Supreme Court New South Wales Medium Neutral Citation: KCA Super Pty Limited as Trustee of the Superannuation Fund Known as 'KCA Super' (No 2) [2011] NSWSC 1301 Hearing dates: 13 October 2011 Decision date: 02 November 2011 Jurisdiction: Equity Division Before: Brereton J Decision: Advise that KCA Super Pty Ltd as trustee of KCA Super would be justified in giving its consent under clause 47 of the Trust Deed to determinations of Kimberley-Clark Australia Pty Limited that give effect to the proposed reclassification of all members of the Defined Benefit Division of KCA Super to become members of the Accumulation Division from 1 December 2011, substantially in accordance with the letter from the Company to the Trustee dated 30 September 2011. Catchwords: TRUSTS - Trustees - Application for judicial advice - Trustee of superannuation fund seeks judicial advice as to whether it would be justified in consenting to reclassification of members of fund in line with determinations made by Company - Trustee's consent to reclassification required under Trust Deed - reclassification would result in members of particular division being detrimentally affected - Company proposes to dissolve fund pursuant to power in trust deed - question whether consent to transfer is a course reasonably open to a prudent trustee - trustee bound to act honestly and for proper purposes, taking into account the interests of members - trustee must act impartially and fairly in relation to the different classes of members and avoid benefiting one class over another - Company's proposal will result in detriment to class of members - subject to countervailing consideration trustee should not accept proposal - countervailing consideration that if Trustee does not consent Company proposes to dissolve fund - if fund dissolved members will be worse off than under Company's proposal to reclassify and provide compensation - issue as to whether Company can lawfully dissolve trust - express power provided in Trust Deed untrammelled by express limitations - Company not a fiduciary - whether exercise of power moderated by implied obligation of good faith - even if had to exercise power honestly and in good faith would not preclude Company exercising power as proposed given purpose of power to provide mechanism for Company to free itself from onerous obligations under trust deed - Trustee justified in consenting to proposed reclassification of members. Legislation Cited: (CTH) Superannuation Industry (Supervision) Act 1993, s 52 (NSW) Trustee Act 1925, s 63 Cases Cited: Cowan v Scargill [1985] 1 Ch 270 KCA Super Pty Limited as Trustee of the Superannuation Fund Known as 'KCA Super' [2011] NSWSC 1204 Imperial Group Pension Trust Ltd and Others v Imperial Tobacco Ltd and Others [1991] 1 WLR 589 Lock v Westpac Banking Corporation and Others (1991) 25 NSWLR 593 Nestle v National Westminster Bank (Chancery Division, Hoffman J, 29 June 1988, unreported) Re Brockbank [1948] Ch 206 Re Mulligan (Deceased) [1998] 1 NZLR 481 Tanti v Carlson [1948] VLR 401 Category: Principal judgment Parties: KCA Super Pty Limited as Trustee of the Superannuation Fund Known as 'KCA Super' (applicant) Kimberley-Clark Australia Pty Ltd (interested party) Representation: Counsel: Mr Fernon SC with Mr Drew Mr F Gleeson SC with Mr Izzo Solicitors: Freehills (applicant) Herbert Geer (interested party) File Number(s): 2011/305970 Judgment 1The plaintiff KCA Super Pty Limited ("the Trustee") is the trustee of a regulated complying corporate superannuation fund for employees of Kimberly-Clark Australia Pty Limited ("the Company") and their spouses, called KCA Super ("the Fund"). The Company is an Australian subsidiary of the Kimberly-Clark group of companies. The Fund was established by a trust deed dated 29 January 1960, and amended from time to time up to and including a Deed of Amendment dated 5 March 2009. Both the Trustee and the Company are parties to the Trust Deed. The Trustee seeks the opinion advice and direction of the Court, pursuant to (NSW) Trustee Act, 1925, s 63, as to whether the Trustee would be justified in giving its consent under clause 47 of the Trust Deed to determinations of the Company to give effect to the proposed reclassification of all members of the Defined Benefit Division of KCA Super to become members of the Accumulation Division from 1 December 2011, substantially in accordance with a letter from the Company to the Trustee dated 30 September 2011. The context and significance of this appears from the following background, which is adapted from the Statement of Facts. 2The Fund has two main categories of membership: (a) members designated as Accumulation Members pursuant to clause 18 of the Trust Deed and to whom the Accumulation Division applies, of whom as at October 2011, there were approximately 801 (including spouse members); and (b) members designated as Defined Benefit Members pursuant to clause 18 of the Trust Deed and to whom the Defined Benefits Division applies ("the DBD members"), of whom as at October 2011, there were approximately 151. Broadly, a member of the Accumulation Division is entitled to a benefit comprising the contributions mad e to the Fund for that member, adjusted for positive or negative earnings, less expenses, tax and benefits previously paid; plus an additional amount if the member has died in service or ceased service because of total and permanent disability; whereas a DBD member is entitled to a benefit being the sum of an amount calculated in accordance with a formula that is dependant on their years of service and the best average salary level in three consecutive years of continuous employment (generally the last three years), and any additional contributions made to the Fund for that member adjusted for positive or negative earnings, plus amounts transferred into the Fund minus tax. 3The Defined Benefits Division of the Fund was closed to new members in 1999. As at October 2011, the age and average membership profile of the DBD members was as set out in the following table: Age range Number of DBD members Average Length of Membership 35 - 39 years 9 14 years 40 - 44 years 19 16 years 45 - 49 years 34 20 years 50 - 54 years 29 21 years 55 - 59 years 43 23 years 60 - 65 years 17 23 years 4As at 16 November 2010, the Fund had approximately $92 million to fund its liabilities to DBD members. 5In clause 3(1) of the Trust Deed, 'Normal Retirement Age' is defined to mean age 65, and 'Defined Benefit Member' is defined as follows: ... a Member who is designated a Defined Benefit Member pursuant to Clause 18 of the Trust Deed. The Defined Benefit Division applies to Defined Benefit Members. 