The trustees of Australia’s $2.9 trillion superannuation industry are facing an unprecedented level of class actions against them and surging insurance premiums.

Consultants and lawyers say the misconduct exposed by the Hayne royal commission and heightened regulatory scrutiny has increased the risk of trustees being sued by members as opportunistic law firms encourage them to take legal action.

“Being a trustee today is a lot more complex and more onerous,” said Craig Roodt, a director at Deloitte and a former head of investment risk at APRA. “It’s no longer a simple compliance role.”

Roodt, who worked for Australia’s prudential regulator for more than 17 years, said the combination of the royal commission, fiduciary obligations and government legislation about member outcomes, had put trustees under further pressure and changed how they were measured. He added that rising insurance premiums for trustee liability was indicative of the industry anticipating more litigation.

Soaring premiums

A recent report by Marsh found that liability insurance premiums for directors of Australian companies, for example, had surged 75 per cent in the first three quarters of 2019 alone on top of an 88 per cent jump a year earlier. The insurance broker said the “dramatic increase” in shareholder litigation and more than $1.8 billion in cumulative claim settlements had forced the industry’s hand.

Philip Hopley, special counsel at Herbert Smith Freehills, said that while the risks for a trustee were slightly different to those of a company director, the same dynamics were playing out in the superannuation industry that is faced with legal suits on a scale never been seen before.

He said the environment was created by the royal commission which looked at whether members’ interests were being served by trustees. “Plaintiff law firms have piggy-backed off its findings with the result that trustees and their insurers are now entering a new world of class actions and risk exposures,” Hopley said.

Passing of the baton

Deloitte’s head of superannuation in Australia, Russell Mason, said that with trustees at greater risk of being sued and the job being more complex, he had started to see a “passing of the baton” by trustees to younger professionals with different expertise. He also said that as super funds consolidate, an increasing number of trustees would also step aside.

Herbert Smith Freehills partner Michael Vrisakis said there was a “regeneration effect” taking place among trustee boards as their duties got more onerous and the regulatory pressures mount. He said that while this could see younger people coming through, there had already been a “move towards greater sophistication of trustee boards.”

“There is more intense scrutiny on trustee decisions,” said Vrisakis. “There are question marks and scrutiny being applied as to how proactive they have to be in all arrangement involving members. They are more exposed simply because there is more focus on superannuation off the back of the royal commission.”

Along with rising insurance premiums and the threat of class actions, the industry is also paying close attention to the outcome of next year’s court proceedings against the trustees of REST super fund by one of its members.

The landmark case between Mark McVeigh and the Trustees of the $57 billion fund for a possible failure to adequately address climate change risk is widely considered to be an important test of both superannuation and general law in Australia. Deloitte said the case had placed a further emphasis on the fiduciary duties of trustees.

“We are all looking, including the regulators and the courts, for legal guidance for trustees as to what is expected and what the minimum standards are,” said Deloitte’s Mason. “Trustees have the dilemma of social responsibility and acting in the best interest of members.”

Sarah Jones worked for Bloomberg News in London for more than 12 years covering equity markets and global asset management. Prior to moving to the UK, she worked for Australian Associated Press in Sydney covering economics and monetary policy.
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