This case is a reminder to have administration practices aligned with the governing rules of the fund.
The member had what was referred to as a "family law sub-account" as part of a defined benefit fund. His eventual defined benefit amount would be reduced by the balance in this account. The dispute concerned the trustee’s decision to credit the sub-account with interest at the fund’s crediting rate instead of the Family Law Act 1975 statutory interest rate.
The member and his former wife agreed to split his superannuation entitlement in September 2009 pursuant to the splitting arrangements contained in the Family Law Act. They entered into a binding agreement to pay his former wife 47 per cent of his notional defined benefit entitlement. The trustee, in giving effect to this binding agreement, paid his former wife the sum of $182,663 in December 2010 and set up the subaccount with this amount being the starting balance.
On Christmas Eve 2010, the member received a letter from the trustee advising him his defined benefit, when he was eventually entitled to be paid, would be reduced by the subaccount balance and that interest would be credited or debited to that account in accordance with either the statutory interest rate or the fund’s crediting rate – the choice was his. If he did not make a choice within 30 days, the letter made it clear the trustee would apply the fund’s crediting rate. The member did not make contact with the trustee and so the trustee applied the fund’s crediting rate as the applicable interest rate. In May 2014, the member lodged a complaint with the trustee regarding the negative impact of the sub-account on his defined benefit and transferred his entitlement out of the fund in October 2014.
He calculated that he was charged interest of approximately $70,000 to $80,000 which he considered excessive. This amount included $10,000 in additional administrative fees. The member submitted that he “had no idea” of the impact of the splitting arrangement on his final defined benefit amount and had he known of the impact, he would have made other financial arrangements. He admitted he had received the trustee’s letter but had not really understood its contents.
The Superannuation Complaints Tribunal carefully analysed the fund’s rules and concluded the trustee had not applied those rules correctly. The Tribunal noted that on the facts for the rule the trustee had relied on to apply, the member was required to provide written consent to the splitting arrangement and here, the member had not done so. This resulted in a particular fund rule not operating in the circumstances and the correct interest rate to be applied to the sub-account was the statutory interest rate. That rate would give the member approximately $38,000 more.
The Tribunal concluded the trustee’s failure to follow the fund rules precisely was unfair and unreasonable and it ordered the trustee to recalculate the sub-account balance at the statutory interest rate until the date the member left the fund in October 2014, and then to calculate an interest adjustment at the fund’s cash rate until the date of payment. The difference between what had been paid to the member and the revised entitlement, plus the interest adjustment would be paid to the member by way of compromise.
This case highlights the complexities of transferring UK pension funds to an Australian superannuation fund under the Qualifying Recognised Overseas Pension Scheme (QROPS) rules. [Note these rules have changed since this case which concerns late 2013].
The member joined the Australian fund in May 2013 in anticipation of a QROPS transfer from the UK. An amount of £850,000 was received by the trustee’s bank on 26 September 2013 and this equated to $1,417,127. The transfer was complicated, in part, by the moneys having been moved from one UK fund to another prior to transfer, the lack of detail about the growth component of the transferred moneys and the member indicating he wished to transfer the moneys out of the Australian fund to his self-managed fund once the transfer was completed.
The member had temporary resident visa status in Australia and the trustee was concerned about the tax implications if he ever wished to return the money to the UK under the Departing Australia Superannuation Payment legislation. In addition, there were regulatory issues given the amount being transferred was in excess of $450,000 and the member’s representative had a different view of the tax implications to those of the trustee. Needless to say there were communications going back and forth to attempt to resolve these complexities.
The trustee did not get the information it required and it did not ever make a final allocation of the moneys. After a period of approximately two months, it decided to return the moneys to the UK fund as the situation had gone on for long enough. In calculating the amount to return to the UK, it added investment earnings at the bank interest rate of 2.45%.
The member’s complaint was the trustee’s refusal to compensate for the exchange rate loss (between the AUD and the GBP) incurred when repatriating the moneys. This amounted to $173,445.
The Tribunal found the trustee did not have to compromise the member for the exchange rate loss. In coming to this conclusion, it noted the application form made it clear moneys could be returned to the UK and the Australian fund was not responsible for any fees charged or investment losses if the moneys were so returned. This left the question of whether the trustee had acted in a timely fashion. On this point, the Tribunal was satisfied that “it was reasonable for the trustee to firstly request and then verify the information relating to the transfer, to ensure it was meeting all of its Relevant Requirements”.
This case concerns the trustee declining to pay a 73-year-old member his remaining account balance due to the illiquid nature of the investments.
By way of background, the trustee had applied to APRA for portability relief and this relief had been granted in a number of APRA instruments. However, the APRA relief did not apply to this 73-year-old member as he had retired and met a condition of release under superannuation law. He was entitled to receive his moneys in cash.
In October 2010, the trustee received a letter from another superannuation fund advising it to transfer the entire member’s benefit to that fund. Later in October, the trustee sent a letter to the member advising it had been able to transfer $55,714 to the requested fund but that an amount of $10,700 remained in the fund due to the illiquid nature of the investment. The member complained saying the “2008 downturn cannot still be the reason for the funds being illiquid”. He wanted compensation for the difference in earnings between what his money earned in the fund and what it would have earned in his chosen fund.
The Tribunal affirmed the decision of the trustee to not pay compensation to the member. It specifically noted that the trustee has a duty to administer the fund in the best interests of all members. Accordingly, the Tribunal was satisfied that the trustee deciding to not allow redemptions from moneys in illiquid options was fair and reasonable in the circumstances. “The Tribunal considered [the trustee’s approach] to be diligent, ensuring the assets of remaining members were not unfairly affected by reducing values and market movements”.
This article was first published in Super Funds, 1 December 2016.