6'Earnings' is defined as follows: ... the total amounts paid by the Company or by any Employing Company to an Employee for personal services in the form of salaries or wages but excluding bonuses, commissions or other special payments or payments for overtime PROVIDED HOWEVER that where a Member was a Part-Time Member for any period the Earnings of that Member shall be calculated as if the Member had been a Full-Time Member PROVIDED FURTHER that if the Employing Company in its absolute discretion nominates a sum which exceeds the said total amounts paid as earnings under this Trust Deed in relation to any particular Employee such sum shall be deemed to be such Employee's "Earnings". 7'Final Average Earnings' is defined as follows: ... the average annual Earnings of a Member during the last three (3) years of continuous employment with the Employing Company prior to cessation of membership of the Fund or any earlier period of three (3) years of continuous employment which gives rise to a higher average annual Earnings or in the event that the Member has not had three (3) years continuous employment prior to cessation of membership of the Fund the average annual Earnings during that lesser period PROVIDED THAT for the purposes of calculation of the death benefit and the Total and Permanent Disablement benefit the Final Average Earnings of a Member shall be calculated as at Normal Retirement Age assuming that the annual Earnings of the Member at the date of the death or Total and Permanent Disablement shall remain unaltered. 8Clause 18 provides: The Members will be divided into categories. The number and designation of categories and the conditions for entry to and exit from a particular category shall be as determined by the Company, and at any particular time a Member shall be classified into the category of Members determined by the Company. 9Clause 47 provides: If a Member is reclassified to another category of membership pursuant to Clause 18 then, subject to the Statutory Requirements and with the consent of the Trustee, the Company shall: (1) determine the extent to which (if at all) and the basis upon which the Member's Benefit in any existing category of membership is to continue; and (2) in lieu of providing all or part of the Member's existing Benefit - (a) in the case of a Member who is reclassified as an Accumulation Member - determine the amount (if any) to credit to the Member's Accumulation Account; (b) in the case of a Member who is reclassified as a Defined Benefit Member - (i) determine the amount (if any) to credit to the Member's Additional Contribution Account; and (ii) determine the period (if any) of deemed membership of this Fund for the purposes of calculating Benefits hereunder subject to such conditions as the Company may impose. 10Clause 48 is as follows: DISSOLUTION OF FUND If the Company is wound up (unless it shall be otherwise provided on the occasion of reconstruction or amalgamation and the amalgamated or new company corporation or other body or authority shall take the place of the Company for the purposes of the Fund) or if the Company so determines the Fund shall be dissolved as at the commencement of such winding up or such date as is specified by the Company. 11Clause 49 provides as follows: APPLICATION OF PROCEEDS (1) On dissolution of the Fund as above or on the termination of the trusts declared by this Trust Deed the Fund shall be converted into money and the proceeds shall be applied in the following order of priority: (a) Firstly in paying the costs, charges and expenses of administering and winding up of the Fund so far as the same are not paid by the Company; (b) Secondly in the purchase as soon as conveniently may be from some company or companies of good repute of annuities for the then Pensioners equivalent to their respective Pensions and set aside the Member's Award Account, the Member's Voluntary Contribution Accounts, the Member's Accumulation Account and the Member's Spouse Member Account for the benefit of those Members and in the payment to Members of all other Benefits accrued to them, as determined by the Actuary PROVIDED THAT if the Fund is not sufficient to provide in full the said other Benefits they shall abate proportionately PROVIDED ALSO THAT until the purchase of annuities for the then Pensioners as above provided the Trustee shall out of the said proceeds pay the respective Pensions for the time being payable or a proportional part thereof so far as the proceeds shall permit; (c) Thirdly the balance of the proceeds of the conversion of the Fund shall as to one half thereof be paid to the Company and as to the other half thereof shall be apportioned by the Actuary among the Members having regard to their prospective Benefits if the Fund had continued in existence; PROVIDED THAT the Trustee may if it thinks fit, pay to a Pensioner or Member the sum which would have been expended in the purchase of an annuity for him such sum to be certified in writing by the Actuary. (2) If the Fund is dissolved pursuant to Clause 49 and there are Members who continue in the employ of any Employing Company the Benefits payable to those Members pursuant to their interest in the Fund shall not be paid directly to them at that time if such payment is not permitted under the Act or if specific approval under the Act to such payment is not given. In such event the Trustee shall continue to hold such benefits in Trust for such Members or in such other manner as is specifically approved at the time under the Act for subsequent payment to such Members in accordance with the Trust Deed and in compliance with the Act or specific approval obtained thereunder. 12In about November 2010, the Trustee became aware that the Company was proposing to close the DBD, and o n 25 November 2010, the Trustee submitted a list of questions to the Company concerning the proposed closure of the DBD. On 26 November 2010, the Company advised the Trustee that a review of the DBD was being undertaken, and on 24 January 2011 the Company advised the Trustee that the Company was to make an imminent announcement to DBD members. 13On 25 January 2011, the Company sent a communication to the DBD members, advising that it would "engage with the Trustee of KCA Super in the coming weeks with the intention of closing the Defined Benefit Division in 2011 and transferring members to the Accumulation Division of KCA Super or to a superannuation fund of their choice", and that "the Company will work with the Trustee to agree on the specific closure and keep members updated on progress". The Company also provided a "Q&A document" to the DBD members which stated, in part, that it was "appropriate that the company discuss this matter relating to KCA Super thoroughly with the Trustee." On or about 3 February 2011, the Trustee sent a communication to all members, advising that the Trustee would work for the best interests of all members, would seek an equitable result for all DBD members, and would consult with the Company on an ongoing basis once a specific proposal was received from the Company. 