LGSS v Egan [2002] NSWSC 1171 | Case summary

The Scheme - Overview 8 The Scheme is a successor to the Local Government Pension Fund, which was created in April 1977, out of previous funds, as a defined benefit scheme. The contributing employers were local government authorities and others, including the health services and the County Councils which supplied or distributed electricity. The reserve for local government employees was kept separate from the reserve for other employees. The Local Government Pension Fund was amalgamated with another public sector superannuation fund in 1985, to establish the Public Authorities Superannuation Fund, with the local government reserve fund forming Part 3 of the new fund. In 1988 the State Authorities Superannuation Fund (SASS) took over the assets and memberships of the Public Authorities Superannuation Fund, and Part 3 of the previous fund became (with a few addenda) Part 2 of the SASS. Also in 1988 the State Authorities Non-Contributory Superannuation Scheme (SANCS) commenced, for the purpose of providing "productivity" superannuation benefits. Part 2 of that scheme contained the same employing authorities as Part 2 of SASS. In December 1992 SASS and SANCS were closed to new entrants, and all new entrants joined First State Super (FSS). 9 The Scheme was established in 1997, after the reconstitution of State public sector superannuation schemes that was implemented upon the enactment of the SAA. Generally speaking, the SAA established separate trustees for accumulation style schemes that were open to new members, and defined benefit style schemes that were closed to new members. It established two bodies referred to as FTC (FSS Trustee Corporation) and STC (SAS Trustee Corporation), as trustees of various public sector superannuation schemes including the local government employees superannuation schemes. FTC and STC are statutory bodies representing the Crown: ss 7 (2) and 48 (3) of the SAA. 10 Part 2 of SASS and Part 2 of SANCS were split into three schemes, namely the Local Government Superannuation Scheme (which is the "Scheme" for the purposes of this case), the Energy Industries Superannuation Scheme and "the rest". Former SASS members were included in Division B of the new Scheme, and former SANCS members were placed in Division C. 11 FTC and STC transferred assets equivalent to the assets held by them as trustees for the local government employees superannuation schemes, as required by reg 16(1) of the Superannuation Administration (Local Government Superannuation Scheme Transitional Provisions) Regulation 1997, made under the SAA. As I have said, the assets at that time already contained a substantial surplus. 12 The Scheme provides retirement, death or disablement benefits for its members, who are (generally speaking) people employed in the local government sector. It was established by the defendant as Treasurer under s 127 of the SAA. Section 127(1) authorised the Treasurer to approve the preparation of a trust deed for a superannuation scheme for the benefit of certain classes of State public sector employees, but s 127(5) required that "the trust deed must be consistent with the requirements of [the SIS Act] for a regulated fund within the meaning of that Act" and stipulated that "any trustee must satisfy the requirements of [the SIS Act] for a trustee". 13 There are six Divisions in the Scheme, each with their own Rules. For example, Division B has the Rules set out in Schedule 2 to the Deed. Each Division relates to a particular category of the beneficiaries of the Scheme. Pursuant to clause 3.8 of the Deed, the beneficiaries of the Scheme are entitled to have the assets held by their Division of the Scheme applied in accordance with the Rules. The assets consist of the small amount settled under the Deed, assets transferred to the Scheme on 1 July 1997 from earlier schemes, subsequent contributions made by "Employee Contributors" and "Employers" pursuant to the Rules, and investment earnings. 14 The assets of the Scheme comprise a fund that is held in two pools, namely Pool A and Pool B. The fund is a regulated superannuation fund under the SIS Act, established with a view to being a complying superannuation fund (Deed, clause 3.1). 15 The assets of Divisions A, E and F are contained in Pool A. These are accumulation schemes. Hence, the Rules for these Divisions are to the effect that the beneficiaries are entitled to be paid a superannuation amount equal to the balance held in the individual beneficiary's "Member's Benefits Account". Pool A has no material reserves and if it did, they would be distributed equitably amongst the members due to the fully vested nature of the Pool. 16 The assets of Divisions B to D inclusive are contained in Pool B. These are defined benefit schemes (except in the case of Division B, which provides for both defined benefits and accumulation benefits). The Rules for these Divisions have the effect that the beneficiaries are entitled to be paid a superannuation benefit calculated by reference to formulae described in the respective Rules of the Divisions. 17 Essentially Pool B is a closed fund. Clause 3.10 of the Deed provides that new beneficiaries and may not be admitted to Divisions B to D inclusive, except in limited circumstances relating to mobility and government initiated transfers. Mobility and transfers are relatively small in number and accordingly, the number of beneficiaries in these divisions will decrease over time. 18 Pool B has a surplus of assets over actuarially calculated liabilities. It is this surplus that has led to the dispute resulting in the present proceeding. The surplus emerged slowly over time. The old Local Government Pension Fund commenced with a deficiency, because the value of the defined benefits granted in respect of past service was greater than the accumulated assets. However, the deficiency was rapidly extinguished because of high investment returns, and because the employers were contributing at a relatively high rate designed to eliminate the deficiency. According to contemporary actuarial investigation, the Fund moved from a deficiency of $24.3 million in March 1984 to a surplus of $122 million in March 1986, and by March 1988 the surplus was $272 million. The rate of growth of the surplus declined immediately after the amalgamation which established SASS, because of the effect of contributors transferring from other funds, but by June 1994 the surplus had climbed back to $248 million, notwithstanding depressed investment earnings. By June 1997 the surplus had risen to $366 million for SASS, with a deficiency of $54 million for SANCS, but in June 1998 an actuarial calculation as at 1 July 1997 showed a surplus of $296 million for the whole of Pool B (which, as I have said, included the former SASS and SANCS schemes). Key provisions of the Deed 19 The Deed is dated 30 June 1997. It is a complex document which, together with its annexures and schedules (including the Rules of the Divisions) comprises an exhibit of 353 pages. My account of the Deed is confined to those provisions of particular relevance to the case before me. 20 Clause 3.1 establishes the "Fund", defined in clause 1 to mean each and both of the superannuation funds constituted by Pool A and Pool B, as the context requires. It obliges the Trustee, the plaintiff, to hold the assets of the Fund in trust for the persons who are or will be entitled to Benefits under the Divisions of the Fund to which each Pool relates. There is a cascading flow of definitions, beginning with the word "Benefits", from which it emerges that Benefits are amounts payable to or in respect of those employees of employers who participate in the Fund, in respect of whom the employer is required to make superannuation contributions. 21 Clause 3.4 required the plaintiff as Trustee to establish two pools of assets within the Fund as from 1 July 1997. As I have said, Pool A comprises the assets held by the Trustee for the purpose of providing the benefits specified in the Rules of Division A and Division E (to which Division F was subsequently added). These are the accumulation schemes. Pool B comprises the assets held by the Trustee for the purpose of providing the benefits specified in the Rules of Divisions B, C and D. Clause 3.5 makes provision for the transfer, effective on 1 July 1997, of assets to the Fund and for allocation to the appropriate pool of the assets of former accumulation and defined benefit schemes. Clause 3.6 requires that the assets in each Pool are to be applied only for the purposes of the Divisions to which that Pool relates, and those assets are not available to meet any liabilities in respect of the Divisions which relate to the other Pool. 22 Clause 3.8 provides that each beneficiary is entitled to have the assets held in respect of the Division under which the person is a beneficiary applied to provide the Benefits to which that person is entitled under the Rules. Clause 3.13 provides that, subject only to any contrary provision of the SIS Act, the Deed and the Rules are taken to include provisions to ensure that on the transfer day, any rights that a transferred member had under a former scheme are not removed or restricted. But according to clause 3.15, the Deed and the Rules are not to be taken to increase rights or create rights which a transferred member did not have under a former scheme. 23 Clause 3.16, which is headed "Superannuation Law to Prevail", provides: "Notwithstanding any of the provisions of this clause, the Trustee may apply and administer the Deed and the Rules in a manner and to the extent that they comply with the requirements of Superannuation Law, and where Superannuation Law prohibits the doing of any act or thing or requires the doing of any act or thing then notwithstanding the requirements of the Deed or Rules the Trustee may refuse to do that act or thing or do that act or thing as the case requires." 