Merkel v SCT: Are Your Policies and Procedures Consistent? by TurksLegal

Merkel v SCT: Are Your Policies and Procedures Consistent? By Paul Cleary | June 2010 Area of Expertise | Superannuation and Managed Investments

Summary This case addresses two important concepts in dealing with complaints by members procedural fairness; and the jurisdiction of the Superannuation Complaints Tribunal (SCT). The procedural fairness aspects of the case related to the treatment by the SCT of a complainant. The case also gives insight into what the court will consider when determining whether a complaint falls outside the jurisdiction of the SCT as a complaint that ‘relates to the management of a fund as a whole’.

Who Does This Impact? The case has important implications for superannuation fund trustees and administrators in relation to policies which may affect the entitlements of beneﬁciaries and the administrative processes for beneﬁt payments.

What Action Should Be Taken? Trustees need to check that the administration of beneﬁts is carried out in accordance with the governing rules and relevant policies.

Merkel v Superannuation Complaints Tribunal [2010] FCA 564

Facts The applicant was the wife and sole beneﬁciary of a member of the Telstra Superannuation Scheme (the Fund). The member died on 13 January 2007. The member’s account balance (including insurance) was $408,234.68. At the date of death, the account balance was invested approximately half in a growth option and half in a balanced investment option, pursuant to the member’s choice of investment options under the fund’s Member Investment Choice arrangements. On 3 August 2007, a cheque for $418,793.44 was forwarded to the member’s wife as the sole beneﬁciary (nearly 6 months from the date of the member’s death). This amount represented the account balance of $408,234.68 plus $10,558.76 interest, calculated by applying the rate of interest earned in the cash option from the date of death to the date of payment. However, the account balance had not in fact been transferred into the cash option, as required under the trustee’s policy, but was instead left in the growth and balanced options, which had returned much higher returns than the cash option.

Treatment of the Complaint As required, the applicant ﬁrst complained to the trustee that interest applied at the cash option rate resulted in inferior returns to those that were obtained in the growth and balanced options. The complaints ofﬁcer of the trustee determined the matter in the trustee’s favour. The applicant then complained to the SCT, stating that the trustee:

TURKSLEGAL

TURK A L E R T

Merkel v SCT: Are Your Policies and Procedures Consistent? by Paul Cleary

is refusing to pay the money earned on my late husband’s superannuation account from the date of his death to the date of [sic] they paid out his account balance and death insurance beneﬁt...The Fund earned approximately $40,000.00 on my late husband’s superannuation contributions while it remained invested in a growth option. The Fund did not pay me this money when they paid out my late husband’s superannuation account balance.

The SCT declined to hear the complaint on the basis that it was outside of the SCT’s jurisdiction as a complaint that related to the management of a fund as a whole under s 14(6) Superannuation (Resolution of Complaints) Act 1993 (Cth) (SRC Act). The SCT also declined to allow the applicant access to material supplied by the trustee to the SCT which was relevant to the decision by the SCT that the matter was outside its jurisdiction and which was ‘credible, relevant and signiﬁcant to the decision to be made’. The applicant then commenced proceedings in the Federal Court of Australia arguing principally that: (a) the SCT had denied her procedural fairness; and (b) the decision by the SCT that the complaint was beyond its jurisdiction was incorrect. The Court found that the SCT had denied the applicant procedural fairness and that the decision by the SCT that the complaint was beyond its jurisdiction was incorrect. Accordingly, the Court made an order pursuant to s 16(1)(a) of the Administrative Decisions (Judicial Review) Act 1977 (Cth) (ADJR Act), setting aside the SCT’s decision to reject the complaint. The Court also made an order pursuant to s 16(1)(b) of the ADJR Act referring the matter to the SCT for further consideration, with a direction that the SCT proceed to exercise its jurisdiction in relation to the applicant’s complaint.

Procedural Fairness THE ISSUE: The applicant asked for copies of materials provided to the SCT by the trustee which were relevant to the decision by the SCT that the matter was outside its jurisdiction and which were ‘‘credible, relevant and signiﬁcant to the decision to be made’. The SCT staff took the view that the consent of the trustee to the release of the material was required, or the applicant would have to make an application under the Freedom of Information Act and therefore refused to release the materials.

FINDINGS: The Court held that this conclusion was erroneous. As the exercise of the authority affected the applicant’s right to make a complaint to the SCT, and to have that complaint dealt with, there was: no doubt at all that the exercise of the delegated authority to make a decision about the jurisdictional limits of the Tribunal in relation to the particular complaint attracted the requirement that the person exercising it afford to [the applicant] procedural fairness ... To preclude [the applicant] from having access to the very material on which an ofﬁcer of the Tribunal had relied in concluding that the complaint was outside the jurisdiction of the Tribunal amounted to a clear denial of procedural fairness.

