SUPERANNUATION OPERATIONAL RISK RESERVES
Noel Davis*
The recent decision of the Federal Court in APRA v Kelaher, known as the IOOF case, is of interest to members of superannuation funds as to the circumstances in which they can be compensated for losses in the fund from operational risk reserves, which all superannuation funds are required to maintain.
Since 1 July 2013, all such funds have been required by legislation to maintain such reserves of at least 0.25% of the fund’s assets.
The legislation came about as a result of lobbying by the Association of Superannuation Funds and others that such reserves be required. Over 3 years, the reserves were brought up to the required level, largely by taking away earnings that would otherwise have been credited to those who were members during those 3 years. Thus, those members were deprived of some of the earnings that would have otherwise been credited to their accounts. They will never recoup the lost earnings if they have since left the fund or if they don’t obtain any benefit from the reserve during their future membership.
It is arguable, therefore, that the legislation is unfair because the effect of it is that earnings were taken off those who were members of a particular fund between 2013 and 2016 to create a reserve which will be utilised for the benefit of future members, at least some of whom did not contribute to the creation of the reserve. It will be applied, at the latest, on termination of the fund, if it isn’t needed beforehand.
The issue in the IOOF case, which will be of interest to members of superannuation funds generally, is whether, if there are losses in their fund because of negligence of the trustee or its investment managers or otherwise, will the reserve be able to be applied to compensate the members who have lost money or will the trustee or anyone else who caused a loss have to compensate the fund, thus leaving the reserve intact? If the reserve is reduced, it will have to be topped up by the existing members.
In the IOOF case, there were losses to the fund caused by some companies who were providing services to the fund and the trustee applied money from the reserve to compensate those members who lost money. APRA argued in this case that the trustee should have first attempted to obtain payment from the companies that caused the losses before compensating the members out of the reserve, because the money in the reserve was the members’ own money and they were, in effect, compensating themselves rather than being compensated by those who caused the losses.
APRA’s arguments were not accepted by the judge who decided the case. She said in her judgment that the reserve was not the members’ own money. Rather, she said, it was money held for the express purpose of compensating members for operational risk, including risks arising from the conduct of the trustee or others. Compensating members from it did not, therefore, involve compensating members from their own money.
It is understandable why APRA argued the way that it did as the money in the reserve was contributed by the members out of the earnings on their money in the fund and any top up to keep the reserve at the minimum level, after compensating the members, would have to be contributed by the members.
Regardless of whether APRA’s argument should have succeeded or not, it is strongly arguable that superannuation members should be entitled to expect that if losses occur in the future, the trustee will take all reasonable steps to recover the loss from those responsible for the loss before the reserve is raided to compensate members. That includes the trustee itself paying compensation if it caused the loss.
*Noel Davis is a Sydney barrister
Since 1 July 2013, all such funds have been required by legislation to maintain such reserves of at least 0.25% of the fund’s assets.
The legislation came about as a result of lobbying by the Association of Superannuation Funds and others that such reserves be required. Over 3 years, the reserves were brought up to the required level, largely by taking away earnings that would otherwise have been credited to those who were members during those 3 years. Thus, those members were deprived of some of the earnings that would have otherwise been credited to their accounts. They will never recoup the lost earnings if they have since left the fund or if they don’t obtain any benefit from the reserve during their future membership.
It is arguable, therefore, that the legislation is unfair because the effect of it is that earnings were taken off those who were members of a particular fund between 2013 and 2016 to create a reserve which will be utilised for the benefit of future members, at least some of whom did not contribute to the creation of the reserve. It will be applied, at the latest, on termination of the fund, if it isn’t needed beforehand.
The issue in the IOOF case, which will be of interest to members of superannuation funds generally, is whether, if there are losses in their fund because of negligence of the trustee or its investment managers or otherwise, will the reserve be able to be applied to compensate the members who have lost money or will the trustee or anyone else who caused a loss have to compensate the fund, thus leaving the reserve intact? If the reserve is reduced, it will have to be topped up by the existing members.
In the IOOF case, there were losses to the fund caused by some companies who were providing services to the fund and the trustee applied money from the reserve to compensate those members who lost money. APRA argued in this case that the trustee should have first attempted to obtain payment from the companies that caused the losses before compensating the members out of the reserve, because the money in the reserve was the members’ own money and they were, in effect, compensating themselves rather than being compensated by those who caused the losses.
APRA’s arguments were not accepted by the judge who decided the case. She said in her judgment that the reserve was not the members’ own money. Rather, she said, it was money held for the express purpose of compensating members for operational risk, including risks arising from the conduct of the trustee or others. Compensating members from it did not, therefore, involve compensating members from their own money.
It is understandable why APRA argued the way that it did as the money in the reserve was contributed by the members out of the earnings on their money in the fund and any top up to keep the reserve at the minimum level, after compensating the members, would have to be contributed by the members.
Regardless of whether APRA’s argument should have succeeded or not, it is strongly arguable that superannuation members should be entitled to expect that if losses occur in the future, the trustee will take all reasonable steps to recover the loss from those responsible for the loss before the reserve is raided to compensate members. That includes the trustee itself paying compensation if it caused the loss.
*Noel Davis is a Sydney barrister