24 "Superannuation Law" is defined to mean the requirements of the SIS Act and certain other superannuation taxation legislation, regulations made under those statutes, and other requirements including administrative guidelines issued by a Superannuation Authority and statements by government advising changes and proposed changes to the Superannuation Law. 25 Clause 6.1, which is headed "General powers", confers upon the Trustee "power to do all acts and things which it considers necessary, desirable or expedient for the administration, maintenance and preservation of the Fund or any part of it", and then the clause proceeds to authorise the Trustee to do a long list of things "in the exercise and performance of its powers and obligations under this Deed". Clause 6.2, headed "Investment powers", obliges the Trustee, subject to Superannuation Law, to invest the Fund at arm's length, but otherwise in such manner as it shall in its absolute discretion determine". The clause purports to confer on the Trustee "full and absolute powers of investing" and says that the Trustee's power to invest is not to be restricted by any legislation relating to trustee investments. It then specifies a list of powers, "without limiting the generality of the absolute powers given" to the Trustee. Clause 6.8 authorises the Trustee to do all things considered by it as necessary or convenient to comply with any provision of Superannuation Law. Clause 6.10 prohibits the Trustee from terminating certain investment management and administration agreements without the Minister's consent. 26 Clause 6.12, upon which the plaintiff lays emphasis, is headed "Exercise of powers and discretion" and states: "The Trustee in the exercise of any power, discretion or authority under this Deed or otherwise vested in the Trustee shall have an absolute and uncontrolled discretion and may exercise or enforce all or any of those powers, discretions or authorities from time to time or at any time and may refrain from exercising any of those powers, discretion or authorities from time to time or at all." 27 A central provision for this case is clause 8.2. I shall set out the whole of clause 8: " 8 VALUATIONS 8.1 Valuations Unless otherwise provided in the Rules, the Trustee shall cause a valuation of all assets of the Fund to be made at least once in each year of income of the Fund and at such other dates, by such persons and using such methods as the Trustee may determine. 8.2 Excess amount When the value of the assets of a Pool or a part of a Pool or in an account established under the Deed or Rules in respect of a particular Employer ( Employer's reserve ) is more than the value of the liabilities of the Pool, part of the Pool or supported by that Employer's reserve (as the case may be) ( excess amount ), the Trustee may, on the advice of the Actuary apply the excess amount to reduce Contributions otherwise payable by an Employer or with the consent of the Minister [the defendant] and on the advice of the Actuary, determine to apply all or part of the excess amount for any purpose agreed by the Trustee and the Minister and in accordance with Superannuation Law." 28 Clause 11 provides for the payment of contributions by employers and members. They are to make contributions in accordance with the Deed and the Rules, and other arrangements agreed by the Trustee, although the Trustee may refuse to accept a contribution which in its opinion might jeopardise the status of the Fund as a complying superannuation fund. Clause 11.7, which is headed "Contributions holiday", provides: "The Trustee shall determine as required by the Rules from time to time on the advice of the Actuary and in accordance with the Rules, the Contributions to be made by Employers. The Trustee may, on the advice of the Actuary and in accordance with clause 8.2, permit an Employer or class of Employers to reduce its Contributions otherwise required to be paid under the Rules in respect of all or some of the Employers' Beneficiaries for such time and subject to such conditions as the Trustee on the advice of the Actuary, determines." 29 Amendments to the Deed are permitted by clause 20, which provides (so far as relevant): " 20.1 Amendments Subject to sub-clauses 20.2 and 20.4, the Trustee may, with the consent of the Minister, at any time by Deed or oral or written resolution, amend, add to, delete or replace all or any of the provisions contained in this Deed, including the provisions of this clause, and the amendment, addition to, deletion or replacement may be retrospective or take effect on a specified date. 20.2 Amendment not to reduce Benefits No amendment shall be made under sub-clause 20.1 which would have the effect of adversely altering a Beneficiary's right or claim to accrued Benefits or the amount of those accrued Benefits unless such amendment is permitted by Superannuation Law. 20.3 Actuary's advice In determining whether or not the effect specified in sub-clause 20.2 will occur the Trustee may rely on the advice of the appointed Actuary (if any)." 30 Clause 21.1, headed "Superannuation Law deemed to be included", says: "Notwithstanding any provision of this Deed any provision of Superannuation Law that is required to be included in this Deed for the Fund to remain or to be a complying superannuation fund shall be deemed to be included in this Deed as if every such provision was set out in this Deed on and from the date that the provision is required to be so included." 31 Clause 21.2, headed "Inconsistency of provisions", expands on clause 21.1 by saying: "In the event of any inconsistency between the provisions deemed by sub-clause 21.1 to be included in this Deed and the terms of this Deed, the provisions deemed to be included by sub-clause 21.1 shall prevail." 32 Clause 22 deals with termination of the Fund or a Pool or a Division. Clause 22.1 authorises the Trustee, with the consent of the Minister, to terminate the Fund on certain grounds, from a date agreed between the Trustee in the Minister. Clause 22.3 requires the Trustee to make provision out of the assets of the Fund to provide for various expenses, in a specified order of priority. Included in the list are provisions for benefits that have become payable prior to the termination date, and for benefits in certain Divisions that would have been payable if the member's employment had been terminated by the employer on the Fund's termination date. 33 Clause 22.4 (headed "Surplus") states: "If after making the provisions set forth in sub-clause 22.3 the Trustee is of the opinion that the value of assets of the Fund exceeds the value of the liabilities then the excess amount may be applied by the Trustee for any of the following purposes: (a) to be repaid to an Employer; (b) in increasing the provisions made for Beneficiaries of the Fund as at the Termination Date; (c) to be paid to the States of New South Wales; the governing rules of a superannuation entity (d) for such other purposes as the Trustees [sic] and Minister may agree." 34 To the extent that clause 22.4 contemplates repayment to an employer, it must be read together with clause 23.1, which says that (subject to clause 23.2, which permits the Trustee to pay an employer an amount for services rendered in connection with the management or operation of the Fund) no amount is to be paid to an employer under the Deed except in compliance with Superannuation Law. 35 Clauses 22.6 and 22.7 permit termination of a Division or a Pool respectively, by the Trustee with the consent of the Minister on certain grounds. Where a Division is terminated, the requirements of clause 22.3 for provisions to be made for expenses apply, but there is no provision in the Deed itself equivalent to clause 22.4, to authorise the Trustee to distribute any surplus upon termination of the Fund. Where a Pool is terminated, there is no provision in the Deed either for provisioning or for distribution of surplus. 36 The Rules for the various divisions are Schedules to the Deed. The rules for Division B, which is a defined benefit scheme, are in Schedule 2. Rule 4.1 requires an employer to pay contributions at the rate determined by the Trustee on the advice of the Actuary. Rule 5.2 governs payment of benefits by the Trustee to a Member/Contributor in Division B who retires, after reaching the Early Retirement Age, or dies during employment on or after reaching the Early Retirement Age. Rule 5.6 is the comparable provision for payment of benefits upon resignation, dismissal or discharge prior to Early Retirement Age. The plaintiff's proposals with respect to the surplus and the plaintiff's communications with Treasury 37 By early 1999 it emerged that the assets in Pool B were so substantial that if the employer contributions continued at their then current rate, sufficient funds would have accumulated, in about eight years, to cover the present value of all benefits in respect of past and future service. On 24 February 1999, the actuary to the Scheme, Mr Martin Stevenson of William M Mercer Pty Ltd, wrote a letter to the Scheme's Secretariat setting out some options for the Scheme to become "self-funding". Mr Stevenson recommended various alternatives for further consideration. They included reducing future contributions so that the Surplus would be absorbed over the lifetime of the fund; ceasing contributions at some future time; injecting an immediate lump sum or increasing contributions for a short period, so that no future contributions would subsequently be required; or relying on excess investment earnings to enhance the surplus so that no further contributions would be required after a time. 38 Mr Stevenson summarised the financial position of the Scheme as at 30 June 1998 as follows: · Present value of benefits in respect of past service: $1004.4 million · Present value of benefits in respect of future service: $856.4 million · Amount of assets: $1,490.9 million · Excess of assets over value of past service benefits: $486.5 million · Shortfall of assets below value of total benefits: $(369.9) million 39 The directors of the plaintiff came to address the options raised by Mr Stevenson in the context of preparation for their decision to fix employer contributions as from 1 July 1999. There were employer and employee representatives on the board of the plaintiff, and therefore there was every prospect that any proposal to deal with the surplus by benefiting employers at the expense of employees, or vice versa, would be controversial. Discussions took place in the context that under clauses 8.2 and 11.7, a reduction in the employer contribution rate could be determined by the Trustee and the Actuary alone, but any other use of the surplus would require the consent of the Treasurer. 