Mercer Superannuation (Australia) Limited v Billinghurst

1. The appeal be dismissed.
2. The appellant pay the respondent's costs to be taxed if not agreed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

FLICK AND KERR JJ: 1 Mercer Superannuation (Australia) (the Trustee) appeals against the primary judge's dismissal of an appeal from a determination made by the Superannuation Tribunal (the Tribunal).

Background 2 Mr Billinghurst is a former employee of Grosvenor International Australia Pty Ltd (Grosvenor). In that capacity he was remunerated by salary and superannuation. On 13 April 1993 Mr Billinghurst entered into a Deed with, inter-alia, his employer, substituting new provisions for those that had previously applied to his superannuation fund. As relevant clauses 8.1, 8.2 and 8.3 of that Deed provided: 8.1 Periodical Increases in Pensions The Company shall review each pension payable hereunder and may at its discretion on the advice of the Actuary direct the Trustees to increase any pension by such amount as they consider appropriate having regard to the assets of the Plan, the actual and potential liabilities of the Plan hereunder, and any changes in any statistic indicating changes in the cost of living recommended by the Actuary since the last occasion of such review or the date on which such pension became payable, as the case may be. 8.2 Payment All pensions payable hereunder shall be paid in the Commonwealth of Australia by monthly instalments on such days and in such manner as the Trustees think fit. 8.3 Augmentation of Benefits Subject to such terms and conditions as the Company may determine, the Company may direct the Trustees to pay or provide a benefit or other amount greater than would be provided but for such a direction and the company may rescind or vary such a direction. The Trustees shall act on such a direction PROVIDED THAT, if and to the extent that, in the opinion of the Trustees (after obtaining the advice of the Actuary), to act on such a direction would cause a deficiency in the Plan, before acting on such a direction or in the course of doing so the Trustees may require an undertaking from an Employer that it shall contribute to the Plan such additional amounts or rates of contribution and at such times as the Trustees shall determine after obtaining the advice of the Actuary. If any undertaking required by the Trustees as aforesaid is not given or, having been given, is not fulfilled to the satisfaction of the Trustees, the Trustees may refuse to pay or provide (or to continue to pay or provide) the greater benefit or amount to which the undertaking relates. 3 Mr Billinghurst retired in 2000. 4 The assets and members of Mr Billinghurst's original superannuation fund were transferred to a defined benefit division of a fund managed by the Trustee as from 2 May 2006. There is nothing to indicate that Mr Billinghurst was involved in or agreed to that transfer. However it is not in dispute that that fund was subject to what are described as its Designated Rules. 5 In a report to the Trustee dated June 2011 (Grosvenor Australia Properties Pension Plan-Statement of Advice) the Plan Actuary set out at 3.1 the funding objective, as it understood it, of the Trust Deed, as specified by the Participation Agreement, applying in respect of that defined benefit division: 3.1.1 Provisions of the Trust Deed Schedule 1 of the Plan's Trust Deed includes a requirement that an actuary carry out an actuarial valuation of the financial condition of the Plan in accordance with relevant Commonwealth superannuation legislation. The Participation Agreement governing the operation of the Plan specifies that "The Employer will make contributions to the Plan of such amount and upon such basis as will ensure the payment to or in respect of the defined benefit members of the Plan of their benefits…" 3.1.2 Professional requirements Under Professional Standard 400 issued by the Institute of Actuaries of Australia, the Funding method selected by the actuary should "… generally aim to ensure that, to the extent possible: (a) members' benefit entitlements, including any pension increases provided by the documentation, in accordance with precedent, or the intentions of the trustees and/or employer-sponsor, are fully funded before the members retire; and (b) the assets of the Plan from time to time, after making provision for the entitlements of any beneficiaries or members who have ceased to be employed, exceed the aggregate of benefits which employed Plan members would reasonably expect to be payable to them on termination of membership having regard to the provisions of the documentation and the likely exercise of any discretions." (Paragraph 14 of PS400) Accordingly the actuary needs to be satisfied that any Funding program is expected to provide a level of assets which meets or exceeds immediate benefit entitlements based on members' reasonable expectations. Should assets fall below that level, there needs to be a clearly documented and progressively implemented program to lift assets to the required level over a reasonable time period. 6 Those assumptions, in our opinion, clearly were premised on the proposition that the financing objective of the defined benefit superannuation scheme, after the transfer of its assets and members to the Trustee, remained that of providing pensions and benefits to employees and former employees of Grosvenor having regard to the pre-existing obligations that had been undertaken by Grosvenor, as their employer, to them. In our opinion the premise assumed by the Fund Actuary in June 2011 was both unremarkable and sound. 