Certainty in superannuation is elusive

One of the most difficult parts of the job that financial planners do is helping their clients to plan for the consequences of their death. It is safe to assume that most of us want the certainty of knowing that when we die our superannuation benefits will go to the people we nominate.

But financial planners have had to warn clients that super fund trustees can have a broad discretion when distributing death benefits between a deceased member's dependants and the member's estate.

The concern with this discretionary approach was that it offered clients no certainty and made it difficult for financial planners to advise clients.

Given this, it was perhaps not surprising that the law relating to death benefit nominations was changed in 1999 so that people could, if they wished (and if the fund rules allow it), make nominations that were binding on their super fund's trustee.

Initially, fund trustees and planners welcomed this new provision. They assumed that when a member died, the trustee would simply pull the binding nomination out of the file and follow it to the letter.

Planners were happy because it meant clients could know how their death benefits would be paid and rely on this when making other arrangements, such as drafting their will or taking out insurance.

Trustees were also happy because they would not have to conduct tedious and time-consuming enquiries to determine if there were other dependants whose circumstances and potential entitlements had to be considered.

However, since the new regime came into force, its shortcomings have become apparent. For fund trustees, life is not as simple as they expected. And, for clients, the certainty they were offered is in fact far from certain.

The problems begin even before the binding nomination is made because the nominations have to be signed and doubly witnessed in much the same way as a will. But the complexities get worse.

When a client makes the nomination, the law says each beneficiary nominated by a client must fit into a class of prescribed beneficiaries. What it doesn't say is when that person must fit into the prescribed class. At the time the client dies or when the nomination is made?

The legislation steps around this issue by ignoring how the market operates on a day-to-day basis. It says that if a fund allows for nominations and one is made and the member dies, if the nominated beneficiary is a dependent, then the benefit must be paid.

But the Act does not contemplate that procedures covering these arrangements may vary across funds. Some trustees, for example, restrict their members to nominating no more than three dependants. The law doesn't say that funds can impose such restrictions. So what happens when it's time to pay and there are seven nominated beneficiaries?

Even though a fund has its own rules and the trustee may have rejected the non-conforming nomination, it seems the law requires the fund's rules to be ignored and the benefit to be paid. This is a classic case of confusion between what fund trustees and members are doing and what they are allowed to do. This is regrettable because nominations are a good idea that are being undermined by legislation.

A foreseeable consequence of this is that beneficiaries who have not been paid benefits will challenge or perhaps even sue the trustee.

The vast majority of situations in which trustees and beneficiaries find themselves are normal and the law serves these people well. But it fails dismally in abnormal situations which, despite their unusualness, occur all too often. In these situations, there is uncertainty for trustees and uncertainty for members and their beneficiaries.

What happens, for example, if a member has not included someone in his or her will because they have made a binding death benefit nomination which turns out to breach Superannuation Industry Supervision (SIS) Act or the fund's rules?

And how far do the trustee's duties extend in relation to the making of binding nominations? It has been suggested that trustees may have to check the validity of any nominations. This implies that a trustee would have to warn a member if their nomination refers to a beneficiary who, on the face of it, is not within the prescribed class.

It is not difficult to imagine bizarre but common enough circumstances that could be resolved only by the Superannuation Complaints Tribunal. It's also not difficult to imagine a Tribunal decision that overturned a fund trustee's ability to enforce policies and procedures which it had developed over many years at considerable cost.

Many fund trustees who welcomed the change in law two years ago have found, as is often the case, that the devil is in the detail. Anecdotal evidence suggests that in this case, a law that was intended to reform has actually addressed one set of problems by replacing them with another.

If industry grape vines are correct, and planners are now starting to push for binding death benefit nominations to be offered more widely, then, in the absence of necessary changes to the law, funds can expect those problems to increase.

There is clearly a demand for binding death benefit nominations — the benefits for both fund members and trustees are obvious. The legislation should, however, be revised to give trustees more direction and control in terms of the practicalities surrounding their use.

Ruth Stringer (partner) and Richard Batten (senior associate) are superannuation lawyers in the Sydney office of law firm Minter Ellison.