40 The management arrangements for the plaintiff were that it had contracted with a company called Superannuation Services Company Pty Ltd (referred to in the evidence as the "Secretariat") to provide administrative and secretarial services to it in its capacity as trustee of the Scheme. The chief executive officer of the plaintiff, Mr Westbrook, was employed by the Secretariat, as was the chief financial officer, Mr Sainsbury. 41 At a board meeting on 12 May 1999, it was proposed that actuarial advice be obtained from Mercer to determine a rate that could be applied without reducing the surplus in Pool B. Mr Robertson, a board member, opposed that proposal because he would not support any reduction in the employer contribution rate below historical levels without a demonstrable improvement to member benefits, and he was concerned that if actuarial advice were obtained, the board might be in an awkward position if it did not follow the actuary's recommendations. A proposal to instruct the Scheme Actuary to determine a rate was not carried. However, the directors resolved that an employer representative and an employee representative of the board meet with Treasury officials for general discussions about options (without specific proposals), after the June board meeting. 42 Although not commissioned to determine a rate, Mercer kept working on plans for the surplus. On 25 May 1999 Mr Stevenson provided the Secretariat with a draft letter explaining the history of the Scheme's surplus, the implications of various funding strategies, and the financial effects of specified benefit improvements. He sent the Secretariat a letter on 27 May 1999 advising on the financial effects of possible benefit improvements. On 8 June 1999 he advised the Secretariat in writing on alternative crediting rate strategies for members of Division B of Pool B. 43 The directors of the plaintiff met again on 9 June 1999. Mr Stevenson and a solicitor were present, and the determination of the employer contribution rate was on the agenda. According to the minutes of the meeting, Mr Stevenson told the board that the Scheme was in a strong financial position and that the board could consider lowering the contribution rate for the 1999/2000 financial year. He reminded members of the board of their obligation to its "stakeholders" (evidently meaning to refer to the members and the employers) to determine the contribution rate for the 1999/2000 financial year having regard to the financial position of the Scheme. 44 The board resolved to obtain actuarial and legal advice so that it could establish a policy on the amount of any surplus required to be maintained for Division B. It also resolved to hold urgent discussions with the Treasury as to options to improve the benefits payable to employee members, on the basis that after those discussions, the board would reconsider the issue of contributions for the 1999/2000 financial year. The board resolved to request the actuary to prepare formal advice on the lowering of the retirement age. 45 Further investigations were pursued by the Secretariat and Mr Stevenson. In his letter of 11 June 1999, Mr Stevenson expressed the view that, if one were to disregard future contributions and benefits in respect of future service, the surplus as at 30 June 1999 would be $551 million or 34% of assets. If the employers were to cease contributing for five years, the 34% in surplus would reduce to 15%. On 17 June 1999 he provided some costings in respect of proposals for benefit improvements. 46 On 25 June 1999 Mr Woods, Mr Robertson and two other members of the board, accompanied by Mr Westbrook and Mr Sainsbury, met with the Treasurer and various Treasury officials, including Mr North. According to Mr Westbrook's evidence, the Treasurer said: "I will be supportive of the Scheme offering defined benefit members the ability to convert accrued entitlements to the accumulation division of the Scheme. The surplus can be used in this process to make the offer attractive to affected members. However, I will not support any proposal that will set a precedent for State superannuation schemes in New South Wales. Please discuss any proposals with Treasury staff, namely Tim North, a New South Wales Treasury official. "I am concerned that improvements to the LGSS Scheme will set an unfortunate precedent for State superannuation. The Government is not in a position to increase the financial obligations liability attached to State superannuation. I don't want any backwash. "I will, however, consider any proposal as long as you provide an outline of its merits. I will assess any proposal against two benchmarks. First, the potential backwash that may occur as a result of setting a precedent. Secondly, why any proposal is better than simply winding up the defined benefit scheme and equitably distributing the surplus to all stakeholders." 47 Later in the conversation, the Treasurer said: "In the end, I would like to see the Scheme put forward a proposal to wind up Divisions B and D in favour of Division A." Mr Westbrook said it was unlikely that the Trustee would consider any proposal that would force members to transfer from one division of the Scheme to another. 48 There was a subsequent meeting between representatives of the plaintiff (Mr Westbrook and Mr Sainsbury) and two representatives of NSW Treasury (Mr North and Mr Pappas), to discuss the surplus position of the Scheme and the options available to the Trustee other than a reduction to the employer contribution rate. Possible benefit improvements that were discussed in the meeting included some that would benefit employees: a change to the crediting rate policy, a change to the definition of salary, improvements to the resignation benefit, and the lowering of the early retirement age. The Treasury representatives indicated that it was unlikely that the Treasurer would improve any of those benefit improvements, because to do so would establish a difficult precedent for the State Superannuation Scheme. It appears that the Treasury representatives reiterated the two "benchmarks" that had been outlined by the Treasurer at the meeting on 25 June. 49 The Treasury representatives indicated that the Treasurer would be favourably disposed towards the Trustee offering members a financial incentive to transfer from the defined benefit divisions (Divisions B & D) to the accumulation Scheme (Divisions A). The ultimate objective desire by Treasury was said to be the closure of the defined benefit divisions. The Treasury representatives suggested a financial incentive is as high as 120% of the member's current redundancy benefit. Initially they proposed that transfer to the accumulation scheme be on a compulsory basis, but when the Trustee representatives said that the board would not consider any compulsory action, the Treasury representatives proposed a voluntary programme of transfer, on the basis that when membership of the defined benefit divisions fell below 5000 those divisions would be wound up compulsorily. 50 Mr Westbrook and Mr Sainsbury reported back to the board meeting held on 5 July 1999. The board rejected "out of hand" the idea of shutting down the defined benefit sections of the Scheme, but directed the Secretariat to prepare a discussion paper on the financial merits of introducing a voluntary programme for members to transfer to the accumulation divisions. The board also resolved to reduce the employer contribution rate to apply from 1 July 1999 and, subject to the Treasurer's approval, reduce the retirement age for Pool B members from 58 to 57. After this meeting, the Secretariat continued to explore benefit improvements and at their meeting on 14 July 1999, the board decided to obtain legal advice to challenge the Treasurer's ability to veto benefit improvements. Concurrently Mr Stevenson developed proposals for a conversion offer to members on financially advantageous terms, setting out his conclusions in his letter dated 2 September 1999. 51 Discussions continued with representatives of Treasury. At a meeting on 28 September 1999 attended by Mr Westbrook and Mr Tim North, Finance Manager/Superannuation at NSW Treasury, Mr Stevenson gave a powerpoint presentation summarising his advice on the conversion proposal. Mr Westbrook followed this up with a letter to Mr North dated 8 October 1999, seeking "formal endorsement of the methodology proposed by Mercer in its letter of advice on 2 September 1999". He noted that the Trustee had not made any "in principle" decision on the matter, but sought formal endorsement from the Treasurer to ensure the resources were not wasted on the development program that would ultimately not be acceptable to the Treasurer. Then on 17 November 1999 Mr Stevenson provided additional information as to membership profiles if a conversion offer were made, which indicated that only a minority of members of the defined benefit schemes would convert to the accumulation scheme. 