuper or Choice products are encompassed under the covenant in section 52(12). This ignores other beneficiaries, such as those in defined benefit plans and the nominated beneficiaries under the insurance arrangements of each member, who enjoy the protection (such as it is) of the covenant in section 52(2)(c).

It is also true that the covenant in section 52(12) does not contain the superlative 'best'. Much ink has been spilled on how much to read into the presence of this superlative in the section 52(2)(c) covenant, with the weight of opinion (but not the current author) arguing 'not much'. In this case, however, the exhortative effect of the verb 'promote' probably achieves much the same effect, signalling that it is not sufficient that RSE licensees safeguard the interests of members; they must expend energy in furthering those interests.

Notice also that the covenant in section 52(12) is not conditioned on the powers and duties of the RSE licensee in the way that the covenant in section 52(2)(c) is. This difference could be quite consequential. It is axiomatic that the powers of the trustee of an express trust arise by virtue of the legal instrument creating and defining the trust. Unless the trustee is granted power under the trust instrument (or, in theory a statute, although there are relatively few relevant powers granted in this manner) to do something in relation to trust assets, the actions purportedly taken by the trustee are ineffective in so far as the trust is concerned. (They may of course be effective from the perspective of a third party for value without notice of the lack of power). As a result, the content of each trust relationship depends on its terms, and each trust instrument is different. The substance, therefore, of the covenant in section 52(2)(c) is contingent upon the precise duties and powers of the RSE licensee in respect of each fund (or segment of the fund) it administers. But there is nothing in the covenant in section 52(12) to condition its application in a similar way. There is therefore a very real potential for conflict between the legal obligation of the RSE licensee to promote the financial interests of members and the constrained powers of the RSE as trustee of the superannuation fund. What, apart from the expensive and time-consuming exercise of approaching the court for authority, is the RSE licensee to do if the governing rules do not empower it to do the things it determines are in the financial interests of members?

The fact that section 52(12) is not conditioned on the powers and duties of the trustee has another implication. Legal professionals have long argued that the reference in the covenant in section 52(2)(c) to the 'powers' and 'duties' of the RSE licensee mean that that covenant only applies when it is acting as trustee, and does not apply when it is acting on other capacities. However, the covenant in section 52(12) is not conditioned on the powers and duties of the RSE licensee; it is a plenary duty to promote. Does this mean that it applies even when the RSE licensee is acting in a personal capacity and not as a trustee? That would be a significant extension, especially as there is nothing to limit the requirement to exertions in respect of which the trustee might enjoy a right of indemnity. Matters such as the acquisition of trustee capital and indemnity insurance, product design and 'business' planning may all be subject to this duty to 'promote' even though, strictly speaking, these are business decisions of the RSE licensee and not, again strictly speaking, decisions taken pursuant to administration of the trust.

The requirement to promote members' financial interests might extend even further. It is not hard to come up with hypothetical scenarios in which the financial interests of members could be promoted by the RSE licensee by actions outside the scope of the trust or of the role of trustee envisaged in the trust's governing rules. For instance, might the section 52(12) obligation mean that RSE licensees ought to put in place procedures to encourage employers to make timely contributions on behalf of the fund's members, even when such an obligation is not provided for in the trust's governing rules? Or might it mean that RSE licensees ought to put in place measures to ensure that members are not over-charged for financial advice in relation to their superannuation, where that expenditure is funded out of the members' account and the adviser is not a related party of the trustee? Both are things an RSE licensee could practically do. The benefits to the members would in both cases flow to them as increases in their account balances, and as such seem to be promoting their financial interests. However, absent express reference to such obligations in the trust instrument, neither initiatives are inherent to administering the trust. Indeed they are arguably extending the trust.

An even more extreme result would arise if a court (or regulator) read 'financial interests' broadly, to connote interests beyond those enjoyed under the trust. Then the covenant in section 52(12) might even justify (and indeed motivate) expenditure on member education, political advocacy and other programmes that could be defended as being in members' financial interests. This would bypass the limits of section 62 of the SIS Act because the requirement would arise outside the maintenance of the fund.

Concluding comments

Commissioner Hayne was scathing in his criticism of the industry and its advisers for making the best interests duty more complicated than he believed it ought to be. But one cannot ignore a statutory text, however unfashionable, enigmatic and inconvenient the provision might be. And the covenant in section 52(12) remains on the books, alongside, but certainly not eclipsed by, the covenant in section 52(2)(c). However, as the Kiwi cricket team discovered forty years ago,¹⁶ you underestimate the black sheep of the family at your peril.

Footnotes

1. Two exceptions are the present author, in a 2021 submission to the Senate Economics Legislation Committee on the Treasury Laws Amendment (Your Future, Your Super) Bill 2021, and Dr Alison Silink in her presentation to the 2022 Superannuation Lawyers Conference titled ‘Best Financial Interests under s52(2)(c) – Is it a New Duty?'

2. [1985] 1 Ch 270.

3. Notably, the deliberations of Byrne J in Invensys that are frequently cited as relevant to the interpretation of the covenant were expressly made in relation to the analogous general law provision; Invensys Superannuation Fund Pty Ltd v Austrac Investments Ltd (2006) 198. FLR 302.

4. Re VBN [2006] AATA 710.

5. Manglicmot v Commonwealth Bank Officers Superannuation Corporation Pty Ltd [2011] NSWCA 204, [118]. (Giles JA, with whom Young and Whealy JJA agreed).

6. Commonwealth Bank Officers Superannuation Corporation v Beck (2016) 334 ALR 692, [136]–[140] (Bathurst CJ. with whom Macfarlan and Gleeson JJA relevantly agreed).

7. Australian Prudential Regulatory Authority v Kelaher (2019) 138 ACSR 459, [49] (Jagot J).

8. Above n 3.

9. Hon Margaret Stone, ‘The Superannuation Trustee: Are Fiduciary Obligations and Standards Appropriate?' (2007) Journal of Equity 167.

10. Geraint Thomas, ‘The Duty of Trustees to Act in the “Best Interests” of their Beneficiaries' (2008) 2 Journal of Equity 177.

11. M Scott Donald, ‘Best interests' (2008) 2 Journal of Equity 245.

12. See for instance Stanley Drummond, ‘SIS Act obligations to beneficiaries' (2010) 4 Journal of Equity 140; Daniel Mendoza-Jones, ‘Superannuation trustees: Governance, best interests, conflicts of interest and the proposed reforms' (2012) 30 Company and Securities Law Journal 297; Paul Collins, ‘The best interests duty and the standard of care for superannuation trustees' (2014) 88 Australian Law Journal 632.

13. David Pollard, ‘The Shortform “Best Interests Duty”: Mad, Bad and Dangerous to Know' (2018) 32 Trust Law International 106 and 176.

14. Commonwealth of Australia, Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Final Report, 2019), 225-226.

15. Although the covenant was referred to, there was no discussion of its content in REST v Pain [2016] SASC 121.

16. On 1 February 1981, then captain of the Australian cricket team, Greg Chappell, persuaded his younger brother, Trevor Chappell to bowl the final ball of a 50 over cricket match underarm, along the ground to stop the NZ batsman from hitting an (unlikely) six to win the match. Australia won the match. The notorious ‘underarm incident' poisoned Australian-New Zealand relations for the best part of a decade and remains a sore point in many trans-Tasman interactions to this day. Although playing occasionally for Australia in the following two seasons, Trevor Chappell never matched the post-playing career of his brothers Greg and Ian, and has for some years been relegated to hosting the 2:00 – 6:00am shift for ABC radio.

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