The Tribunal's determination
60 On 29 December 2015, the Tribunal made its determination and signed the Reasons. The Reasons state that a review meeting of the Tribunal was conducted under the provisions of the Complaints Act on 26 October 2015. The Reasons then state as follows in [2]-[9]:
DECISION UNDER REVIEW
2. The Complainant was a member of a defined benefit division (the Plan) of the Fund, the members of which were employees and retired employees of the Employer. The Employer ceased to carry on business on 31 December 2011 and ceased contributing to the Fund on that date. Consequently, the Trustee resolved to terminate the Plan in the Fund.
3. The Complainant had retired from the Employer's employment well before the termination of the Plan and, at the date of termination, he was being paid a pension from the Plan in accordance with the rules that applied to the Plan.
4. The Trustee advised the Complainant that, as a result of the termination of the Plan, it would be converting his pension to a lump sum amount to be paid to him and the Trustee advised him of its calculation of the lump sum equivalent of his pension. In making its calculation, the Trustee relied on calculations performed by the actuary for the Plan (the Plan Actuary). The same actuary also advised the Employer in relation to ceasing its participation in the Plan and in relation to options available to the Employer. Subsequent to the Plan Actuary's advice to the Employer, the Employer gave directions to the Trustee as to how the lump sum equivalents of pensions should be calculated, including that no account should be taken of potential future pension increases.
5. The Complainant objected to the Trustee's calculation of the lump sum equivalent of his pension and the Trustee considered the Complainant's complaint but decided to maintain its original decision as to the amount of the lump sum payable to the Complainant.
6. The Complainant complained to the Tribunal in relation to the Trustee's decision and it is the Trustee's decision in relation to the calculation of the lump sum payable to him which is the decision under review by the Tribunal.
DETERMINATION OF THE TRIBUNAL
7. Under s 37(6) of the Complaints Act, the Tribunal is required to affirm the decision of the Trustee if the Tribunal is satisfied that the Trustee's decision, in its operation in relation to the Complainant, was fair and reasonable in the circumstances.
8. At the review meeting, the Tribunal determined that it was not satisfied that the Trustee's decision in relation to the calculation of the amount of the lump sum payable to the Complainant was fair and reasonable, in the circumstances, in its operation in relation to the Complainant. The Trustee's decision is not, therefore, affirmed.
9. In accordance with the provisions of the Complaints Act, the Trustee's decision is set aside and the Complainant's complaint is remitted to the Trustee for reconsideration by obtaining advice from an actuary, who does not have a conflict of interest, as to what the proper calculation is of the lump sum equivalent, or commutation value, of the Complainant's pension under Designated Rules 16.5 and 16.6. The Trustee is to then calculate the lump sum payable to the Complainant, without acting on any directions or request by the Employer and by applying its prudential obligations and the covenants in s 52(2) of the Superannuation Industry (Supervision) Act 1993 (Cth), including by making a determination that is in the best interests of the beneficiaries, including the Complainant, and in accordance with this determination of the Tribunal. In making the calculation, the Trustee will need to determine whether it is appropriate to make any allowance for future expenses.
61 The Reasons dealt with procedural matters and the jurisdiction of the Tribunal, and then set out the background facts. Next, the Tribunal outlined the governing rules of the Plan and the relevant provisions of the Participation Agreement.
62 The Tribunal summarised the submissions of the parties at [28]-[65].
63 The Tribunal set out its deliberations and findings at [66]-[108] of the Reasons. In order to provide proper context for the Trustee's submissions on appeal, I set out this section in full:
66. The function of the Tribunal is, initially, to determine whether the decision of the Trustee was fair and reasonable, in the circumstances, in its operation in relation to the Complainant. It is not, therefore, a question of what decision the Tribunal would have made on the evidence that was before the Trustee but whether the Trustee's decision was fair and reasonable.
67. In making its determination, the Tribunal took into account the whole of the evidence and the submissions of the Parties.
68. The Complainant's complaint to the Tribunal contains a number of bases, including that the Trustee calculated his lump sum without allowing for future pension increases, that the Plan Actuary had a conflict of interest in advising the Trustee on the calculation because the actuary also advised the Employer, that the Employer gave directions to the Trustee as to factors to be taken into account and the Trustee acted on them, that the Trustee did not allow for the costs of administering his pension in calculating the lump sum and the Trustee took no notice of the calculations that were undertaken by the Complainant's Actuary.