52 On 22 December 1999 the Treasurer replied to Mr Westbrook's letter of 8 October 1999. He noted that estimates of the amount by which possible conversion benefits would exceed the value of past service liabilities ranged from $230 million to $349 million, and that the generosity of possible conversion offers would have adverse financial implications for the Government if it established a precedent for public sector employees. He noted the expectation of Mr Stevenson that only a minority of contributors would be likely to accept, despite the generosity of possible conversion offers, and so the winding up of the defined benefits divisions would not be likely in the near term. Nevertheless, he said he was willing to have further discussions, particularly to identify conversion benefit parameters under which the Trustee would be willing to wind up the defined benefits divisions. 53 The plaintiff appears to have adopted a new strategy with the arrival of the year 2000. On 23 February 2000 the chairman of the plaintiff, Mr Woods, wrote to the Treasurer informing him of advice that the plaintiff had obtained from senior counsel. Essentially, that advice was that the purported requirement for consent of the Treasurer under clause 8.2 of the Deed was invalid or inoperative, because it would be contrary to s 58 or s 59 of the SIS Act. Mr Woods noted that according to this legal advice, the obtaining of the Treasurer's consent was not a required element for the Trustee to implement, under clause 8.2, one of the various options that had been raised in relation to the surplus in Pool B. He said that while preserving all of the plaintiff's rights, the board was willing to have further discussions, but it was mindful of the plaintiff's legal and equitable obligations as Trustee of the Scheme. 54 The Treasurer did not reply until 26 June 2000. In the meantime, Mr Stevenson estimated that the "past service" surplus had increased to nearly $726 million, and with the current level of contributions the surplus would continue to grow. Indeed, he expressed the opinion that no further contributions would be required to meet past and future service liabilities, as there was a surplus over projected liabilities of $101 million. In his letter of 26 June 2000, the Treasurer said he did not favour the possible conversion offers that had been outlined by the Trustee, and he noted that he had not received a firm proposal seeking his consent to any relevant amendments to the Deed. He reiterated his inquiry as to the terms upon which the Trustee would be willing to wind up the defined benefits divisions, and said it remained his preference to explore this or other options in a consultative process. 55 During July 2000 the plaintiff endeavoured to arrange a meeting with Treasury officials, and Mr Stevenson was instructed to think about the financial implications of various alternatives, including a special bonus for non-deferred members and a zero employer contribution rate. Mr Stevenson responded on 8 August 2000, revising the estimate of "past service" surplus as at 30 June 2000 to about $823.5 million. He canvassed various options to deal with it. 56 A meeting was held on 9 August 2000, attended by the Treasurer and three Treasury officials (including Mr North), Mr Robertson and Mr Woods representing employee and employer interests on the board of the Trustee, and Mr Westbrook and Mr Sainsbury representing the Secretariat. Mr Woods explained that there had been a strong investment performance by the Scheme, and consequently the Scheme's surplus in Pool B had increased. He canvassed a number of proposals to deal with the surplus, including contributions holidays for employers and employees, the declaration of bonus crediting rates, and resettlement of the Deed to allow surplus in Pool B to meet employer liabilities in Pool A. 57 One of the representatives of Treasury raised the question of ownership of the surplus. The Treasurer expressed the view that the surplus had arisen through employer contributions and was therefore a surplus that should only be used for the benefit ofthe employers. Mr Woods disagreed, and said: "The surplus has arisen through a combination of both employer and employee contributions. Furthermore, the greater contributor to the surplus over the past three years has been excess investment earnings not contributions. We have to treat all the Scheme's stakeholders equitably." 58 Mr Robertson said that according to preliminary advice, the likely contributions to the surplus by the employers and members respectively were two-thirds and one-third. The Treasurer said: "I could be persuaded of the case to allow the members to benefit from the surplus if independent actuarial advice was obtained showing that a proportion of the surplus is 'owned' by the employees." 59 Shortly after the meeting, Mr Sainsbury instructed Mr Stevenson to provide advice as to the sources of the surplus of the Scheme, specifically how much was "owned" by the employers and how much could be fairly attributed to the employees. The board of the Trustee met on 23 August 2000, noting that this advice had been requested from Mr Stevenson and resolving to take no further action until it was received. 60 Mr Stevenson provided his advice by letter dated 13 October 2000. He said that the investment surplus could be split into two components, namely fluctuations that occur randomly, and a fundamental shift in the level of real investment return. The first component, random fluctuation, should belong to the employer, since the employer would be called upon to make up the deficiency in the event of poor investment performance. The employer assumed the investment risk and was, in his view, entitled to the rewards of a good investment return. In the particular circumstances of the Scheme, there was, in Mr Stevenson's opinion, a strong argument that the second component of the surplus, a fundamental shift in real investment returns, belonged to the employees. Mr Stevenson referred to various grounds for believing that there had been a fundamental shift in the level of real investment return, from 2% to 3.5%. He calculated that the value of the shift represented 39% of the past service surplus. He concluded that it would be reasonable to allocate one-third of the surplus to employees and two-thirds to employers. His conclusion therefore corresponded with the estimates made by the Trustee representatives in their meeting with the Treasurer on 9 August 2000. By a letter of the same day, Mr Stevenson recommended a substantially reduced future contribution rate for employers, and that employer contributions should cease as soon as practicable. 61 Mr Stevenson presented his views to the board meeting of 25 October 2000. The board resolved that two-thirds of the surplus be quarantined for the benefit employers, and one-third be quarantined for the benefit of members, and also that employer contributions cease until further notice as from 1 November 2000. It was noted that negotiations with the Treasurer would continue, in relation to using the portion of surplus quarantined for employees for the purpose of providing member benefits. On 31 October 2000 Mr Stevenson provided two letters of advice, dealing with the methodology for implementing the board's resolution of 25 October, and the steps that should be taken to protect the surplus, so they knew non-local government employees and employers would not benefit from the historical surplus. 62 On 14 November 2000 Mr Stevenson prepared some projections in respect of the Scheme, apparently as a result of a meeting with Treasury officials. His projections considered the employer and "contributor" (evidently employee) reserves separately. The projection for the employer reserve (calculated to be $548.9 million at 30 June 2000) showed that in the absence of further contributions by employers, the surplus would be eliminated in the year 2016, while the projection for the contributor reserve (calculated to be $274.5 million at 1 July 2000) showed that the surplus would be maintained to 2019, but it would slowly diminish. 63 On 16 January 2001 Mr Westbrook wrote to the Treasurer, enclosing a paper identifying changes sought to be made to the Deed to enable employees to receive benefits from the portion of surplus quarantined for them. Various advices from Mr Stevenson were attached to the paper. The letter sought agreement from the Treasurer to the proposed course of action, before draft amendments to the Deed were prepared. The paper set out arguments to support the view that the Deed be amended to permit: 1. employees to be granted a contributions holiday; 2. the surplus to be separated into an employer reserve and employee reserve; and 3. the surplus in the employer reserve to be made available to meet employer liabilities in Pool A, by partial resettlement of the Deed. 64 A meeting was held on 19 March 2001. In attendance were the Treasurer, Mr North and another Treasury official, and Messrs Woods, Robertson, Westbrook and Sainsbury for the Trust. The minutes of that meeting record the following, under the heading "Scheme Surplus": "The LGSS delegation referred to the briefing note forwarded under cover of the Secretariat's letter of 16 January 2001. Included in this briefing note was a copy of the Mercers advice of 13 October 2000. The delegation went on further to advise that employers had been granted a contributions holiday with effect from 1 November [2000]. "The Treasurer confirmed that he had received and considered our briefing note and indicated that he could not be persuaded, on the evidence presented, that any part of the surplus was legally owned by Scheme members. Mr Egan rejected the notion of an employees' surplus component, or the idea of alternate uses of the surplus. Moreover, it was the Treasurer's view that the surplus had arisen through employer contributions and therefore the surplus could only be used for the benefit of employers. "The Treasurer indicated that he would only change his position if the Scheme were able to provide irrefutable legal advice that the members owned part of the surplus. "LGSS representatives asserted that the surplus had arisen through a combination of both employer and employee contributions and contended that the Trustee must treat all Scheme stakeholders equitably. The delegation made continual reference to actuarial advice received from William M Mercer, which clearly indicated that it would be reasonable to allocate one-third of the surplus to members and two-thirds to employers. "The Treasurer indicated that he did not share a similar view to the LGSS delegation. He commented that 'you could get any advice you wanted from an actuary' and he required legal rather than actuarial opinion. When the LGSS delegation highlighted that he had previously indicated actuarial advice would be sufficient his response was that it was a misunderstanding of terminology and what he was now seeking was irrefutable legal advice in relation to surplus ownership. "The LGSS delegation expressed disappointment at the Treasurer's current stance that seemed at odds with his previous position." 