TURKSLEGAL

TURK A L E R T

Merkel v SCT: Are Your Policies and Procedures Consistent? by Paul Cleary

COMMENTS: In Muin v Refugee Review Tribunal [2002] HCA 30 McHugh J held that: whenever a statute confers on a public ofﬁcial or tribunal the power to do something that affects a person’s rights, interests or legitimate expectations, the ofﬁcial or tribunal must accord procedural fairness to the person affected unless the statute plainly indicates a contrary intention...Natural justice requires that a person whose interests are likely to be affected by an exercise of power be given an opportunity to deal with matters adverse to his or her interests that the repository of the power proposes to take into account in exercising the power.

Similarly, in Kioa v West (1985) 159 CLR 550, Brennan J held that: in the ordinary case . . . an opportunity should be given to deal with adverse information that is credible, relevant and signiﬁcant to the decision to be made.

In view of those authorities, the Court was critical of the SCT in its handling of the procedural fairness aspects of the matter. However, it must be remembered that the SCT declined to provide the materials to the applicant on the basis that it had formed the view that the matter was beyond its jurisdiction. We examine that aspect of the case next. Note that although this part of the case dealt with the provision of procedural fairness by the SCT, procedural fairness is acutely relevant for superannuation fund trustees. For an analysis of a recent case addressing the provision of procedural fairness by a superannuation trustee, see our TurkAlert, Trustees and Adverse Materials - How to Make a Smart Decision when Assessing TPD Claims, which deals with the case of Tuftevski v Total Risks Management Pty Ltd [2009] NSWSC 315.

SCT Jurisdiction - what is a complaint that ‘relates to the management of a fund as a whole’? ISSUE: In Merkel v SCT, SCT staff determined that the SCT did not have the requisite jurisdiction to hear the matter by operation of s 14(6) of the SRC Act. Under s 14(6) of the SRC Act, the SCT cannot deal with a complaint that relates to the management of a fund as a whole. The applicant complained that this conclusion was wrong in law.

FINDINGS: After considering the relevant authorities, the court held that in the circumstances: the complaint that the application of a rule or policy to the particular case was unfair or unreasonable was manifestly one relating to the interests of the individual member [sic, this should be beneﬁciary], and not to the management of the fund as a whole.

Therefore, the Court held that the complaint was within the SCT’s jurisdiction.

TURKSLEGAL

TURK A L E R T

Merkel v SCT: Are Your Policies and Procedures Consistent? by Paul Cleary

The Court found that it was incorrect to characterise the complaint as solely involving the action of the trustee in switching the investment option to cash once a member died. The Court also held that the time elapsing between the member’s death and the actual switching of the amount standing to his credit to an interest-only option was relevant to the complaint. The date at which the switch occurred was very much a part of the complaint. It was a legitimate fact for the Tribunal to consider in determining whether the trustee’s decision was unfair or unreasonable.

In considering the authorities on the interpretation of s 14(6), Gray J noted that in Employers First v Tolhurst Capital Ltd [2005] FCA 616 the Court held, ‘A clear example of a complaint that relates to the management of a fund as a whole would be a complaint concerning the investment policy being adopted by the trustee of the fund.’ Gray J also noted that in Employers First First, the focus of s 14(6) of the SRC Act is to be on the nature of the complaint, not the nature of the decision of the trustee. He went on to say, ‘Attempts by trustees to confine complaints within the narrow terms of the decisions made by those trustees have been rejected in the past’, citing Retail Employees Superannuation Pty Ltd v Crocker [2001] FCA 1330 and Commonwealth Superannuation Scheme Board v Dexter [2004] FCA 1434. The Court also referred to Vision Super Pty Ltd v Poulter [2006] FCA 849 where Young J examined s 14(6) and held that the SCT had jurisdiction to deal with the complaints of certain individual members. In Vision Super the complaints were distinguishable from a complaint concerning the fund’s investment policy. Each of the complaints related to debits made to deferred benefit member’s accounts. Further, none of the complaints mentioned the management of the fund as a whole (although it is difficult to see how that would of itself be determinative of the matter as it appears to relate to the form of the complaint and not its substance). In Vision Super Super, the Court also said that even if the complaints related to the treatment of a particular class of members, they cannot be said to relate to the management of the Fund as a whole. The Court also held that the mere fact that a trustee acted in a similar way in relation to other members does not have the consequence that the complaints relate to the management of the fund as a whole. As the deferred benefit members did not constitute the whole of the members of the Fund, the Court held that it did not follow that a decision that adversely affected their particular entitlements necessarily related to the management of the Fund as a whole. The complaints cannot be likened to a complaint about the investment policy that has been adopted by a trustee. It is not to the point to observe, as the applicant did, that other types of action by a trustee in the management of a division of a fund might be regarded as an act done in the management of the fund as a whole. A complaint that a superannuation trust deed had been contravened in a way that directly and adversely affected the financial position of a particular member lodging the complaint could not be described as a complaint about ‘the management of a fund as a whole’.