69. There is a substantial difference in the calculation by the Plan Actuary and the Complainant's Actuary of what the correct amount of the lump sum for the Complainant is. The Plan Actuary, on his alternative valuation basis adopted by the Trustee, calculated it as being $1,432,824, whereas the Complainant's Actuary calculated it as being in the range of $1,921,000 to $2,065,000.
70. In reviewing the decision of the Trustee, the governing rules governing the operation of the Fund and the Plan are highly relevant. The governing rules include Designated Rule 16.5 referred to above which states that, on termination of the Plan, the Trustee was required to apply the assets firstly in payment of costs and, secondly, in payment of pensions which had commenced to be paid before the termination date. Paragraph (c) of Rule 16.5 refers to paying the amount which the actuary of the Plan determines has accrued in respect of members but, in the view of the Tribunal, paragraph (c) refers to those defined benefit members who are not covered by paragraph (b) which refers to those members to whom pensions had commenced to be paid before the termination date.
71. The second priority directed by Rule 16.5 was, therefore, payment of the pensions which had commenced to be paid. However, Designated Rule 16.6(a) permitted the Trustee to make arrangements it considered appropriate in securing the entitlements of the members that were payable under Rule 16.5 including the purchase of an annuity, the transfer of the benefit to another fund or payment of the benefit to the member, which would, in the Tribunal's opinion, include payment of a lump sum.
72. The effect of these provisions is that the Trustee was required to pay to the Complainant, as a pensioner, the amount of his pension or, if the pension was commuted to a lump sum, the lump sum equivalent of the pension if the Trustee chose, as it did, that method of payment.
73. The Trustee was, therefore, required to calculate the lump sum equivalent of the pension that was being paid to the Complainant and it was for the Trustee alone to make the determination of what the lump sum equivalent of the pension was after receiving whatever advice it regarded as appropriate. There is no reference in rules 16.5 and 16.6 to the calculation of the lump sum commutation value of the pension being performed by an actuary but it was, of course, reasonable for the Trustee to rely on the calculation of an actuary, having regard to what was involved in making the calculation.
The Trustee applied a fair and reasonable test
74. An issue that arises in relation to the Complainant's complaint is whether the Trustee applied the correct test in determining the Complainant's lump sum equivalent of his pension.
75. The Tribunal has not been provided with any minutes of a meeting of the directors of the Trustee in relation to the calculation of the Complainant's lump sum nor has the Tribunal been provided with any other material, other than the submissions of the Trustee discussed below, which shows the reasoning of the Trustee or what factors it took into account in making the calculation.
76. As a result of the Complainant's complaint, the Trustee's decision as to the lump sum payable was reviewed by the Committee on 20 September 2012. In the minutes of that meeting it is said:
They (the Committee) were satisfied that the basis adopted by the trustee in its determination of the value of the lump sum payments made from the Plan for all Plan members including [the Complainant] in the circumstances that the [Employer] had notified that contributions would cease was fair and reasonable in the circumstances and was made in accordance with the trustee's obligations at law.
77. In a similar vein, the Trustee, in a letter to the Complainant of 5 April 2012 said:
I am satisfied that the Trustee has taken all necessary steps to ensure that the outcome for all Plan members (including yourself) was fair and reasonable.
78. The Tribunal is of the view that the evidence referred to immediately above indicates that the Trustee and the Committee have both applied the wrong test in the Trustee making its decision and in the Committee reviewing the decision as a result of the Complainant's complaint. In determining the lump sum equivalent of the Complainant's pension, the Trustee was required by the covenant imposed by s 52(2)(c) of the Superannuation Industry (Supervision) Act 1993 (Cth) to perform its duty and exercise its power to calculate the lump sum amounts in the best interests of the beneficiaries, which includes the Complainant. It appears from the evidence referred to above that the Trustee was of the view that it had to apply a fair and reasonable test in making the calculation rather than act in the best interests of the beneficiaries, including the Complainant, in making the calculation.