65 In June 2001 Mr Stevenson provided a substantial report on William M Mercer's actuarial review of the Scheme as at 30 June 2000. It showed a past service liability surplus of $743.8 million, which included a surplus as at 1 July 1997 of $390.2 million and higher-than-expected investment earnings of $324.2 million. The SIS Act 66 Writing in 1988, I described the system of regulation of superannuation schemes in the following manner (T G Youdan (ed), Equity, Fiduciaries and Trusts (Carswell, 1989) pages 112 to 113): "In contrast with Canada (at any rate at a formal legal level), Australia and the United Kingdom rely principally on regulation through fiscal incentives and penalties, leaving the basic rights and duties of administrators to be determined by the constitutional instrument and the general law. Australia is perhaps the 'purer' example of fiscal regulation. Except in Queensland, there has been no attempt to set direct standards for superannuation arrangements. Instead, the Federal Parliament has set standards which must be met in order that income of the fund may be exempt from tax. Those standards are to be found in the Occupational Superannuation Standards Act, 1987 (which vests regulatory responsibility in the newly constituted Insurance and Superannuation Commissioner) and in the elaborate regulations made under that Act." 67 That regulatory structure changed when the SIS Act and ancillary legislation was enacted in 1993. The legislation was intended to give effect to new prudential arrangements for superannuation announced by the Commonwealth Treasurer on 21 October 1992. The first object of the Act was declared to be "to make provision for the prudent management of certain superannuation funds". The plaintiff contends that "prudent management" involves ensuring that trustees have primary responsibility for what they do. 68 The SIS Act confers direct enforcement powers on the regulator (initially the Insurance and Superannuation Commission) and makes trustees and investment managers subject to legislative sanctions for the proper performance of their responsibilities. Part 25 subjects a superannuation entity to monitoring by the regulators (now the Australian Prudential Regulation Authority and the Australian Securities and Investment Commission). 69 Section 7 states that the Act applies to a superannuation entity despite any provision in the governing rules of the entity, including any provision that purports to substitute the provisions of the law of a State. Section 19 defines "regulated superannuation fund" and makes provision (in s 19(4)) for a fund to become a regulated superannuation fund by the trustee giving written notice in an approved form electing that the Act is to apply. A notice, once given, is irrevocable: s 19 (5). Such a notice has been given in respect of the Scheme, and consequently the Scheme is a "regulated superannuation fund" to which the SIS Act applies. This was clearly the intention of the plaintiff and the defendant as parties to the Deed, since clause 2 of the Deed imposes a duty on the Trustee to make an application under s 19(4), clause 3.1 of the Deed deals with the effects of that election, and clause 3.16 renders the provisions of the Deed subject to Superannuation Law (including the SIS Act). 70 Section 52 makes provision for certain covenants to be taken to be included in the governing rules of a superannuation entity. Covenants 52 (2) (a), (b) and (c) may be of general relevance to the present case. The last of these is a covenant to ensure that the trustee's duties and powers are performed and exercised in the best interests of the beneficiaries. The word "beneficiary" is defined in s 10 (1) to include a member. Section 55 explains the consequences of contravention of a covenant. 71 The sections at issue in the present case are ss 58 and 59. Section 58 is headed "Trustee not to be subject to direction". Subsection 58 (1) says: "Subject to subsection (2), the governing rules of a superannuation entity … must not permit the trustee to be subject, in the exercise of any of the trustee's powers under those rules, to direction by any other person." 72 Subsection 58 (2) says that subsection (1) does not apply to directions given by various persons including a court, the regulator, a beneficiary or group of beneficiaries or an employer-sponsor. Subsection 58 (3) says that if the governing rules of a superannuation entity are inconsistent with subsection (1), that subsection prevails, and the governing rules are, to the extent of the inconsistency, invalid. 73 Section 59 is headed "Exercise of discretion by person other than trustee". Subsection (1), so far as relevant, states: "Subject to subsection (1A), the governing rules of a superannuation entity … must not permit a discretion under those rules that is exercisable by a person other than the trustee to be exercised unless: (a) those rules require the consent of the trustee to the exercise of that discretion; …". 74 Where the entity is an employer-sponsored fund, s 59(1)(b) permits a non-trustee to exercise certain discretions relating to contributions by an employer-sponsor, termination of the fund, and circumstances specified by regulations. Regulation 4.04 to the SIS Act specifies certain circumstances for the purposes of s 59(1)(b). None of the circumstances specified in subparagraph (b) or the regulation is relevant to the present case. 75 Subsection (1A) is not relevant. Subsection (2) says that if the governing rules of a superannuation entity are inconsistent with subsection (1), the subsection prevails, and the governing rules are, to the extent of the inconsistency, invalid. 76 The explanatory materials for the SIS Bill give only general guidance to the legislative purpose underlying ss 58 and 59. According to the Explanatory Memorandum for the Bill, the legislation would provide (relevantly to the present case): · "clear delineation of the basic duties and responsibilities of trustees, … indicating that trustees have primary responsibility for the operation of funds; · that trustees and investment managers must be suitable to act as fund trustees and to manage fund monies respectively;... · for equal member and employer representation…". 77 The second reading speeches in the House of Representatives (Hansard, 27 May 1993, page 1101) and in the Senate (Hansard, 19 October 1993, page 2099) is to the same effect. The emphasis on delineating the responsibilities of trustees, and on the primacy of their responsibilities, suggests that ss 58 and 59 may have to do with the responsibility of trustees for the operation of superannuation schemes. The commentary on the clauses themselves (clauses 54 and 55 became ss 58 and 59) merely restates the provisions. The relationship between clause 8.2 and ss 58 and 59 78 There is no significant dispute between the parties as to the proper construction of clause 8.2 of the Deed. Counsel for the plaintiff submitted that the general principle of construction of deeds of trust establishing employer-sponsored superannuation schemes providing defined benefits for members is that it should be purposive and practical rather than detached and literal (citing Mettoy Pension Trustees Ltd v Evans [1990] 1 WLR 1587, at 1610 per Warner J; Re Courage Group's Pension Schemes [1987] 1 WLR 495, at 505 per Millett J; Lock v Westpac Banking Corporation (1991) 25 NSWLR 593, at 602 per Waddell J). But it is unnecessary to choose between a purposive and practical, and a detached and literal, construction here, because the meaning of the words used is plain in all relevant respects. 79 Clause 8.2 applies where there is an "excess amount", with respect to a Pool (or part of a Pool, or an account established in respect of a particular employer (that is, an employer's reserve)). The excess amount is calculated by subtracting the value of the liabilities of the Pool (or part, or employer's reserve, as the case may be) from the value of the assets of the Pool (or part, or employer's reserve). Where there is an excess amount so calculated, the Trustee is given a discretion to apply the excess amount in either of two ways. In each case the Trustee may act "on the advice of the Actuary", and cannot therefore act in the absence of actuarial advice. 80 The two methods of application are "to reduce Contributions otherwise payable by an Employer", and "any purpose agreed by the Trustee and the Minister and in accordance with Superannuation Law". In the latter case, but not in the former, the Trustee is authorised to make its determination "with the consent of the Minister" as well as on the advice of the Actuary. Thus, an application of the excess amount otherwise than to reduce employer contributions requires 1. agreement between the Trustee and the Minister as to the purpose of the application, 2. the consent of the Minister, 3. the advice of the Actuary, and 4. the exercise of discretion by the Trustee. 