14On 7 February 2011, the Company provided a response to the list of questions the Trustee had submitted to the Company. Also on 7 February 2011, the Company provided the Trustee with a proposal ("First Proposal"), in which the Company requested the Trustee's " consideration and approval " for: (a) a reduction in its contributions to the Fund; (b) a change in the investment profile of the DBD assets; and (c) the elimination of the DBD, by reclassifying all of the DBD members as Accumulation Division members. The Company proposed an "uplift", which was said to be an additional amount for some (but not all) DBD members, based on actuarial advice, to ensure that there was a high probability that members would over time remain no worse off than if current defined benefits were maintained (the "Uplift"). 15In the First Proposal, the Company noted that the DBD had a surplus of assets - which, for present purposes, means the excess of Fund assets over members' total vested benefits (being a members' leaving service benefit if the member voluntarily leaves the Company's service by way of resignation, early retirement or age retirement) - of approximately $15 million. The First Proposal also noted that the estimated total Uplift to be offered to DBD members was $0.8 million. 16On 14 February 2011, the Trustee sent a communication to members, advising that the First Proposal had been received from the Company and that the Trustee was seeking legal and actuarial advice on the proposal, with a view to continuing discussions with the Company in the best interests of all members. In mid February 2011, the Trustee engaged Julian Hotz, the Fund's Actuary, to review the First Proposal. On 22 February 2011, the Trustee sent a communication to all members, observing that there were significant differences between the Company's proposal and a position that the Trustee would support. 17On 1 March 2011, the Company presented a further proposal ("Second Proposal") at a meeting with representatives of the Trustee, which altered the investment performance assumption in the model used to calculate the Uplift, from 6.5% to 6.0% pa, having the effect of increasing the total Uplift amount to be allocated to DBD members upon reclassification from $0.8 million to $2.25 million. Following a review of the Second Proposal by the Fund's Actuary, the Trustee, by way of email dated 11 March 2011, rejected the investment performance assumption of 6.0% per annum (coupled with a salary increase assumption of 3.0% per annum), on the basis that it did not adequately compensate members for the transfer of risk and expected total salary increases, and that it would provide an uplift for only approximately 87 of the 173 DBD members. The Trustee was also concerned that no uplift was proposed for DBD members over 55 years of age, thereby not compensating for any increase of risk for those members. 18On 28 March 2011, the Company provided the Trustee with a further amended proposal ("Third Proposal"), in which the Company: (a) decreased the investment performance assumption of the Fund from 6.5% to 6.25% per annum; (b) increased the salary increase assumption from 3.0% to 3.5% per annum; and (c) offered that all of the DBD members receive some uplift, by allowing "the [Trustee] to use up to $500k of the $3.5m total uplift to transfer uplift from some or all DBD members less than 55 years old to some or all DBD members 55 years or older ". Under the Third Proposal, the estimated amount of the total Uplift to be offered to the DBD members was $3.5 million. 19On 29 March 2011, the Company communicated to the Trustee that: ... If the Trustee does not accept the 3 rd proposal dated 28/03/11 the company advises the Trustee that: (a) The company will withdraw all proposals for a mandatory closure of the DB division, (b) The company will make an offer to all DB members that they may, for the foreseeable future, voluntarily transfer to the Accumulation Division or to another superannuation fund of their choice, (c) If they transfer to the Accumulation division they will receive ongoing company contributions of 10% of total remuneration as Accumulation Members do now and receive all other benefits and conditions attributable to Accumulation members, (d) If they transfer to another superannuation fund of their choice they will receive ongoing company contributions of 9% of total remuneration up to the superannuation guarantee limit (currently approx $170,000) as similar employees do now and receive all other benefits and conditions attributable to similar employees, (e) If members elect to transfer out of the DB division before a nominated date in 2011 (TBA) they will receive an uplift amount (TBA), (f) The uplift amount will be significantly less (in total and per employee) than the uplift represented in the company's 3 rd offer, (g) If members elect to transfer out of the DB division after the nominated date they will receive their Leaving service benefit but no uplift amount, (h) DB Members who do not opt to transfer from the DB Division will be offered a variation of their terms of employment which will include no salary increases for the foreseeable future to the extent that is allowable by law; (i) The main implications of accepting these varied employment terms would be that: a. the employee would not receive salary increases in the foreseeable future; and b. the effect that would have on the 'Final average salary' calculation for the calculation of the members leaving or retirement benefit when the member ultimately ceases employment with the company, (i) The company may alter some of the above provisions when they are implemented. 20On or about 12 April 2011, the Trustee, having regard to the advice of the Fund Actuary, rejected the Third Proposal and itself proposed a basis and assumptions on which the Trustee would be prepared to consent to the Company's request to close the DBD ("Trustee Proposal"). In the Trustee Proposal, the total Uplift to be offered to the DBD members was $5.7 million. 21On 6 May 2011, the Company rejected the Trustee Proposal and advanced a further amended proposal ("Fourth Proposal"), under which the amount of the total Uplift was increased to $4.6 million. 22On 10 June 2011, the Trustee submitted a further proposal ("Final Trustee Proposal") to the Company, under which the total Uplift amount was $8.16 million. 