Despite having billions of assets under management, Australia’s superannuation funds have share capital ranging from as little as A$12 (€7.9) to A$100 (€66.2).

Under newly-introduced laws, trustees would be forced to run into insolvency if they were penalised for wrongdoing.

The precarious nature of share capital has come to light during recent hearings at various Australian supreme courts. Super funds have applied to change their trust deeds to allow capital to be set aside for special purpose reserves, described variously as ‘rainy day funds’ or ‘penalty war chests’.

Take the case of AustralianSuper, the nation’s largest industry fund, managing A$250bn of members’ funds. In a judgment handed down in December, Justice Malcolm Blue of the Supreme Court of South Australia wrote: “At present, the imposition on the trustees of any penalty in excess of A$12 would render [the trustee of AustralianSuper] insolvent, and potentially give rise to grave consequences for beneficiaries.”

Justice Blue said the fund’s two shareholders – the Australian Council of Trade Unions and the peak national employer association, the Australian Industry Group – each have six shares in the holding company. Both have indicated that they are not prepared to contribute additional share capital to create a risk reserve.

At the other end of the spectrum is the A$15bn CareSuper. Its application to amend its trust deed was heard in the Supreme Court of Victoria.

Justice Kevin Lyons said trustees for CareSuper could face insolvency if the fund was not granted the power to pay fines using reserves “in the light of its current capital of A$60”.

In his judgment, Justice Blue highlighted the difference between industry funds and commercial for-profit funds owned and controlled by banks or other financial institutions.

A commercial trustee charges a fee or series of fees to its superannuation fund and is free to use the money generated by the fee for its own purposes. This includes paying out profits by way of dividends to its shareholder.

Until recently, this was a sleeper issue. Then, in 2020 the Australian government amended a little-known provision, Section 56 of the Superannuation Industry Act, to make all trustees accountable, and to prohibit trustees from seeking to indemnify against the assets of their super funds. Instead, trustees will now be personally liable for financial penalties.

The amendments came into effect on 1 January this year, after a year’s grace period.

So far, a dozen or so of Australia’s largest industry superannuation funds have obtained or are seeking to obtain Supreme Court approval to impose risk fees on their members.

There is no uniform approach or a standard fee. To date, funds have sought, subject to approval by the courts, fees ranging from 0.015% for AustralianSuper to 1.65% in the first year for Hostplus, to establish the risk-premium reserve.

IPE spoke to several large industry funds, which all declined to comment publicly but confirmed that the amendments have a direct impact on the not-for-profit sector where funds traditionally have not built up reserves or capital of their own.

By contrast, one super fund executive says that retail funds, which are owned by large businesses, have capital from which they can pay fines on behalf of directors should they be sanctioned by regulators.

A spokesperson for AustralianSuper told IPE: “A recent technical change in the law required this adjustment and we confirm the decision will have no impact on member fees.”

“This is a technical change,” says a spokesperson for another industry fund. “As the shareholders of industry funds have no capital, we have had to do slight changes to our trust deeds. But we are not seeking to impose new fees on our members.”

In February, Hostplus wrote to its 1.3m members in the tourism and hospitality industries informing them of the changes.

“This raises two questions. One, is where you draw the line and say that the trustee or its director hasn’t done what is required and ought to be held accountable. Second, is where the money comes from”

 It said that the legislative changes have significantly broadened the types of penalties for which the trustee and its directors cannot be indemnified out of fund assets.

Hostplus said that as its fund operates on a profit-for-member basis, the trustee body does not currently hold sufficient capital that could be used to indemnify the trustee, or otherwise meet related liabilities.

Instead, the trustee has previously relied on being able to draw against the assets of the fund to recover such costs.

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“The big issue is how to hold trustees accountable”

Scott Donald

“As a result of these legislative changes, the trustee risks becoming insolvent if a penalty were to be imposed on it, or its directors, and the trustee does not have sufficient capital to pay the penalty.”

Hostplus was due to make the first deduction of the trustee fee in March 2022, based on the balance of the member’s account at 31 March 2022. Hostplus aims to accumulate A$54m in a risk premium fund by 2024. It has left open the option of continuing to collect a fee beyond that period.

IPE understands that Cbus Super intends to take time over “a number of years” to build up a special-purpose reserve. Cbus is allowed to potentially raise up to A$63m for its risk reserve.

Superannuation governance expert Scott Donald, an associate professor at the University of New South Wales, says he broadly supports the policy behind the Section 56 amendments.

“People are quite rightly surprised and offended when they find that trustees may not have performed their duty appropriately and then, when a sanction is imposed on them, the trustees use trust assets to pay for liabilities. In effect, the members are paying the penalties.”

He told IPE: “The big issue here, and potentially in the United Kingdom and Canada which also have trustee structures to govern their pension systems, is how to hold trustees accountable for their administration of the fund.

“The issue of accountability is crucial. This raises two questions. One, is where you draw the line and say that the trustee or its director hasn’t done what is required and ought to be held accountable. Second, is where the money comes from.”

Donald says changes to Section 56 came into force against a background of intensification of regulatory scrutiny and with regulators becoming more inclined to prosecute. Consequently, trustees are more likely to have sanctions imposed on them.

So far, according to Donald, only the large funds have obtained court blessing to set up special reserves. “It is quite an expensive process and I don’t know whether the smaller funds are able to do the same,” he says.

Trustees can get indemnity insurance, he adds, but again, the question as to who pays the insurance premium arises. “There is no magic pudding here; the money will have to come from somewhere.”

Donald says: “This is an issue in Australia, but it resonates in other markets where authorities are holding trustees accountable.”

Historically, this hasn’t been an issue in countries with defined benefits systems, he adds, because employers ultimately foot the bill if the fund suffers a loss because of a trustee’s actions. But as they change over to defined contributions, like in the UK, pension regulators are starting to intensify supervision.

“Australia provides an early warning for markets that they are going to go down the same path on trustee accountability. But they have some distance to go,” Donald says.