81 The assent of the Minister is required at two levels. First, the purpose of the application of the excess amount (or part of it) is to be settled by agreement between the Trustee and the Minister. Secondly, the Minister must consent to the decision to apply the excess amount for that agreed purpose, the consent presumably extending to the manner in which the agreed purpose will be fulfilled. 82 It is clear that clause 8.2 of the Deed is part of the "governing rules" of the Scheme for the purposes of ss 58 and 59. It is also clear that clause 8.2 gives the Trustee a power for the purposes of s 58(1). As counsel for the plaintiff said, the Trustee's power under clause 8.2 is in the nature of a special power to appoint the whole or part of the excess amount to reduce employer contributions or for certain other purposes. 83 The first contentious question is whether clause 8.2, so construed, permits the Trustee to be subject, in the exercise of its power under clause 8.2, to direction by the Minister. If it does, then clause 8.2 is inconsistent with s 58(1), and it is invalid to the extent of the inconsistency (s 58 (3)). 84 The SIS Act does not define the word "direction", and s 58 itself gives no particular guidance as to the meaning of the word. The Oxford English Dictionary gives the following, as the most relevant meanings of the word "direction": "the action or function of directing, aiming, guiding, instructing, or administering"; and "an instruction how to proceed; an order, a precept". Similarly, the Macquarie Dictionary refers to "the act of directing, pointing, aiming, etc" and "management; control". The dictionary definitions convey the idea that a direction, in a context such as is provided by s 58, is an order or instruction. This may be contrasted with the idea of consent or agreement to a proposal, which is an act of assent or acquiescence to something external to the person consenting or agreeing. 85 The notion that the word "direction", or "direct", conveys the idea of an instruction or order has been adopted in various legal contexts. For example, in Dudderidge v Rawlings (1913) 108 LT 802 at 804, Coleridge J observed that "correct" implies "obey". In Newton v Ellis (1855) 24 LJQB 337, a contractor was held to be acting under the direction of a local board for the purposes of the Public Health Act, because he was subject to the orders of the board as to how work was to be done and who was to do it. In Benson v Benson [1941] P 90 at 97, Lord Merriman said: "Mr Hollins has directed my attention to Murray's Oxford Dictionary, from which it is quite clear, as I should myself have supposed, that in certain contexts 'order' and 'direction' are interchangeable terms. A 'direction' is said to be 'an order to be carried out' …". 86 Observations about the meaning of a single word in a quite different statutory or other context must be used with care, although it is of some assistance in the present case that the observations in the cases to which I have referred are to uniform effect. In s 58 the word "direction" is used to apply to the governing rules of a superannuation entity. Those governing rules will almost always, in practice, include a trust instrument. It is plausible to infer that in using the word "direction" in this context, the legislature intended to give the word the meaning it has in the law of trusts. 87 The law of trusts draws a distinction between a case where the trust instrument provides that the power of a trustee may be exercised only with the consent of a designated person, and a case where the trust instrument makes the exercise of the trustee's power subject to directions from a designated person. Professor HAJ Ford and Mr WA Lee observe (Principles of the Law of Trusts, 3rd ed, 1996, paragraph [1208]), that a provision of the former kind "enables the settlor to repose wide powers in the trustee while at the same time placing a break upon their exercise". In the latter case, in the exercise of his or her powers the trustee is "fettered by the terms in which the power to give directions is couched" (at paragraph [1209]), so that if the power is couched in highly specific terms there will be little opportunity for the trustee to do otherwise than obey any direction properly given. 88 Ford and Lee refer to a note by Penelope Pearce, "Directing the Trustee", (1972) 36 Conv 260. Ms Pearce says (at 261-2): "Since the trustee is bound to obey his trusts, it is possible to provide that he must act in accordance with the wishes of some other person. This may be the settlor, a beneficiary or a third party, such as a panel of investment experts. The trust instrument may provide for the consent of the other person to be obtained or, more rarely, require the trustee to act on the direction of the other person. It is usually stated that the duty of the trustee in such circumstances is simply to obey, 'however much he may disapprove'." 89 According to Ms Pearce, the text writers who explain the distinction between a requirement for consent and a requirement to act on directions invariably cite Beauclerk v Ashburnham (1845) 8 Beav 322; 14 LJCh 241 and Cadogan v Earl of Essex (1854) 2 Drew 227; 23 LJCh 487. In both of these cases the trustees were authorised and required, by and with the consent and direction in writing of the tenant for life, to invest in leaseholds. In the first case the trustees objected to doing so, on the ground that the proposed investment would be unfair to the remainderman. It was held that the trustees could not object to investment in leaseholds as such, but they had a discretion whether or not to agree to the particular investment proposed. In the second case, Beauclerk v Ashburnham was followed on the ground that "the trustees are under an obligation; the direction is imperative; and if the tenant for life thinks fit to have the trust fund invested in the purchase of leaseholds the trustees must adopt that investment" (2 Drew at 229 per Kindersley V-C), without any acknowledgement that the trustees had a residual discretion of any kind. Although Ms Pearce criticises the latter decision, she accepts (as do Ford and Lee) that where the obligation to follow directions is clearly and specifically expressed, any discretion of the trustee is wholly removed. 90 In the present case, clause 8.2 of the Deed empowers the Minister to agree with the Trustee as to the purpose of the application of the surplus, and to consent to the Trustee's determination to apply the surplus. The Minister may agree or decline to agree, and may grant or withhold consent. However, he is not empowered by clause 8.2 to issue any order or instruction to the Trustee with respect to the surplus. He cannot force the Trustee to undertake any particular course of action. My view is that, having regard to the meaning of the word "direction" gleaned from dictionaries, cases exploring the use of the word in other contexts, and the law of trusts, clause 8.2 does not permit the Trustee to be subject to direction by the Minister in the exercise of its power of application of the surplus. 91 Substantially the same conclusion was reached by Merkel J in Seafarers' Retirement Fund Pty Ltd v Oppenhuis (1999) 94 FCR 594. In that case Rule 14(a)(ii) of a superannuation scheme purported to impose, as a condition upon the exercise of the trustees' discretion to grant a disability benefit, a requirement that a medical certificate be obtained. On appeal from the trustees' decision to grant only limited benefits, the Superannuation Complaints Tribunal held it was not bound to obtain a medical certificate, because s 58 of the SIS Act required a trustee to act without "direction". Merkel J said (at 599-600): "I do not accept that the requirement that a trustee comply with r 14(a)(ii) constitutes the exercise of any of the trustee's powers in accordance with the direction of any other person contrary to s 58 of the Superannuation Industry (Supervision) Act. Rule 14(a) prescribed a condition for an entitlement and does not authorise any person to 'direct' the trustee as to the manner in which it is to exercise its powers under the Trust Deed." 92 The plaintiff seeks to resist these conclusions by making three points. The first submission relates to the meaning of the word "direction". The plaintiff submits that a power to direct a trustee may exist even though directions may be given only within a limited field, and only negative directions may be given. In the present case, clause 8.2 would literally empower the Minister to respond to a request for consent by saying "I do not consent to you applying the surplus at all". That, according to the plaintiff, would amount to an instruction, and therefore a direction, that the trustee shall not apply the surplus. The same point could be made if the Minister refused to agree to the surplus being applied for a particular purpose. That would amount in substance to a direction not to apply it for that purpose. 93 I accept that a power to direct may exist even though the directions are confined to a limited field - for example, in the two cases I have mentioned, the field of investment in leasehold interests. I also accept that a power to direct may exist even though it is confined to instructions not to act in certain ways - for example, a trust instrument may provide that the trustee must not invest in leasehold interests if so directed by the remainderman. Additionally, it must be correct that in deciding whether a governing rule permits a trustee to be subject to direction by another person, it is the substantive effect of the provision that must be assessed, rather than its formal structure and wording. But clause 8.2 does not, in substance, give the Minister the power to give directions of any kind, limited or unlimited in scope, negative or positive in nature. The Minister cannot act unless an occasion arises for him to agree to a proposed purpose or consent to a proposed determination. When an occasion arises for him to act under clause 8.2, the function conferred upon him by the clause is merely to agree or consent, not to issue any form of order or instruction or even guidance as to what the Trustee can or cannot do. If the Minister says "I shall not consent to any application of surplus" he is not thereby giving any direction to the Trustee, but rather he is explaining (to a limited degree) the basis upon which he has decided to exercise the only function conferred on him by clause 8.2, namely the function of agreeing and consenting in the instant circumstances. 