23The Company rejected the Final Trustee Proposal in a meeting between representatives of the Trustee and representatives of the Company on 15 September 2011. The Company informed the Trustee that its Fourth Proposal was withdrawn, and the Company now wished to cease negotiations on a mandatory closure of the DBD. A letter, dated 19 September 2011, from the Company to the Trustee, rejecting the Final Trustee Proposal, formally confirmed this. 24On 16 September 2011, the Company sent to DBD members a letter enclosing a document entitled "Changes to your super" ("Transfer Guide"), a statement of advice and transfer offer form (together, "Offer Documents"). The Transfer Guide set out reasons for requiring the DBD members to transfer to the Accumulation Division, including to: 1. Eliminate fluctuations in the Company's financial results directly due to the uncertainty of the funding needed for defined benefit arrangements. 2. Reduce the considerable administration cost in providing defined benefit arrangements. 3. Ensure that all employees enjoy consistent employment conditions, including terms of their super. 4. Align with global best practice, both within KC and elsewhere, in providing accumulation arrangements. 25The Transfer Guide offered the following options to DBD members: + Change to accumulation-style super effective 1 December 2011 and receive an immediate uplift to your current super entitlement . Under the terms of the offer, your defined benefit super, together with the additional uplift amount, will be transferred to the Accumulation Division of KCA Super. OR + Remain in the Defined Benefit Division and your salary will be frozen . Under the terms of the offer, if you choose to remain with defined benefit super, or don't respond you will be deemed to have consented to a variation in your employment contract from 15 October 2011 to the effect that any eligibility you may otherwise have had or become due for in future for a salary review is removed from your contract of employment other than increases required to comply with any minimum wage required under relevant awards, industrial agreements or legislation. Eligible employees will still receive bonuses to which they become entitled, subject to applicable Company policies as varied from time to time. 26The Transfer Guide also stated: You must respond to the offer by 14 October 2011 and remain with the Company through 30 November 2011 to qualify for the uplift amount. If you don't respond to the offer, you will be deemed to have rejected it. Your decision to transfer to the Accumulation Division will be effective from 1 December 2011. Your decision to remain in the Defined Benefit Division will be effective from 15 October 2011. This offer is important for you and has implications for your employment contract. This offer will remain in place, so you can transfer your defined benefit to the Accumulation Division at any time. However, if you request to transfer after 14 October 2011, you will not receive an uplift amount. As an Accumulation Division member, you will again be eligible for any salary reviews. 27The offer contained in the Transfer Guide included a minimum Uplift amount of 1% on the member's DBD vested benefit. The Trustee has since been informed that the aggregate Uplift amount for the DBD members referred to in the Transfer Guide was $4.7 million. 28The Company stated its reasons for wishing to close the DBD as follows: There are four key reasons behind this change to accumulation super: 1. ... employees conditions across the Company are to be standardised and in line with market best-practice. 2. The adverse financial impact on the Company's performance and ultimately on our share price, as a result of the unpredictable funding variability for defined benefit liabilities. 3. The Company's commitment to providing consistent employment conditions to all our employees. Defined benefit super is an outdated style of super arrangement. Accumulation super provides choice and flexibility. 4. The considerable costs to administer and manage defined benefit super in addition to accumulation arrangements. 29It would appear that the statement of advice contained in the Offer Documents advised DBD members that the "transfer value" consisted of the DBD member's vested defined benefit as at 30 November 2011 and an uplift amount, and that each DBD member was also informed of the amount that it was estimated would become that DBD member's opening account balance in the Accumulation Division on 1 December 2011 if that member accepted the offer. 30The Trustee was uncertain as to whether the Company had made a determination, for the purposes of clause 47 of the Trust Deed, of (a) the extent to which (if at all) and the basis upon which any DBD member's benefit is to continue, and (b) the amount (if any) to credit to the Member's Accumulation Account, upon reclassification of a DBD member as an Accumulation Member. The Company has since stated, in a letter from its solicitors to the Trustee's solicitors dated 23 September 2011, that it had not made a determination for the purposes of clause 47 of the Trust Deed. 31The offer contained in the Transfer Guide was expressed to be open for acceptance until 14 October 2011. However, as indicated below, the Company subsequently (on 30 September 2011) withdrew that offer. 32Following the issue of the Offer Documents by the Company, DBD members contacted the Trustee to, amongst other matters: (a) obtain legal advice relating to the offer; (b) seek an opinion as to the calculations of the offer; (c) enquire as to whether the Trustee intended to make a complaint to APRA; (d) communicate various concerns of the DBD members to the Company; and (e) understand the Trustee's position with respect to the offer. On 20 September 2011, the Trustee's solicitors, Freehills, sent a letter to the Company's solicitors, Herbert Geer, requesting that the Company provide an undertaking that the Offer be suspended. 