7 However, later in 2011 Grosvenor made a decision that it no longer wanted to conduct business in Australia. 8 By that time Mr Billinghurst had long since retired. He was receiving a pension. 9 On 15 November 2011 Grosvenor wrote to advise the Trustee that it would cease to carry on business in Australia as from 31 December 2011. The text of its correspondence was as follows: Further to your meeting with Dori Petrides of our office and Mr John Sullivan of PwC on Tuesday 8 November 2011, please accept this letter as confirmation that, following a restructure within the Grosvenor Group in Australia, Grosvenor Australia Asset Management Pty Ltd ("GAAMPL") will cease to operate as a business with effect from 31 December 2011. GAAMPL is the current participant of the Mercer master Fund ("the Plan"). As a result of the cessation of business and the fact that no other entity will succeed to the business of GAAMPL, it is understood that GAAMPL will automatically cease to participate in the Plan in accordance with rule 3.3(a)(i)(B) of the Designated Rules. As a consequence of the cessation of GAAMPL's business, it wishes to advise the Trustee of the Plan that: 1) GAAMPL is committed to reaching a fair and equitable resolution for each member of the Plan, including the current pensioners. To this end, the GAAMPL has: a. Provided each member of the Plan with access to individual personal financial planning advice at no personal cost to the member; and b. Intends to provide to each pensioner a lump sum arrived on the basis of a fair and reasonable valuation of their current entitlement, to allow, should the pensioner wish, the purchase of an annuity, which would maintain their current stream of income. 2) GAAMPL requests that the Trustee convert the current Plan balance to cash progressively between now and mid-December 2011 on the basis of redeeming 20% of the investment in the Mercer Growth Fund into cash each week preferably on the same day of the week, for example Thursday, and placing the funds so raised into an interest bearing cash management account. 3) GAAMPL requests that the Trustee prepare calculations of the final Transfer Value for each member using the valuation terminology outlined in Mercer's correspondence "Grosvenor - Summary of Options for Defined Benefit Plan", dated 7 September 2011, noting that, for: a. Active Members - the Transfer Value for each active member should be determined using the "More Conservative Value" method as outlined in the Mercer document dated 7 September 2011. b. 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. c. We attach page 4 of the Mercer advice correspondence "Grosvenor-Summary of Options for Defined Benefit Plan", dated 7 September 2011, and have highlighted the methodologies that are referred to in the preceding paragraph. 4) GAAMPL 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. When calculating the additional contribution, please gross up for all additional taxes and any associated costs, including, but not limited to, 15% contributions tax, excess contributions taxes and income taxes as applicable. 5) For ease of calculations, with the exception of the additional contribution required to make up any funding shortfall, GAAMPL will cease to make employer superannuation contributions to the Plan with immediate effect. When the quantum of any shortfall in funding is known, all appropriate actions will be taken by GAAMPL to make the additional payment, to enable the Trustee to make the Transfer payments to each member's chosen fund. 6) Members of the Plan will be given a choice as to the complying fund into which their Transfer Value will be transferred. As previously mentioned, GAAMPL is providing the members with access to independent financial planning advice, to assist them in making an informed decision. In the absence of the member advising the Trustee of full details of their chosen complying superannuation fund, we understand that the default fund for Transfer Values will be the AMP Eligible Rollover Fund. Please provide details of this Fund. 7) We request that the Trustee of the Plan provides GAAMPL and Grosvenor Funds Management Pty Ltd with details of an alternative defined contribution superannuation product that can be offered to current members of the Plan who have been offered new employment with Grosvenor Funds Management Australia Pty Ltd. This entity conducts a Funds Management business which is fundamentally different to the proprietary business managed by GAAMPL and to GAAMPL's own business of provision of administrative services. Further, GAAMPL has a Senior Counsel's opinion confirming that the Funds Management business is not a successor to GAAMPL. Accordingly, the Senior Counsel is of the opinion that GAAMPL is ceasing business with no successor and, therefore, will automatically cease to participate in the Plan. 8) GAAMPL confirms that Grosvenor Funds Management Australia Pty Ltd provides insurance coverage outside superannuation for all its employees. Please advise us of any separate insurance arrangements for existing members of the Plan that may need to be offered under the new superannuation arrangements provided by Grosvenor Funds Management Pty Ltd to employees recruited from GAAMPL. 