Raiding the Fund

If a final salary Defined Benefit has established for many decades and has been well managed such funds will often build up a substantial surplus of assets over the vested benefits accrued by Members of the Fund.

This surplus is often a tempting target for fraudulent Trustees and the Employer-Sponsor.

Generally the Employer-Sponsor will take advantage of a fund surplus by taking an extended “Contribution Holiday” and make no Employer-Contributions into the Fund, allowing the Member Contributions and the Investment Returns provide sufficient income to pay benefits as they fall due.

However in some circumstances the Trustee and/or the Employer-Sponsor will seek to Raid the Fund and take the surplus.

The administration of a Trust involves the payment of general administrative expenses by the Trustee. Trustees have recourse to the assets of the fund to pay for expenses properly incurred on the trust’s behalf. This right is recognised both at general law and by the Trustee legislation.

Instead of expending the Trustee’s own funds and subsequently seeking reimbursement, the trustee may discharge liabilities directly out of the trust assets where this is permitted – the “right of exoneration“.

However these expenses and liabilities must have been properly incurred in the administration of the trust for the benefit of the beneficiaries (including members) and not for some ulterior motive.

Australian Guardians has amongst its case files the following case:

Case AS#9 – The $0.5 Billion Raid.

The fund in this case was established in 1913 and by the early 1980s had a substantial surplus. This was a very tempting target for a new management team.

There was a problem however, the governance of this fund has five natural person Trustees:

  • two nominated by the Employer
  • two elected by the Members, and
  • one elected by the Pensioners (Beneficiaries).

The Employer could be outvoted 3:2. What to do?

The Employer put a proposal to these Trustees that they be replaced by an existing  corporate Trustee where all the Directors were nominated by the Employer.

Of course to gain acceptance additional Member benefits and protections were included in the proposal which was executed as Deed of Amendment in 1982.

One protection was to delete the Retrenchment Rule so as to covert this Fund to a Deferred Benefits fund for Members who in future would be retrenched by the Employer. Members who were trenched were entitled to remain Members of the final salary Defined Benefit Fund until they attained the Normal Retirement Age of 65.

Once control of the Members’ and Beneficiaries’ Superannuation Fund was solely in the hand of Directors nominated by the Employer an extended period of asset striping ensued that has been confirmed from audited accounts obtained from ASIC {Docs No. 930178 -647, 648, 649 & 650}.

The general administrative expenses were around $1 million per annum and were paid directly from the funds assets. There can be no legitimate reason that over $100 million in “liabilities” were properly incurred in the administration of this Fund.

There was a substantial surplus available and this surplus was stripped from the Fund, since the Members and Beneficiaries were in no position to prevent this from happening.

If this surplus had not been unlawfully stripped from this Fund and instead had been re-invested, this Fund would not have assets of around $0.5 Billion instead of only $50 Million.

Furthermore Members of this fund did not even receive their lawful superannuation entitlements (most only received about half of their lawful benefit, some even less), since paying out the lawful benefit would have increased the vested benefits and so reduced the surplus that could be stripped from the Fund.

The Trustee unlawfully terminated the membership of Members who were retrenched to further reduce the vested benefits liability and so further increase the amount that would be available to be stripped from the Fund.

Without the asset stripping  Benefits of Members and Beneficiaries could have been increased above their lawful entitlement.

So how many funds has this happened to?

Even though this Fund became a Government Regulated Superannuation Fund after the enactment of the Superannuation Industry (Supervision) Act 1993, the stripping of the surplus continued.

Under Section 117 of the Superannuation Industry (Supervision) Act 1993 Members of the Fund have to be notified of any proposal to return surplus funds to the Employer-Sponsor and the Fund Actuary has to also approve of such a proposal.

There is no evidence to suggest that the Members of this Government Regulated Superannuation Fund were advised of the ongoing stripping of the Fund Surplus after 1993.

If you would like the tools to check whether your final salary Defined Benefit Fund has been subject to unlawful asset stripping with Members then denied their lawful entitlements, become a Member of Australian Guardians today.

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