33On 22 September 2011, the Trustee appeared before the Duty Judge in Equity and obtained leave to file the Summons, returnable before the Duty Judge, on 26 September 2011, when after a short hearing , I made the following orders, and adjourned the proceedings to 4 October 2011 [ KCA Super Pty Limited as Trustee of the Superannuation Fund Known as 'KCA Super' [2011] NSWSC 1204]: By order, pursuant to (NSW) Trustee Act (1923), s 63, I advise that the plaintiff would be justified in communicating with members of the Defined Benefit Division of KCA Super to following effect: (a) The Trustee has been advised by the Fund Actuary that it is unable to express an opinion upon the offer contained in the Offer Documents, including amounts proposed to be credited to the Accumulation Account of a Defined Benefit Member transferring to the Accumulation Division, until the Fund Actuary receives the actuarial model used by the Company to calculate the transfer values. The Fund Actuary, on behalf of the Trustee, has requested this actuarial model but, at this time, the Trustee has not received this model. Accordingly, the Trustee is not presently in a position to form an opinion as to whether it will, or is likely to, give consent to any determination that may be made by the Company. (b) You should be aware that matters discussed between the Company and Trustee prior to 16 September 2011 concerned, among other things, the amount to be credited to the Accumulation Account of a Defined Benefit Member reclassified as an Accumulation Division member. The Trustee considered that the amounts proposed by the Company during those discussions were inadequate. Such discussions are referred to at page 21 of the Offer Document ('Changes to your super') wherein reference is made to 'extensive discussions with the Trustee... concerning the closure of the Defined Benefit Division' and that '[w]hilst those discussions were held in good faith, terms could not be agreed. (c) You should be aware that: (i) The Trustee understands that the uplift is supposed to compensate you for the investment risk, expenses, costs and potential personal tax liability that a member will incur by transferring from the Defined Benefits Division to the Accumulation Division; and (ii) On reaching the age 55, a Defined Benefit Member accrues superannuation at the rate of 17.5% multiplied by years of membership of KCA Super multiplied by their Final Average Earnings compared to a member of the Accumulation Division for whom the Company will make superannuation contributions of 10% of their Accumulation Super Earnings. (d) You should be aware that there is considerable doubt as to the validity of that term of the offer that provides for you to be deemed to have consented to a variation of your employment contract resulting in a salary freeze if you do not accept the offer. The trustee is seeking further advice and considering further action in this and other respects. (e) While you must bear in mind that at present the offer expires on 14 October 2011, you may wish to consider deferring your decision whether or not to accept it until these matters have been clarified or until you have heard further from us in the meantime. 34On or about 27 September 2011, the Company provided to the Fund Actuary detailed information regarding the basis upon which the amounts in the offer for each Member had been calculated, as a result of which, o n or about 28 September 2011, the Fund Actuary advised the Trustee that the total amount of the Uplift for the DBD members under the Offer documents was $4.7 million. This amount had been calculated using revised salary data, based on DBD members' current 'Earnings' and 'Final Average Earnings' as defined in the Trust Deed ("Revised Salary Data"), whereas a ll estimates of the Uplift in previous offers were calculated using salary data based upon outdated 'Earnings' and 'Final Average Earnings' ("Outdated Salary Data"), which meant that all such estimates of the total Uplift were lower than would have been the case had they been calculated using the Revised Salary Data. As at 28 September 2011, using the same assumptions adopted in the financial model used to calculate the Final Trustee Proposal, but replacing the Outdated Salary Data with the Revised Salary Data, the total amount of Uplift under the Final Trustee Proposal was $10.2 million. 35On 28 September 2011, representatives of the Company met with the Chairman of the Board of the Trustee, and advised (a) the Company's preferred position was to proceed with a compulsory transfer of all DBD members to the Accumulation Division; and (b) if the compulsory transfer did not occur the Company was considering dissolving the Fund in its entirety pursuant to clause 48 of the Trust Deed. 36On 29 September 2011, the Company indicated that it would agree to a total Uplift amount of $7 million (less the Trustee's legal costs) for the DBD members, if the Trustee agreed to a compulsory transfer of all DBD members to the Accumulation Division. However, the Company also indicated that if the Trustee did not agree the compulsory transfer of all DBD members to the Accumulation Division, then the Company would likely terminate the Fund. The Trustee's Directors discussed the above proposal and resolved to agree to it (in principle, and subject to judicial opinion, advice and direction), considering: (a) although the amount of the Uplift proposed (being $7 million less the Trustee's legal costs) was significantly less than the Trustee's Final Proposal (being $10.2 million), if the Company instead dissolved the Fund under clause 48, the amount available for payment to DBD members on finalisation of the dissolution would (according to the actuarial advice received) be less than the amount that would be allocated to DBD members from the Uplift in the Company's current proposal; (b) the Trustee's legal and actuarial costs being incurred in responding to the various proposals advanced by the Company, to be deducted out of the amount that would otherwise be available as an Uplift for the DBD members, are increasing as the matter continues; (c) the prospect of future costs in respect of any protracted dispute with the Company should the Trustee refuse to consent to the Company's proposal, and the impact that such costs would have upon the residual Uplift which would ultimately be available to DBD members upon the resolution of the dispute; (d) the individual circumstances of certain groups of DBD members (including those who had recently been made redundant, those who will be made redundant and those who are approaching retirement) who, given their circumstances, would benefit from the Company's proposal; and (e) the impact upon the morale of DBD members who were concerned by the uncertainty surrounding the decision which was to be made in relation to their superannuation. 37On 30 September 2011, the Company wrote to the Trustee, stating: The Company now intends to withdraw its current offer to members... The Company is considering its superannuation strategy going forward and is in the process of seeking advice to terminate the Fund in its entirety in the not too distant future, pursuant to its rights in the Trust Deed. In lieu of total Fund closure, the company now seeks the Trustee's consent to a compulsory reclassification of all remaining members in the Defined Benefit Division to become Accumulation members from 1 December 2011 in consideration of the allocation of the amount of $7 million (inclusive of the Trustee's legal expenses) from the Fund surplus to the aggregate crystallised Defined Benefit Withdrawal Benefits. 