9) GAAMPL kindly requests that the Trustee provides copies of all correspondence sent by Mercer to both active members and pensioners pertaining to the termination of the Plan to the Grosvenor Australia Group Board. GAAMPL understands that, in accordance with Rule 16.3(b) of the Designated Rules of the Plan, the Termination Date is determined by the Trustee. In practice, we understand that this date will be the date that all Transfer Values have been paid from the Plan. We kindly request that the Trustee takes into account the desire of Grosvenor Group to have these matters concluded by 31 December 2011. GAAMPL would appreciate your formal confirmation that the Trustee is agreeable to proceeding on the basis set out in this letter and acknowledging our timeframe to complete the process. 10 What happened then was conveniently summarised by the primary judge at [7]-[15]: 7 On 9 December 2011, the Plan Actuary provided a letter to the Trustee setting out his opinion as to the appropriate basis for determining the transfer value for the current pensioners. He set out two alternative values for each pensioner: (a) the first was based on the assumptions used in preparing the actuarial valuations of the Plan (a discount rate of 7.8% per annum and an assumption that there would be future pension increases); and (b) an "alternative valuation basis" based on a discount rate of 4.3% per annum (based on the yield on 10 year government bonds at the time of preparing the August 2011 Advice) and an assumption that there would be no future pension increases. 8 The figures produced on the alternative basis were slightly higher, and the Plan Actuary recommended that these figures be adopted. On this basis, the transfer value for Mr Billinghurst was $1,432,824. 9 In December 2011, the Trustee wrote to Mr Billinghurst to the effect that one of the options it was considering was payment of a lump sum to him; to do this, it would need the approval of the Australian Prudential Regulation Authority (APRA); and the Trustee's estimate of the lump sum equivalent of his pension was $1,432,824. Subsequently, APRA approved the use of pension valuation factors which would produce that lump sum. 10 In March 2012, Mr Billinghurst wrote to the Trustee complaining about the basis used to calculate the lump sum. His main complaints were: (a) the discount rate had been based on the yield on 10 year government bonds at 29 August 2011 (the date of the August 2011 Advice) rather than at 31 December 2011 (the date as at which the pension was to be valued); (b) no allowance had been made for future pension increases; and (c) no provision had been made for expenses that would be incurred by Mr Billinghurst in administering the lump sum. 11 Also in March 2012, Mr Billinghurst received a lump sum payment from the Trustee of $1,432,824 as a rollover amount. 12 In April 2012, the Trustee, having received further advice from the Plan Actuary, maintained that the lump sum amount was fair and reasonable. 13 Mr Billinghurst requested that his complaint be referred to the Trustee's Claims and Complaints Committee for reconsideration. Mr Billinghurst subsequently provided to the Trustee advice from another actuary, which valued the lump sum equivalent of the pension at $1,921,000, based on: a discount rate of 3.7% (based on the yield on 10 year government bonds at 31 December 2011); an allowance for future pension increases of 2%; and an allowance for expenses of administering the assets of $10,000 per year. The Committee decided to affirm the original decision. 14 In February 2013, Mr Billinghurst complained to the Superannuation Complaints Tribunal (the Tribunal) pursuant to the Superannuation (Resolution of Complaints) Act 1993 (Cth) (the Complaints Act), in relation to the Trustee's determination of the lump sum payout to him. 15 On 29 December 2015, 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 Mr Billinghurst was fair and reasonable in the circumstances. The Tribunal determined to set aside the Trustee's decision and remit the matter to the Trustee for reconsideration on a particular basis, set out in the reasons of the Tribunal (the Reasons). The Tribunal's determination and the Reasons were communicated to the parties in early January 2016. 11 The "particular basis" that his Honour referred to at [15] was that the Trustee should obtain the advice of an actuary not having a conflict of interest to advise what the proper calculation of the lump sum equivalent, or commutation value of Mr Billinghurst's pension was. 12 The Tribunal further directed at [113]: …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 s52(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. 13 In Mercer Superannuation (Australia) Limited v Billinghurst [2016] FCA 1274 the primary judge dismissed an appeal by the Trustee from the Tribunal's decision. 14 The Trustee appeals to the Full Court on the following grounds: 1. The Judge erred in finding that the Tribunal had addressed the correct question under s 37(6) of the Superannuation (Resolution of Complaints) Act 1993 (Cth) (Act), and erred in finding that: 1.1 the Tribunal had "in substance" addressed the question of whether the Appellant's determination of the lump sum amount that would be paid by way of commutation of the Respondent's pension (the Decision) was fair and reasonable in its operation in relation to the Respondent in the circumstances; and 1.2 this was a case in which unfairness or unreasonableness in the process adopted by the Appellant led to unfairness or unreasonableness in the Decision. 