94 The plaintiff's second point appeals to the legislative purpose underlying s 58. Counsel for the plaintiff contends that the purpose of s 58 is to create a duty under statute analogous to the equitable duty of trustees to act personally (citing Re Brockbank [1948] Ch 206), and to make the trustee independent of others when exercising any power under the governing rules. Counsel refers to the explanatory materials, and to s 3(1) of the SIS Act, according to which the object of the Act is to make provision for the prudent management of certain superannuation funds, and for their supervision by the regulators. 95 I can find nothing in the Act and explanatory materials to justify these broad submissions. It is clear that a purpose of the legislation was to delineate the basic duties and responsibilities of trustees and to indicate that they have primary responsibility for the operation of superannuation schemes. But this does not mean that trustees must be entirely independent of others. It is more likely that the legislative purpose of s 58 relates to the special taxation status that is afforded to complying superannuation funds. I agree with counsel for the defendant, who explained the probable legislative purpose of s 58 in their written submissions in this way: "A privileged taxation status is afforded to complying superannuation funds in order to encourage saving for retirement, and so relieve the burden of consolidated revenue for payment of pensions (see Part 7 of the Act, in particular s 62). The quid pro quo is that the assets within the superannuation fund must be used only for purposes in accordance with the detailed requirements of the Commonwealth's superannuation regime. If a person were empowered to direct a trustee to cause the assets in the superannuation fund to be used for some other purpose, the legislative purpose would be frustrated." 96 This legislative purpose does not require that the word "direction" in s 58 be extended to cases where the exercise of the trustee's power requires the consent or agreement of another person. 97 Thirdly, counsel for the plaintiff appeals to clause 6.12 of the Deed, according to which the Trustee's discretions are absolute and uncontrolled. The argument seems to be that clause 6.12 overrides the express requirement to obtain the Minister's consent in clause 8.2. 98 In my opinion the plaintiff's submission is unsound. The exercise of certain powers conferred on the Trustee by the Deed is expressed to be subject to the happening of an event such as the consent of the Minister (in addition to clause 8.2, see clauses 3.7, 6.10, 20.1, 22.1, 22.3(d) and (e), 22.4(a) to (c), 22.6 and 22.7). The effect of such a clause was described in Scott on Trusts (4th edition, 1988, by AW Scott and WF Fratcher, vol 3, paragraph 186.1): "By the terms of the trust the trustee may be authorised to do an act only on the happening of a certain event. In such a case he is not empowered to do the act until the happening of the event." 99 That being so, the Trustee's discretion does not arise until the Minister agrees to the purpose of the proposed application and consents to the proposed determination, and accordingly there is nothing upon which clause 6.12 can operate until the Minister's agreement and consent has been given. 100 The plaintiff also contends that clause 8.2 permits a discretion under the governing rules of the Scheme that is exercisable by a person other than the Trustee, and consequently the clause is inconsistent with s 59 of the SIS Act. The essential contention is that the Minister's power to grant or withhold consent, and to agree or decline to agree, is a discretion under the governing rules of the Scheme. 101 The power to grant or withhold consent is a discretion, in one sense of the word "discretion". So is the power of the Actuary for the Scheme to give or decline the advice which is necessary for a decision to apply the surplus under clause 8.2. In other circumstances, the power of a medical practitioner to issue or withhold a certificate of disability is a discretion. There is, however, a distinction between discretions of those kinds, and the discretion to make an operative decision under the governing rules of a superannuation scheme. My opinion is that the "discretion" to which s 59 refers is the discretion to make an operative decision under the governing rules of the superannuation scheme, rather than a discretion to grant or withhold consent or to agree or disagree with a proposal or to issue or withhold an advice or certificate of some kind. Were the position otherwise, provisions requiring actuarial advice or a medical certificate would be inconsistent with s 59(1), and the directions expressly permitted by subsection 58 (2) would be discretions prohibited by s 59 (1) - outcomes surely not intended by the legislature. The limitations of the Treasurer's discretions to consent and agree under clause 8.2 102 The plaintiff contends that the Treasurer owed fiduciary duties to members of the Scheme in deciding whether to agree and consent to the plaintiff's proposed application of the surplus. The plaintiff's case is that the Treasurer breached his fiduciary duties by taking into account irrelevant considerations and acting for an improper purpose, when he refused to consent to the Trustee's proposal. Although the complaints against the Treasurer have not benefited from precise pleading, they include his failure properly to consider the interests of members, based on his assertion that none of the surplus was "owned" by employees, and his concern that improvements to the Scheme would set "an unfortunate precedent for State superannuation", and his desire to wind up the defined benefit sections of the Scheme. 103 The fiduciary obligation is said to arise out of the following considerations: 1. the purpose of the Scheme, according to clause 3.1 and recital B of the Deed, is to provide superannuation benefits for the members (see also s 127(1) of the SAA); 2. the plaintiff as Trustee has duties and powers under the Deed and in equity; 3. although the Scheme was established by the Treasurer under s 127 of the SAA, it is otherwise a private scheme administered by a non-statutory trustee, who holds funds on trust to pay benefits to members, without any contribution by the Treasurer or the State of New South Wales; 4. the only assets contributed by the Treasurer and the State of New South Wales were the nominal sums paid into each Pool upon the establishment of the Scheme; 5. the Treasurer's agreement and consent is not required for a decision to pay benefits to members in the defined benefit sections of the Scheme; 6. the Trustee is not entitled to withhold benefits or pay out money except under the terms of the Deed and the SIS Act, which authorise uses only for the benefit of members of the Scheme, except that employers may receive a "contributions holiday" under clause 8.2 or repayment of contributions in the event of a surplus at termination of the Scheme under clause 22.4(a). 104 These considerations are said to lead to the proposition that the Treasurer, in exercising his powers under clause 8.2, must limit his consideration of any proposal made by the Trustee regarding the application of the surplus to the question whether the proposal is for the benefit of members. This is because the Treasurer's power is fiduciary in character and is only exercisable for the benefit of the beneficiaries of the power. 105 If it were not already obvious, Breen v Williams (1996) 186 CLR 71 and Pilmer v The Duke Group Ltd (in liq) (2001) 207 CLR 165 have made it crystal clear that the fiduciary idea is to be employed with precision of thought. It is reasonably clear from the plaintiff's submissions that it does not intend to invoke the central obligation of a fiduciary to avoid any actual or possible conflict between duty to the principal and personal interest. The plaintiff asserts, instead, that the Treasurer owed a duty to the employee members of the Scheme (described as a "fiduciary" duty but perhaps only a duty to act in good faith), and that this duty created an equitable limitation on the scope of the Treasurer's power to give or refuse consent under clause 8.2. 106 The equitable doctrine of fraud on a power imposes a limit on certain kinds of powers, even when they are expressed in general terms. There is a discussion of the scope of the equitable doctrine in Commonwealth v The Colonial Combing, Spinning and Weaving Company Ltd (1922) 31 CLR 421, at 470-475 per Higgins J. His Honour points out (at 471, citing Vatcher v Paull [1915] AC 372, at 378 per Lord Parker) that the term "fraud" does not necessarily denote, in this context, conduct amounting to fraud in the common law sense, but merely means that the power has been exercised for a purpose, or with an intention, beyond the scope or not justified by the instrument creating the power. Later his Honour refers (at 472) to "purposes foreign to the power". The parties placed some emphasis on the application of the doctrine of fraud on a power to the facts of that case, but it seems to me that the facts were so different from the facts of the present case that the decision itself, as opposed to the discussion of principle, is of no direct assistance to me. 107 When a power is vested in a fiduciary such as a trustee, the limitation is more extensive than in a case where the holder of the power is not otherwise in a fiduciary position. In such cases the power is sometimes referred to as a "fiduciary power". The fiduciary is under a duty to consider from time to time whether to exercise the power: Re Baden's Deed Trusts [1971] AC 424,449 per Lord Wilberforce; Lutheran Church of Australia v Farmers' Co-operative Executors & Trustees Ltd (1970) 121 CLR 628, 652 per Windeyer J. The exercise of such a power is open to review if it is in bad faith (Karger v Paul [1984] VR 161), or not on a real and genuine consideration (Re Beloved Wilkes' Charity (1851) 3 Mac & G 440 [42 ER 330]), or not for proper purposes (Cowan v Scargill [1985] 1 Ch 270), or for expressed reasons that are bad (Dundee General Hospitals Board of Management v Walker [1952] 1 All ER 896). The doctrine of fraud on a power, where it applies to the exercise of a power by a non-fiduciary, authorises intervention where the power is exercised for bad faith or for purposes foreign to the power, but not on the other grounds just stated. 