38The Trustee understands this to mean that, if the Trustee does not consent to the proposed compulsory reclassification of DBD members, the Company will terminate the Fund in its entirety, but that it will not terminate the Fund if the Trustee does give its consent. The Trustee executed, by way of agreement, a copy of the Company's letter, and also on 30 September 2011, the Trustee and the Company issued a joint communication to DBD members, setting out the agreed terms of the compulsory transfer of DBD members to the Accumulation Division. On 7 October 2011, the Trustee sent the Company a letter (signed by the Company to indicate its agreement) that clarified that: ... the Trustee has considered the proposal and has agreed in principle to the terms set out in your letter dated 30 September 2011. However, we note that the Trustee's acceptance of the proposal remains subject to the Trustee's application for judicial advice, direction and opinion in respect of the proposal (which is listed for hearing on 13 October 2011) and any subsequent determination by the Court. 39On 12 October 2011, the Company and the Trustee executed a document entitled "Particulars of Agreement Between KCA and KCA Super Trustee 30 th September, 2011" which records the amount and basis of calculation of each DBD member's Uplift, and also contains a number of undertakings by the Company to the Trustee, including: a) Communication in relation to the compulsory transfer of a DBD member to the Accumulation Division (such as a revised individual Statement of Advice) will be done in consultation with the Trustee to achieve clarity of communication. b) No DBD member will incur the initial transfer costs or the Buy / Sell spread on the transfer of the DBD member's account from the DBD Division to the Accumulation Division. c) The Company has agreed to offer one further voluntary financial planning session to DBD members which is to be provided by Mercer (Australia) Pty Limited. d) Following the payment of bonuses in or about February or March 2012, the crystallised defined benefit withdrawal benefit under item 1 will be recalculated to take account of each former DBD member's actual 'Earnings' (as defined in the Fund's trust deed) for 2011. If this results in a higher crystallised defined benefit withdrawal benefit then an additional amount equal to the difference will be credited to the former DBD member's account from the Fund's surplus. The Individual Uplift amount will not be amended as a result of any increase in the Earnings for 2011, any increase in Final Average Earnings or any increase in a member's crystallised defined benefit withdrawal benefit. e) Only DBD members who are employed by the Company as at 30 November, 2011 will be entitled to an individual uplift transferred to the Accumulation Fund. 40The Fund Actuary has reviewed the Current Proposal, and accepts the Company's surplus estimate of $12 million. This surplus is the result of contributions made by the Company to date exceeding the Fund's projected future DBD liabilities. 41On 12 October 2011, the Fund Actuary provided the Trustee with an actuarial summary comparison between: (a) the Final Trustee Proposal (as modified to incorporate the Revised Salary Data); (b) the offer set out in the Offer Documents; (c) the Current Proposal; and (d) an illustrative wind-up scenario: (1) using the amount that is estimated would be available for the DBD member's Uplifts if the Fund is terminated; and (2) using the actuarial model for the Current Proposal except for the following assumptions: (A) a target equivalence ratio of 75% (instead of a target equivalence ratio of 80%); (B) a target equivalence age of 58 (instead of a target equivalence age of 57); and (C) a minimum uplift of 1% (instead of a minimum uplift of 1.4%). 42It is against that background that the Trustee seeks the Court's advice as to whether it would be justified in giving its consent under clause 47 of the Trust Deed to determinations of the Company to give effect to the proposed reclassification of all members of the Defined Benefit Division of KCA Super to become members of the Accumulation Division from 1 December 2011, substantially in accordance with the letter from the Company to the Trustee dated 30 September 2011. On the one hand, the Trustee is concerned as to whether it should give its consent to determinations by the Company under clause 47 for the proposed compulsory reclassification that it considers will not adequately compensate all DBD Members for the additional investment risk, expenses, costs and potential personal tax liability involved in becoming an Accumulation Member. On the other hand, the Trustee is concerned that if it withholds its consent, then the Company will make an alternative determination, to terminate the Fund under clause 48 in its entirety, thereby affecting the interests of all members of the Fund (including members of both the Defined Benefits Division and the Accumulation Division) and resulting in a lower total Uplift amount for the DBD members. 43The Company does not require the consent of the trustee to reclassify a member pursuant to clause 18. However, if a member is reclassified as an Accumulation member, the Trustee's consent is required in respect of the Company's determination under clause 47 of the extent to which and basis upon which the member's benefit in an existing category of membership is to continue, and the amount to be credited to each member's Accumulation Account. The parties have proceeded on the basis, as do I, that in the absence of consent, the member would retain all existing rights and benefits in the DBD, and no amount would be credited to his or her Accumulation Account. In those circumstances, reclassification without the Trustee's consent is not practicable. 44In giving or withholding its consent, the Trustee is bound to act honestly and in good faith, for proper purposes and upon relevant considerations, in the interests of the beneficiaries and the trust estate as a whole [ Re Brockbank [1948] 1 Ch 206; (CTH) Superannuation Industry (Supervision) Act 1993, s 52]. The Trustee must act impartially - or - fairly between all the members of the Fund, avoiding benefiting one class or group at the expense of another [ Cowan v Scargill [1985] 1 Ch 270, 286-7 (Megarry VC); Tanti v Carlson [1948] VLR 401, 405; Re Mulligan (Deceased) [1998] 1 NZLR 481, 501; Nestle v National Westminster Bank (Chancery Division, Hoffman J, 29 June 1988, unreported)]. 