79. In the view of the Tribunal it was not appropriate for the Trustee to apply a fair and reasonable test in making the calculation and in reviewing whether the calculation had been correctly made. The Trustee was required to apply the covenant in s 52(2)(c) as well as the other covenants in s 52(2) and meet its prudential and fiduciary obligations under both legislation and principles of trust law. It was, therefore, required to act in the best interests of the beneficiaries in making the calculations, exercise the same degree of care, skill and diligence as a prudent trustee would exercise in the circumstances and, if there was any conflict between its duties to the beneficiaries and to anyone else, including itself, to give priority to the interests of the beneficiaries over the interests of others and to ensure that the interests of the beneficiaries were not adversely affected by any conflict of interest.
Influence of the Employer
80. Part of the Complainant's complaint is that the Trustee acted on the directions of the Employer in calculating his lump sum. The Trustee has denied that.
81. The material provided to the Tribunal that relates to this issue includes a letter from the Employer to a company associated with the Trustee dated 15 November 2011, in which the Employer advised that it was ceasing to operate its business with effect from 31 December 2011 and in which the Employer said:
Pensioners - the Transfer Values in relation to the current pensioners should be determined by reference to the cost to each pensioner of purchasing an equivalent annuity. The equivalent annuity should be valued consistently with the current pension arrangements, namely the annuities will not increase in future years and should not be linked to CPI.
82. The Employer also said in that letter that it:
acknowledges that there may be a shortfall in the funding required to meet the desired commitments. The Company commits to making an additional contribution to make good this shortfall.
83. The Plan Actuary, in his letter to the Trustee of 9 December 2011, in which he set out his calculations of the benefits payable, said at page 2 that the Trustee had requested that he provide advice on the calculation of the benefits 'taking into account the wishes of [the Employer] and the top-up contribution it is prepared to make'.
84. The function of the Trustee under Designated Rules 16.5 and 16.6 was to properly calculate the lump sum equivalent of the pension that was being paid to the Complainant and, in doing so, it was not entitled to act on directions from the Employer.
85. In view of the submissions by the Trustee set out below that it took into account the factors referred to below, the Tribunal's findings of facts in relation to those factors are that they were taken into account by the Trustee.
86. The Trustee has submitted to the Tribunal that it was reasonable for the Trustee, and the Plan Actuary in advising the Trustee, to take into consideration the preferences of the Employer in deciding the actuarial basis for converting the pension to a lump sum and to have regard to the Employer's not unlimited commitment to make additional contributions.
87. It is the view of the Tribunal that Rules 16.5 and 16.6 did not permit the Trustee to take those factors into account in making its calculation.
88. The Trustee also submitted to the Tribunal that it adopted the valuation after considering the Employer's position about how much it was prepared to fund by way of additional contributions to the Plan. That was also not a factor, in the opinion of the Tribunal, that Rules 16.5 and 16.6 permitted to be taken into account.
89. The Trustee, in its submissions, also referred to the Employer's request that the Trustee determine the lump sums by assuming there would be no future increases in pensions and the Trustee submitted that, as pension increases were at the discretion of the Employer, it was reasonable to determine the lump sum by assuming there would be no future pension increases. The Plan Actuary, in an email to the Complainant's Actuary of 20 February 2012 said that the calculation basis adopted by him 'made no allowance for future pension increases as instructed by [the Employer]'.
90. Having regard to the history of pension increases in many of the years in which the Complainant's pension had been paid, the Trustee's function, in properly calculating the lump sum equivalent of the Complainant's pension, was to determine whether, in acting in the best interests of the beneficiaries, it was appropriate to adopt the assumption of no pension increases. In making that decision, which was an important factor in calculating the Complainant's lump sum, it is the Tribunal's view that the Trustee was not entitled to be influenced by the Employer and, given the history of pension increases, it was not reasonable for the Trustee to assume that there would be no pension increases in the future.
91. A further submission of the Trustee was that it properly took into account the preferences and objectives of the Employer, including the objective to provide the Complainant with a lump sum that was a fair and reasonable valuation of his pension and which was also sufficient to purchase an equivalent annuity. The cost of purchasing an equivalent annuity was a factor that, in the Tribunal's opinion, Rules 16.5 and 16.6 did not permit to be taken into account in valuing the lump sum equivalent of the Complainant's pension. The Employer's objectives were also not factors that could be taken into account by the Trustee in properly calculating the lump sum commutation value of the Complaint's pension.
