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LIV Concerns about "non-lapsing binding death benefit nominations"

LIV Concerns about

By Succession Law Section

Advocacy Succession 

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The LIV has written to the Australian Prudential Regulation Authority (APRA) about the validity of "non-lapsing binding death benefit nominations" being offered by some major regulated superannuation funds. 
 
You can read the LIV's letter to APRA below: 
 
 
The Law Institute of Victoria (‘LIV’) is concerned that some major regulated superannuation funds advise their members that they can make what is referred to as a “non-lapsing binding death benefit nomination” (‘NLBDBN’). The LIV takes the view that this is an incorrect interpretation of the law and that binding death benefit nominations (‘BDBN’) must lapse after three years by operation of law.
 
Legislation
 
Section 59(1A) of the Superannuation Industry (Supervision) Act 1993 (‘SIS Act’) allows the rules of a superannuation fund to permit a member, by notice given to a trustee of a fund in accordance with the Superannuation Industry (Supervision) Regulations 1994 (‘SIS Regulations’), to require a trustee to provide benefits in respect of the member on or after the member’s death. Such benefits are payable to a person or persons mentioned in the notice, being the legal personal representative or a dependent or dependents of the member.
 
Regulation 6.17 of the SIS Regulations deals with notices referred to in the above section.
  • Sub-regulation 7 of SIS Regulation 6.17A states as follows:
Unless sooner revoked by the member, a notice under sub-regulation (4) ceases to have effect;
 
(a) at the end of three years after the day it was first signed, or last confirmed or amended, by the member; or
 
(b) if the governing rules of the fund fix a shorter period – at the end of that period.
 
The combination of the above section 59(1A) of the SIS Act and SIS Regulation 6.17A means that if a regulated fund offers members the right to make a nomination in relation to a death benefit, the nomination must lapse at the end of three years after it was made, confirmed or amended, unless the governing rules fix a shorter period.
 
Some of the major regulated super funds claim that section 59(1)(a) of the SIS Act allows the rules of the fund to offer members the right to make NLBDBN’s without the need to rely on or comply with the mechanism provided for in section 59(1A).
 
  • Section 59(1)(a) of the SIS Act states as follows:
Subject to sub-section 1(A), the governing rules of a superannuation entity other than a self-managed superannuation fund must not permit a discretion under these rules that is exercisable by a person other than a trustee of the entity to be exercised unless:
 
(a) those rules require the consent of the trustee, or the trustees, of the entity to the exercise of that discretion;
 
  • Section 59(2) of the SIS Act states:
(2)   if the governing rules of a superannuation entity are inconsistent with subsection (1), 
that subsection prevails, and the governing rules are, to the extent of the inconsistency, invalid.
 
The LIV submits that the legislative provisions outlined above do not enable superannuation funds to provide for NLBDBN’s in their governing rules, as Section 59(1)(a) expressly provides that it is subject to section 59(1A).
 
Retail Employees Superannuation Pty Ltd v Pain (2016)
 
The LIV notes the position argued by APRA in Retail Employees Superannuation Pty Ltd v Pain (2016) (‘Pain’), that in order for notice to be valid and effective under s 59(1A), the notice must also comply with sub-regulations 6.17A (4)-(7).
 
Further, the LIV notes the comments of Justice Blue, that:
 
“The structure and drafting of sections 58 and 59 of the SIS Act and regulation 6.17A of the SIS Regulations give rise to ambiguities, uncertainties and potentially unintended consequences. The difficulties from the perspective of trustees such as the plaintiff and members such as the members of this Trust are exemplified by the numerous issues examined below in relation to proposed rule 9 of the Trust Deed. It is highly desirable that those provisions be reviewed by the Commonwealth and recast.”
 
The LIV would be interested to know of any developments since Pain, particularly advocacy work APRA has undertaken, if any, to pursue a Commonwealth review and redrafting of the provisions in question.
 
Given APRA’s view adopted in Pain that NLBDBN’s do not comply with the relevant laws, the LIV submits that all major funds should be notified of APRA’s position, and should cease offering NLBDBN’s to their members.
 
The LIV is informed anecdotally that many members of major superannuation funds have made nominations which will lapse, or have lapsed already, but which the members believe to be non-lapsing. Those members may be exposed to risk in relation to their succession planning without any knowledge of the risk.
 
It is difficult for lawyers to advise their clients in relation to BDBNs when they are offered an option in relation to those benefits which, in the LIV’s view, does not comply with the relevant laws governing the superannuation industry.
 
The LIV looks forward to receiving your response. 
 

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