45Clauses 18 and 47 are expressed in terms of an individual member, and involve determining the amount to be credited to the transferring member's Accumulation Account. A separate consent is required in respect of each. The aggregate Uplift must be the aggregate of amounts separately determined in respect of each relevant member. The actuarial assumptions that underlie the calculations of the aggregate Uplift provide parameters by which the amount applicable to each individual can be derived. One group of DBD members (those aged 35 to 50) may bear a higher risk than others of being worse off in the event of a transfer under the Current Proposal, than under existing DBD arrangements. The Trustee must balance the collective interests of the members, and the individual interests of each of them, but in doing so may take into account appropriate actuarial advice and assumptions that inform evaluation of the circumstances of groups of members that share similar characteristics. 46Ordinarily, one would expect the question to be addressed by considering whether the amount proposed represented fair and reasonable compensation to replace the member's existing DBD entitlements. Absent countervailing considerations, a trustee acting prudently would not consent to a clause 47 determination that did not adequately compensate the transferring member for his or her existing DBD entitlements and any additional risk associated with transfer to the Accumulation Division. 47Thus a fundamental question for the Trustee is whether reclassified DBD members will be adequately compensated for: (1) the loss of their DBD benefit; and (2) the additional investment risk, expenses, costs and potential tax liability involved in becoming an Accumulation Member. There is no issue about the first of these components, as each member's DBD benefit is to be transferred, with an "uplift". The "uplift" is intended to compensate for the second component. The Trustee's chief concern is whether the Uplift is adequate to achieve that purpose. 48The Company's actuary has advised the Fund Actuary that with an aggregate uplift of about $6.6 million (being $7 million less Trustee's legal expenses), on appropriate actuarial assumptions there would be an "equivalence ratio" of 80%, meaning that under the proposed compulsory reclassification a particular member could be worse off in up to 20% of the years of future service from 30 November 2011 to age 65. The Fund Actuary's advice is that, on reasonable assumptions, an aggregate uplift amount of $10.2 million would be required if all reclassified DBD members are to be no worse off upon retirement. The difference between this amount and the $6.6 million in the Company's current proposal reflects differences in assumptions as to future increases in earning (3.5%, as against the Company's 3.25%); future investment returns (4.9 - 6.5%, as against the Company's 5.5 - 6.5%); target equivalence age (55, as against the Company's 57); target equivalence ratio (1.00, as against the Company's 0.8), and minimum uplift percentage (1.0%, as against the Company's 1.4%). The "target equivalence ratio" ("TER") is an important factor. It describes the proportion of years until retirement (age 65) in which a member is expected to be equal or better off under the projected accumulation scenario, using the other assumptions mentioned and including the member's proposed uplift under the relevant proposal. The Company's Current Proposal, with a TER of 0.8, involves that a member could be worse off in up to twenty per cent of years of future service (but equal, or better off , in the other eighty percent); the Final Trustee Proposal, with a TER of 1.0, no member would be worse off, and every member would be equal or better off , in any future year. 49The existing "surplus" of $12 million in the DBD exceeds the uplift required adequately to compensate all reclassified DBD members ($10.2 million), and could be applied for that purpose. However, it is being applied to fund a "contributions holiday" for the Company, which holiday is expected to continue for about ten years. Increasing the Uplift would reduce the holiday. The conclusion is inescapable that, even on the Company's assumptions, the Current Proposal does not fully compensate DBD members for all the additional risk involved in transfer to the Accumulation Division; that existing surplus is sufficient to fund full compensation; but that instead it will be used by the Company to continue its "contribution holiday". 50While, if one looks only at the possibility that in 20% of future years a transferring member may be worse off, it could be concluded that the Current Proposal benefits the Company to the detriment of DBD members, and that absent countervailing considerations the Trustee ought not consent to it, this approach overlooks the possibility that in 80% of future years, a transferring member may be not only as well off, but better off, than under existing DBD arrangements. While the actuarial evidence does not enable me to say to what extent and with what degree probability this is so, it detracts from the prima facie conclusion that a proposal that uses a target equivalence ratio of less than 1.0 must be inadequate compensation. Even in the absence of countervailing considerations, the Current Proposal does not provide manifestly inadequate compensation for transferring members. 51The next issue is the impact of the Company's alternative proposed course of action, described in its 30 September letter, that if the Trustee does not indicate that it will consent to the Current Proposal, then the Company will terminate the Fund in its entirety (but that if consent is forthcoming, it will not do so). 52If the Fund is dissolved pursuant to a determination of the Company under clause 48, then by clause 49(1), after payment of the costs, charges and expenses of administering and winding up (so far as the same are not paid by the Company), the members would receive payment of their accrued benefits (in the case of DBD members, their "Defined Benefit Withdrawal Benefits" referred to in the Company's 30 September letter); and of the balance (which corresponds with what has been called the surplus) the Company would receive half and the Members would receive the other half, apportioned among them having regard to their prospective benefits had the Fund continued. The Fund Actuary has advised the Trustee that the apportionment of half the balance of the surplus under clause 49(1)(c) of the Trust Deed would be between DBD members only. The Fund Actuary observes that in the event of Fund closure, pursuant to the terms of the deed, the DBD members would be entitled to 50% of the surplus of $12 million (less termination costs), which would be less than the amount of the Uplift under the Current Proposal. The Fund Actuary also observes that the estimated cost of terminating the fund is between $50,000 and $250,000, in which case in the event of a fund closure DBD members could expect to receive between $5.75 and $5.95 million from the surplus, whereas under the Current Proposal, the estimated Uplift for DBD members (after the Trustee's legal costs), to be provided from the surplus, is $6.6 million. 