Conclusion regarding considerations taken into account by the Trustee
92. In reviewing the decision of the Trustee, the effect of the forgoing is that the Tribunal is of the opinion that the factors referred to by the Trustee, in its submissions, as having been taken into account and which are set out above, were not factors that were permitted to be taken into account in calculating, under Rules 16.5 and 16.6 the correct value of the lump sum payable to the Complainant on termination of his pension. They were not, therefore, factors that were fair and reasonable for the Trustee to take into account.
Assumed rate of return
93. The Complainant took issue with the assumed rate of return adopted by the Trustee. The Trustee submitted to the Tribunal that, in adopting the calculation that it did, it was fair and reasonable to use an assumed rate of return of 4.3% per annum. In the view of the Tribunal, the Trustee was required to adopt an assumed rate of return that was in the best interests of the beneficiaries, including the Complainant, not one that was fair and reasonable.
Future expenses
94. As the Plan Actuary acknowledged in his email to the Complainant's Actuary of 15 February 2012, no allowance was made for future expenses in his calculations. The Trustee adopted his calculations. The Complainant has taken issue with the Trustee not taking future expenses into account. In order for the Tribunal to determine whether it was appropriate, in the circumstances that related to the Complainant, for future expenses to be taken into account in calculating the lump sum, the Tribunal would require further submissions from the Parties on this point. The Tribunal is not in a position, based on the material before it, of being able to determine whether future expenses should be taken into account under Rules 16.5 and 16.6 and that is a matter that the Trustee will need to determine, in acting in the best interests of the beneficiaries including the Complainant, in any future recalculation of the lump sum equivalent of the Complainant's pension.
Conflict of Interest
95. Part of the Complainant's complaint is that the Plan Actuary had a conflict of interest in advising the Trustee on the calculation of the lump sum equivalent of his pension because the Plan Actuary had already advised the Employer in relation to the calculations and termination of the Plan.
96. The Plan Actuary wrote a letter to the Employer dated 29 August 2011, in which he set out calculations of the lump sum equivalent of the pensions on two bases, one called the valuation basis and another called the alternative valuation basis and the latter was higher than the former. The Plan Actuary also otherwise advised the Employer in relation to the termination of the Plan and the payment of benefits.
97. The Trustee acknowledges that the Plan Actuary advised both it and the Employer but justified acting on the advice of the Plan Actuary on the basis set out in its submissions summarised above.
98. An issue for the Tribunal, in reviewing the Trustee's decision in relation to the calculation of the Complainant's lump sum benefit, is, could the Trustee's decision to rely on the Plan Actuary's recommendations have led to an incorrect calculation being made?
99. Under the general law, a conflict of interest can arise where a person who is giving advice advises two or more people, each of which has an interest in the outcome of the advice.
100. The Employer had an interest in the outcome of the Plan Actuary's deliberations and recommendations on the lump sum equivalent of the Complainant's pension because, amongst other things, that could determine the amount that the Employer paid into the Plan if the Trustee accepted the Plan Actuary's recommendations. The Trustee, in acting in the best interests of the members, also had an interest, on behalf of the members, in the outcome of the Plan Actuary's deliberations and recommendations in carrying out the Trustee's function under the Designated Rules of determining what the Complainant's lump sum equivalent of his pension was.
101. That the advice given by an adviser may affect the nature or quality of the advice given where there is a conflict of interest is referred to in the Prudential Practice Guide issued by the Australian Prudential Regulation Authority on conflicts of interest where it is said that a person or firm undertaking a material business activity for, or otherwise advising, a registerable superannuation entity licensee may have a conflict that could affect the nature or quality of the advice given.
102. The Tribunal acknowledges the force of the arguments put by the Trustee as to why it was appropriate for it to act on the Plan Actuary's advice even though he had also advised the Employer. The Trustee submitted that there was nothing unusual about the Plan Actuary advising both the Trustee and the Employer and that it is common industry practice.