2. The Judge ought to have held that the Tribunal erred in its Determination by considering whether the process by which the Appellant arrived at the Decision was fair and reasonable rather than the question of whether, standing in the shoes of the Appellant, the Decision was itself fair and reasonable in its operation in relation to the Respondent in the circumstances. 3. The Judge erred in failing to find that the Tribunal had failed to have regard to a relevant consideration, being that the Decision concerned the distribution of the Plan's assets on the termination of the Plan, in accordance with Rule 16.5 of the Designated Rules, and that the amount to be applied was limited to the amount realised on the redemption of the Units attributable to the Plan supplemented by the additional contribution the Employer was prepared to make on the basis outlined in the November 2011 Letter. 4. The Judge erred in failing to find that the pool of funds available to pay pensioners on the Plan's termination was limited to the Units attributable to the Plan and the additional contribution which the Employer committed to make in the November 2011 Letter, and erred in finding that: 4.1 it may have been open for the Appellant under the Designated Rules to require the Employer to contribute funds to make good any shortfall (based on calculations of lump sum amounts at "fair value", if this were greater than the amounts calculated by the Plan Actuary); 4.2 the November 2011 Letter was a commitment by the Employer to make good any shortfall arising after determination of the lump sum amounts on a fair value basis by the Appellant; 4.3 the Appellant ought to have considered seeking additional funds from the Employer if there was a shortfall (based on calculations of lump sum amounts at "fair value", if this were greater than the amounts calculated by the Plan Actuary); and 4.4 Rule 16.5 of the Designated Rules, which required the Appellant to give priority to current pensions being provided from the Plan ahead of payments to other members, meant the Appellant was not required to take into account that payment of a larger amount to pension members would decrease the amount available for distribution to other members. 5. The Judge erred in failing to find that the Tribunal had failed to have regard to the requirement of s 37(4) of the Act that the Tribunal may only exercise its determination making power under s 37(3) for the purpose of remedying any unfairness or unreasonableness to the Respondent and erred in finding that: 5.1 the Appellant's contentions on this ground ought be rejected on the basis that, if correct, it would have the unfortunate effect of undermining the scheme for the independent review of decisions of superannuation trustees established by the Act in circumstances where the Act expressly contemplates situations where the Tribunal finds unfairness or unreasonableness to exist but is required to leave it unaddressed (s 37(4), s 37(5) of the Act); 5.2 in distributing the Plan's assets upon termination of the Plan under Rule 16.5 of the Designated Rules, the Appellant was required to preserve its ability to give effect to a determination of the Tribunal; and 5.3 it was open to the Appellant to seek additional funds from the Employer if the Appellant (on remitter) forms the view that the lump sum amount, determined on a fair value basis, is greater than that originally calculated by the Plan Actuary. 6. The Judge ought to have found that, in circumstances where the Plan had been terminated and the whole of the amount available to be distributed in accordance with Designated Rule 16.5 had been distributed, the Respondent could not be placed in a position whereby any unfairness or unreasonableness in the Decision no longer existed, and therefore the Tribunal was required to leave the perceived unfairness or unreasonableness unaddressed and refrain from exercising its determination-making power under s 37(3) of the Act. 15 The Appellant's Outline of Submissions at A1 however more conveniently grouped the alleged errors into two subsets as follows: The Appellant (the Trustee) contends that the judgment delivered by the primary judge (the judge) on 28 October 2016 erred as follows: (a) In respect of the first and second grounds, the Superannuation Complaints Tribunal (Tribunal) did not, "in substance", address the correct question under s 37(6) of the Superannuation (Resolution of Complaints) Act 1993 (Cth) (Act) but rather directed itself to determining whether the process adopted by the Trustee in calculating the lump sum payable to the Respondent (Mr Billinghurst) was unfair or unreasonable (as distinct from any unfairness or unreasonableness reflected in the decision itself). (b) In respect of the third and fourth grounds, the amount available to pay members on termination of the Plan was limited to the amount realised on redemption of the units attributable to the Plan supplemented by an additional contribution the Employer was prepared to make in the actuarial basis set out in a letter from the Employer dated 15 November 2011 (the November 2011 Letter), and the terms on which this additional contribution was offered was a relevant matter for the Trustee to consider in calculating the lump sum entitlement of pensioners including Mr Billinghurst.