COMMENTS: The decision in Merkel v SCT has some important consequences for trustees and administrators which we deal with in more detail as follows.

Effect on Administration Merkel v SCT and the other cases referred to above show that the courts are increasingly willing to ﬁnd that the SCT has jurisdiction to deal with a complaint that, on the face of it, may appear to relate to the management of the fund as a whole, provided that

TURKSLEGAL

TURK A L E R T

Merkel v SCT: Are Your Policies and Procedures Consistent? by Paul Cleary

there is some nexus to the individual entitlements of beneficiaries. This approach may have wider ranging ramifications for the administration of benefit payments. In particular, a superannuation trustee should consider whether the administration of benefit payments from the fund, including the transfer of entitlements into lower risk investment options is consistent with its policy (if any) in relation to the transfer of accounts to investment options with lower return profiles. The trustee should also consider whether the administration procedures: •

could enable a beneficiary (including a member) effectively to arbitrage the fund (ie so that the cash rate applicable to a pending death benefit effectively acts as a guaranteed minimum rate of return where a death benefit payment is delayed for example if the beneficiary becomes aware that the account balance has not been switched into a lower risk investment option through a third party);

•

effectively address the situation where there is a significant delay in a benefit payment where the delay is the beneficiary’s fault; and

•

effectively address the situation where there is a significant delay in a benefit payment where the delay is not the beneficiary’s fault.

Effect on Policies In light of Merkel v SCT, when a trustee credits interest in accordance with board policy, that action will be reviewable by the SCT

where it affects a beneﬁciary’s entitlements. Similarly, many superannuation trustee board and administration policies may not be immune from SCT review as being matters that relate to the management of the fund as a whole, where the application of that policy affects a beneﬁciary’s entitlements. As a result, superannuation fund trustees should check their policies. As part of that checking process, trustees should ask: •

Do the governing rules contain the requisite power to formulate and give effect to the policy?

•

Have any conditions on that power been satisﬁed in formulating and giving effect to that policy?

In relation to its policy (if any) to transfer the account balance of a deceased member into a lower risk investment options, the trustee should consider the following, as relevant: •

Does the trustee have power under its governing rules to pay interest on beneﬁts?

•

Does the trust deed permit credits and debits to a beneﬁt account after the death of a member, as well as before?

•

Is the choice of investment option(s) under the trustee’s Member Investment Choice arrangements entirely for the member to decide - or do the governing rules allow the trustee to select the investment option that applies when the member dies?

•

If so, is the policy merely a direction by the trustee to its administrators as to what they are to do upon the death of a member or does the policy of its own force alter the deceased member’s investment strategy (ie is the policy tantamount to a governing rule itself )?

TURKSLEGAL

TURK A L E R T

Merkel v SCT: Are Your Policies and Procedures Consistent? by Paul Cleary

•

How is the policy disclosed?

Where to Now? The matter has been remitted to the SCT for consideration of the complaint under the SCT’s jurisdiction. We will send a further update on this matter when the SCT hands down its ruling because that will shed further light on the position of trustees where the administration of an account balance differs from that required under a board policy. Paul Cleary has expertise in the preparation and review of superannuation trustee board and administration policies and would be pleased to discuss any aspect of this case.

For more information, please contact: Paul Cleary Partner T: 02 8257 5760 paul.cleary@turkslegal.com.au

www.turkslegal.com.au This Tur kAler t is cur rent at i t s d ate o f p u b l i c at i o n . Wh i l e eve r y c a re h a s b e e n t a k e n i n t h e p re p a rat i o n o f t h i s Tu r k Aler t it do es not constitute legal advice a n d s h o u l d n o t b e re l i e d u p o n fo r t h i s p u r p o s e. Sp e c i f i c l e g a l a dv i ce s h o u l d b e s o u g ht o n p a r ticular matters. Tur ksLegal do es not ac ce p t re s p o n s i b i l i t y fo r a ny e r ro r s i n o r o m i s s i o n s f ro m t h i s Tu r k Al e r t . Th i s Tu r k Al e r t i s co py r ight and no par t may b e repro duced in a ny fo r m w i t h o u t t h e p e r m i s s i o n o f Tu r k s Le g a l . Fo r a ny e n q u i r i e s, p l e a s e co nt a c t t h e a u t h o r o f this Tur kAler t. © Tu r k s Le g a l 2 0 1 0

TURKSLEGAL

TURK A L E R T