103. However, in the view of the Tribunal, the fact that there is nothing unusual about it and that it is common industry practice is not determinative of whether it is correct practice. It is a matter of public record that practitioners in other professions apply the legal principles in relation to conflicts of interest in determining who they can advise and those same principles apply to actuaries.
104. In the view of the Tribunal, there was a conflict between the financial interest that the Employer had in the outcome of the Plan Actuary's recommendations and the financial interest that the Trustee had in acting in the best interests of its members, including the Complainant, in the outcome of those recommendations.
105. There was, therefore, in the view of the Tribunal, a conflict of interest in the Plan Actuary advising both the Employer and the Trustee in relation to what was the lump sum equivalent of the Complainant's pension and, because of that conflict of interest, it was not appropriate for the Trustee, because of its fiduciary duties to the Complainant, to act on the advice and recommendations of an actuary who was also advising the Employer. Furthermore, there is no evidence before the Tribunal that clearly demonstrates that the Trustee gave priority to the interests of the beneficiaries, as a result of the conflict of interest.
106. The Trustee submitted that a reason why it was reasonable to rely on the Plan Actuary's recommendations is that they were reviewed by the actuarial committee which, in the Tribunal's understanding, consisted of actuaries employed by an associate of the Trustee. The Tribunal has not been provided with any details of the factors that were considered by that committee. In the view of the Tribunal, the Plan Actuary's conflict of interest was not overcome by the deliberations of the committee because the committee accepted the recommendations of the actuary with the conflict.
107. The Tribunal has also not been provided with any minutes of a meeting of the directors of the Trustee nor with any other material setting out the reasoning of the Trustee or the considerations taken into account by the Trustee, except for the submissions by the Trustee as to the factors that were taken into account. What is clear from the Trustee's submissions and correspondence with the Complainant is that the Trustee acted on the recommendations of the Plan Actuary, who had the conflict of interest.
108. It is the view of the Tribunal that it was not fair and reasonable, in the circumstances, for the Trustee to act on the recommendations of the Plan Actuary in calculating the lump sum equivalent of the Complainant's pension because of the possibility or, at the very least, the perception that the Plan Actuary's recommendations could have been influenced by the fact that he was also advising the Employer, which had an interest in the outcome of the recommendations.
64 The Tribunal set out its conclusions at [109]-[113] of the Reasons:
109. Section 37(6) of the Complaints Act requires the Tribunal to affirm the decision of the Trustee in relation to the calculation of the lump sum payable to the Complainant if the Tribunal is satisfied that the Trustee's decision, in its operation in relation to the Complainant, was fair and reasonable, in the circumstances.
110. For the reasons given above, the Tribunal is not satisfied that the Trustee's decision was fair and reasonable within the meaning of s 37(6) and it is not, therefore, affirmed. Under s 37(3) of the Complaints Act, where a trustee's decision is not affirmed by the Tribunal, the Tribunal can set aside the trustee's decision and can remit the matter to which the decision relates to the trustee, for reconsideration in accordance with the directions of the Tribunal.
111. Section 37(4) of the Complaints Act requires that the Tribunal may only exercise its determination making power for the purpose of placing the Complainant as nearly as practicable in the position he would have been in but for the unfairness or unreasonableness that the Tribunal has determined exists.
112. Section 37(5) of the Complaints Act restricts the Tribunal from doing anything in making its determination that would be contrary to law or the governing rules of the Fund.
113. In accordance with these provisions of the Complaints Act, the Trustee's decision is set aside and the Complainant's complaint is remitted to the Trustee for reconsideration by obtaining advice from an actuary, who does not have a conflict of interest, as to what the proper calculation is of the lump sum equivalent, or commutation value, of the Complainant's pension under Designated Rules 16.5 and 16.6. The Trustee is to then calculate the lump sum payable to the Complainant, without acting on any directions or request by the Employer and by applying its prudential obligations and the covenants in s 52(2) of the Superannuation Industry (Supervision) Act 1993 (Cth), including by making a determination that is in the best interests of the beneficiaries, including the Complainant, and in accordance with this determination of the Tribunal. In making the calculation, the Trustee will need to determine whether it is appropriate to make any allowance for future expenses.