A super fund is, at its most basic, simply a ‘trust’. The ‘trustee’ of the super fund holds the ‘member’s balance’ on trust for the ‘member’. What most people don’t realise is that because the super fund is a trust, it’s governed by the rules of equity that set out how trusts must be run.
‘So what?’, you may ask.
Well, let’s say you receive a super pension during your lifetime, and on your death you want your pension to be paid to your surviving spouse. Your adviser has no doubt recommended that you put in place a reversionary pension. You do this by entering into a pension agreement with the super fund trustee.
However, the super fund trustee is likely to have a discretion under the super fund deed to decide who, among your eligible ‘SIS dependants’ (i.e. your spouse, children and your estate), will receive your member balance on your death. Most people think that the pension agreement will override this discretion, and that the trustee must continue to pay the pension to your spouse. However, this is not necessarily the case.
Let’s say after your death, your children end up with the shares in the SMSF trustee and come and see us about how they can get their hands on your member balance – rather than having to pay it to your spouse as a pension. Can they override your intentions?
There is a little know, but very powerful rule in trust law that says that a trustee may not fetter its discretion (see Dagenmont Pty Ltd v Lugton  QSC 272). What this means is that the trustee cannot decide now how it will exercise its discretion at a future time. In order to comply with this rule, the trustee must exercise the discretion at the relevant time, taking into account all of the relevant matters at that time.
So, your children may argue that by entering into the pension agreement with you, the trustee of the super fund effectively ‘fettered’ its discretion to decide at the time of your death who gets your member balance. Trust law states that an agreement made by a trustee in contravention of this rule is of no effect (as it is not within the power of the trustee).
So in summary, the reversionary nature of the pension will be overridden, and the trustee (now under the control of your children) can decide who gets your member balance, chances are they will distribute to themselves… .
The good news is that the rule against the fettering of the trustee’s discretion can be overriden in an appropriately worded super fund deed (see Muir v Inland Revenue Commissioners  1 WLR 1269). If the super fund deed says that the exercise of the discretion by the trustee can be overriden by the trustee entering into a pension agreement, then your direction to pay your spouse your pension must be honoured by your trustee.
The bottom line is, if you want to make sure that your super pension ends up where you intend, then you need to ensure that your super fund deed allows the trustee to fetter its discretion as to who gets your benefits when you die.
If you would like us to review your super fund deed and pension arrangements, call us on 1300 654 590.