Evidencing superannuation's 'best financial interests duty' – the Beauty or the Beast?

The new best financial interests duty (BFID) for superannuation trustees should represent a pathway to improve the decision-making of the trustee to better, or at least more visibly, calibrate with the interests of the fund’s beneficiaries.

In this, it seems, it should be a 'beautiful' thing. The problem which the superannuation industry has been confronting, however, is that the duty can be seen to be a 'beast' insofar as it represents yet another predatory pitfall for the trustee. This is most stark in the context of the reverse evidentiary burden of proof imposed on trustees.

But it need not be so. This article explores how the beast can be tamed.

‘BFID’ in practice: What evidence do you need?

A key feature of the new BFID is the reversal of the evidentiary burden, which requires the trustee to positively demonstrate that it has exercised its powers and performed its duties in the best financial interests of beneficiaries.

Indeed, there is a presumption that an action of the trustee is not in the best financial interests of beneficiaries, unless the trustee adduces evidence to the contrary. If the trustee adduces such evidence, the onus shifts once again and the other party will have a legal burden of proving the trustee breached the BFID.

This prompts the question: what evidence does the trustee need?

We set out below some practical guidance to assist trustees to answer this question.

The subjective and objective elements

As we have written previously, the BFID has both subjective and objective elements, requiring the trustee to consider whether it genuinely believes its action or decision will be in the best financial interests of beneficiaries and that the action or decision can reasonably be regarded as being in the best financial interests of beneficiaries.[1]

This means that the rebuttal of the presumption by the trustee will require evidence of the subjective view of the Board, as well as objective evidence that the decision or action could reasonably have been regarded to be in the best financial interest of beneficiaries. As set out in the Revised Explanatory Memorandum to the Treasury Laws Amendment (Your Future, Your Super) Bill 2021 (Revised EM) at [3.60]:

Trustees should assess the costs and benefits of actions, which will commonly include quantifiable metrics to demonstrate what the anticipated financial outcome is and the reasonable basis for that expectation.

As the BFID is process (rather than outcomes) driven, it does not require evidence that the resulting outcome of the decision or action was actually in the best financial interests of beneficiaries;[2] although it is likely that a poor outcome may attract regulator attention or complaints from beneficiaries.

It is important to understand that the BFID test is not centred on mathematically calculated outcomes; rather a Court will judge it based on whether the trustee had a reasonable basis for concluding that its decision or action would be in the best financial of interests of beneficiaries collectively.

Trustee attention should not be focused only on benefits to the majority. Trustees are required to hold the scales impartially between different classes of beneficiaries that may be affected.

Lower vs higher order decisions

The BFID is not subject to any materiality threshold. However, strategic decisions with material impacts on the fund, or those relating to discretionary/non-essential or large expenditures (higher order decisions) are likely to face greater scrutiny than decisions that are less material or are essential/non-discretionary operational expenditure (lower order decisions) (see Revised EM [3.34]).

Lower order decisions should be underpinned by language reflecting the BFID but generally, will require less documentation and evidence as compared to higher order decisions. Lower order decisions may be guided by policies and procedures set by the Board, with ongoing reporting and monitoring (e.g. to ensure certain expenditures continue to achieve their intended purpose and are provided on competitive terms) (Revised EM at [3.33]). It is not necessary to test and document every lower order decision at a ‘micro’ level (provided the relevant decision falls within a ‘macro’ policy or procedure).

For example, the policies evidencing best financial interests compliance in respect of essential operational expenditure should be created through the annual budgeting process where costs are approved by the Board. The process could be as follows:

1. Create budgets for any financial year of expected expenditure;
2. Split the budgets in various ‘macro’ categories, e.g. ‘marketing’ or ‘administration’;
3. Standard expenses within each ‘macro’ category should be detailed and tested against BFID; and
4. Expenditure up to this budget will be considered compliant with BFID.

On the other hand, higher order decisions will need to be supported by a robust, well-documented business case, typically in each case. As set out in the Revised EM (at [3.35]):

… a trustee decision which represents a significant expenditure of members’ money, would be expected to be supported by a robust analysis with quantifiable metrics to reflect expected financial outcomes (including but not limited to cost benefit analysis, articulation of risks associated with achieving the outcome and any mitigation strategy).

A policy approach to BFID

One of the constant reverberating issues in the context of BFID is the extent to which a trustee can formulate policies which envelope the relevant areas of BFID activity, so that the trustee does not need to deliberate on each and every activity or piece of expenditure that occurs during the course of the trustee’s day-to-day activities. It is submitted that this must be the case.

In the vast majority of cases, one would expect that the trustee’s discharge of the BFID test will flow from its higher level decision-making centred on trustee activities generally, categories of activity and expenditure policies. This is supported by the Revised EM (at [3.33]):

Provided any expenditure is essential to the prudent operation of a superannuation entity and reporting and monitoring frameworks for such expenditure are put in place by trustees to ensure that the expenditure is necessary and provided on competitive terms (and any ongoing expenditure continues to achieve its intended outcomes), then the expenditure decision would likely be regarded to be in the best financial interests of the beneficiaries.

Exceptions to this policy approach can themselves be documented and separately considered, as is deemed necessary or appropriate. For example:

• activities which carry with them reputational or other material risk;
• expenditure which is large or exceeds a certain preformulated limit;
• conflict issues; or
• activities where the risk/return/benefit to beneficiaries is difficult to quantify.

Structuring and recording proposals to meet the BFID

For decisions which need to be specifically determined, Board and committee papers should have a beneficiaries’ financial interests section to improve focus on BFID considerations and document those considerations.

These and supporting documents should demonstrate the value proposition to beneficiaries and allow the trustee to genuinely and reasonably conclude that, taking into account all relevant considerations, the proposal is in the best financial of interests of beneficiaries collectively.

Therefore, these documents should assist the trustee to identify:

• the beneficiaries that will be affected and their financial interests; and
• the financial benefit to the beneficiaries.

This requires consideration of:

• the pros and cons to each class of beneficiaries that will be affected by the decision; and
• the proper weight to be given to financial interests of cases who may be disadvantaged.

Board minutes

Finally, Board minutes should reflect the key considerations that the Board took into account in determining that the particular decision or action is in the best financial interests of beneficiaries. It is not enough for the minutes to simply state that the Board resolved that the decision or action is in the best financial interests of beneficiaries.

If you would like more information or assistance, please do not hesitate to contact one of our team members below.

[1] Attorney-General (Cth) v Breckler (1999) 197 CLR 87; Hindle v John Cotton Ltd (1919) 56 Sc LR 625; Australian Prudential Regulation Authority v Kelaher [2019] FCA 1521.

[2] Manglicmot v Commonwealth Bank Officers Superannuation Corporation Pty Ltd [2010] NSWSC 363; ASIC v Australian Property Custodian Holdings Limited (Receivers and Managers appointed) (in liquidation) (Controllers appointed) (No 3) [2013] FCA 1342.