108 A power conferred by a trust instrument on a non-trustee to consent to the exercise of a power by the trustee may be a fiduciary power. Ford and Lee, paragraph 1208, draw attention to the distinction between a power to consent intended to be for the benefit of the holder of the power, and a power to consent intended to be for the benefit of some other person. In the latter case, the holder of the power has an obligation to the beneficiary when exercising the power. The power of consent is a fiduciary power and must be exercised solely for the benefit of the beneficiary of it. 109 There may be an intermediate category between fiduciary powers on the one hand, and powers vested in a non-fiduciary but subject to the doctrine of fraud on a power on the other hand. In Lock v Westpac Banking Corporation (1991) 25 NSWLR 593, at 605-6, Waddell CJ in Eq quoted with approval the observations of Browne-Wilkinson V-C (as his Lordship then was) in Imperial Group Pension Fund Ltd v Imperial Tobacco Ltd [1991] 1 WLR 589 at 597 and held that a power of amendment of a superannuation trust deed vested in an employer with the consent of the trustee was subject to an implied obligation of good faith; that is to say, the power was subject to an implied condition that it be exercised honestly and in good faith, but it was not a fiduciary power. 110 Counsel for the plaintiff called in aid, at least by analogy, some well-known administrative law decisions to the effect that the discretionary powers conferred by public law on a Minister must be exercised reasonably, for proper purposes and not upon the relevant considerations: Swan Hill Corporation v Bradbury (1937) 56 CLR 746; Minister for Aboriginal Affairs v Peko Wallsend Ltd (1986) 162 CLR 254 and McPhee v Minister for Immigration and Ethnic Affairs (1988) 16 ALD 77. Whether it is correct to characterise a power vested by a private trust instrument in a Minister of the Crown as a public administrative power subject to judicial review on such grounds, may be a matter for debate: see Wilkinson v Clerical Administrative and Related Employees Superannuation Pty Ltd (1998) 79 FCR 469 at 484; Attorney-General v Breckler (1999) 197 CLR 83 at paragraph 41. But if such grounds are available, directly or by analogy, they appear to be similar in content, at least in the present circumstances, to the equitable principles that I have discussed. 111 It is plain that the Treasurer's power under clause 8.2 is not a power that he enjoys for his personal benefit. He holds it in his capacity as the responsible Minister. In my view, in exercising his power to grant or withhold consent under clause 8.2, the Treasurer was subject to the doctrine of fraud on a power. His decision would be open to challenge if he failed to act in good faith, or he acted for a purpose foreign to the power. The critical issue is to determine the proper purposes for which the power may be exercised. It is not important to decide, in this case, whether the Treasurer's power is a fiduciary power in the sense described above, or is a power to be exercised in good faith, or whether the administrative law cases apply directly or by analogy to the exercise of the power. 112 The more important question is whether the Treasurer was required, in exercising his power, to act only in the interests of the employee members of the Scheme, or was entitled as a Minister of Crown to take into account any matters going to the general public interest in the State of New South Wales. The resolution of that question will determine what purposes are proper and what purposes are foreign to the power, and what considerations are relevant and irrelevant. When the plaintiff asserts that the Treasurer was in a fiduciary position, it asserts (as I understand the argument) that the Treasurer was required to act in the interests of members, and therefore considerations that he took into account, not going to the interests of members, were irrelevant and improper. 113 Identifying the purposes for which a power was conferred is a question of interpretation of the instrument that confers the power, in light of the circumstances existing when the power was conferred. According to Scott on Trusts (Vol 3 paragraph 185): "In determining this question the relationship of the holder of the power to the trust, as well as the nature of the power, is an important consideration. If the holder of the power is one of the trustees, it is ordinarily clear that he owes duties to the beneficiaries with reference to the exercise of that power. … On the other hand, where the power of control was conferred on one of the beneficiaries, the power is more likely to be, although it is not necessarily, conferred on him for his own benefit and not for the benefit of the other beneficiaries also. … Where the person on whom the power of control is conferred is neither a co-trustee nor a beneficiary but is a third person otherwise unconnected with the administration of the trust, the power is ordinarily conferred on him as a fiduciary and not for his own benefit." 114 It would be wrong to regard the general principles enunciated by Scott on Trusts as determinative of the question before me. This is a special situation, where the Scheme emerged from a general rearrangement of public sector superannuation in New South Wales, in which the Treasurer was obviously closely involved, generally acting in the public interest rather than exclusively in the interests of the members of any particular scheme. In the circumstances, it would be plausible to see the Treasurer as the representative of the public interest and the Trustee as the representative of the interests of the Scheme beneficiaries. 115 The history of development of the surplus and the vesting of very substantial funds in the Scheme tends to reinforce this view. To say that the Treasurer contributed only a nominal amount to the establishment of the Scheme is to tell only a small part of the story. The Treasurer established the Scheme under s 127 of the SAA, and by virtue of the regulation made under the SAA enormous funds were transferred into the Scheme from the older superannuation funds. Two trustees of the funds transferred to the Scheme were bodies representing the Crown, whereas the present Trustee is a private corporation. It would not be surprising, when such a large amount was transferred from State trustees to a private corporation as trustee, that the State would insist upon including provisions such as the provision in clause 8.2 requiring the Treasurer's consent, acting in the public interest, to any application of the ongoing surplus. It would be very surprising if, in the circumstances, the Treasurer were to be precluded from taking into account the general public interest, as opposed to the interests of members of the Scheme, and in my opinion there is no proper ground for imposing such a limitation. 116 It has not been shown that the matters considered by the Treasurer were not proper matters going to the general public interest. There are clearly differences of opinion between the Treasurer and his staff, on the one hand, and the board of the Trustee and the Actuary, on the other. One of those differences goes to whether, in some fairly loose sense, the employee members "own" any part of the surplus. The Actuary produced an analysis to support the board's view that the employee members should be regarded as owning one-third of the total surplus. The Treasurer's view is that the whole of the surplus is "owned" by the employers who made contributions. It is unnecessary for me to resolve this dispute. It is sufficient to say that, in my view, the view adopted by the Treasurer is not an unreasonable or totally implausible one. Benefits in Pool B are defined benefits, and there is no doubt that, under the Deed, the members are entitled to have those defined benefits preserved. They participate in the Scheme in order to produce that outcome. It is arguable that the surplus is wholly attributable to the continuation of employer contributions, after it ceased to be necessary for contributions to be made in order to fund accrued liabilities, together with investment returns on contributions made by employers and paid into identifiable employer accounts. Conclusions 117 I have decided that there is no substance to any of the plaintiff's claims. Therefore the amended summons should be dismissed. I cannot at present see any reason why I should not order the plaintiff to pay the defendant's costs, but I shall give the parties the opportunity to make submissions, if they wish, on the question of costs. **********

LGSS v Egan

At a glance

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Before

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Judgment (8 paragraphs)

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Legislation Cited (2)

Cases Cited (10)

Cited By (1)