53Thus, as the Current Proposal involves an uplift of somewhat in excess of half the current surplus, according to the Fund Actuary, DBD members are likely to be slightly better off if reclassified as Accumulation Members than in the event of dissolution. If the Company can and is likely to dissolve the Fund under clause 48 if the Trustee's consent is not forthcoming, that tells strongly in favour of the Trustee giving consent, notwithstanding that the Uplift might be considered less than full compensation, for the reason that the alternative of fund closure would be still more detrimental to members. 54There is no reason to doubt that the Company, if lawfully able to do so, will pursue the alternative course of fund dissolution if the trustee's consent is not forthcoming. The question is whether the Company is lawfully able to do so. 55The terms of the Company's power to dissolve the Fund, conferred by clause 48 of the Trust Deed, are not subject to any express limitation. I agree, as opined by Senior and Junior Counsel for the Trustee in their joint advice, that there is no reason to conclude that the Company is bound by any fiduciary obligation in exercising its powers under the Trust Deed, and is therefore at liberty to act in its own interests. 56Senior and Junior Counsel have nonetheless advised the Trustee that it would not be justified in consenting to the Company's proposal as it presently stands - unless the Court advises to the contrary. This advice is largely founded on the view that there are reasonable prospects that the Court may conclude that the proposed compulsory reclassification, including the alternative proposal to dissolve the Fund, would be a breach of an implied obligation of good faith owed by the Company as employer under the Deed. 57I am much less confident that a determination by the Company to dissolve the Fund would be a breach of an obligation of good faith. Even if the Company is obliged to exercise its powers honestly and in good faith (as to which see Lock v Westpac Banking Corporation (1991) 25 NSWLR 593, 607-8), it is in my view very doubtful that such an obligation would prevent the Company from dissolving the Fund, even for its own benefit. In Imperial Group Pension Trust Ltd and Others v Imperial Tobacco Ltd and Others [1991] 1 WLR 589, in a judgment that was cited with approval by Waddell CJ in Eq in Lock v Westpac, Browne-Wilkinson VC held that an employer's power to give or withhold consent to amendments of the trust deed was subject to an implied duty of good faith (at 597-599): The duty of good faith required the company to preserve its employees' rights and pension fund, not destroy them. If there are financial and other considerations which require the fund to be determined, so be it. But if the sole purpose of refusing to consent to an amendment increasing benefits is the collateral purpose of putting pressure on members to abandon their existing rights, including the right to the surplus on determination, in my judgment the company would not be acting in good faith. 58In the present case, for reasons that it has explained - albeit no doubt including an element of self-interest - the Company is seeking consent to a transfer of members from the DBD to the Accumulation Division, in accordance with the Deed. The Trustee is at liberty, if it wishes, to withhold its consent. The Company alternatively proposes, in that event, to determine the DBD, in accordance with its terms. Doing so will not destroy employees' rights in the fund - they will receive the entitlements for which clause 49 of the Trust Deed provides in the event of dissolution under clause 48. 59Employees joining the Fund signed application forms, which contained the following: In consideration of my being admitted to membership I agree to being bound by the Deed of Trust governing the Fund and to discharge all obligations of a member thereunder. 60While it is not established whether or not the Company informed DBD members that the Company could terminate the Fund pursuant to clause 48 of the Trust Deed, nor whether DBD members were provided with a copy of the Trust Deed, they thus agreed to be bound by the terms of the Deed - which included clause 48. 61A purpose of the power given to the Company by clause 48 is to provide a means by which the Company may at any time free itself of the burdens imposed on it by the Deed. It is to my mind doubtful in the extreme that exercising that power, even if to free the Company of the burdens of the Deed and thereby improve its prospective financial position, would involve a breach of good faith, particularly given that members would still receive the clause 49 dissolution benefits. 62I do not have to consider whether the Trustee must consent; the question for the Court is whether consent is a course reasonably open to a prudent trustee. The Current Proposal offers an outcome which, while it may involve DBD members being worse off in 20% of their years to retirement than under their extant DBD arrangements, should see them at least as well off, and possibly better off, in the other 80% of those years, and is, in overall terms, superior to an alternative which the Company could lawfully bring about by dissolution of the Fund. In those circumstances, a prudent trustee could reasonably conclude that the interests of the beneficiaries and the trust fund as a whole would be better served by consenting to the Current Proposal, than by risking the more detrimental alternative of dissolution. 63By order, pursuant to (NSW) Trustee Act 1925, s 63, I advise that KCA Super Pty Limited as trustee of KCA Super would be justified in giving its consent under clause 47 of the Trust Deed to determinations of the Company that give effect to the proposed reclassification of all members of the Defined Benefit Division of KCA Super to become members of the Accumulation Division from 1 December 2011, substantially in accordance with the letter from the Company to the Trustee dated 30 September 2011. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 02 November 2011