Much Ado about Fettering - reversionary pensions and trustee discretions

'Fettering' is a strange word.  It is strange because it is a legal term which is not generally used in everyday conversations.  However, it is sometimes used in conversations about reversionary beneficiary nominations and binding death benefit nominations.  It seems there is much 'afettering' in superannuation!

So what is a “fetter”?  Shorn of complexity, a fetter is a limit or constraint which the trustee imposes upon itself when exercising a discretion.  The point is that the fetter is an improper or unauthorised limit or constraint.  Essentially, the mischief is that the trustee has not exercised their own mind and made their own decision when they operate under a fetter.

In the context of superannuation funds it has argued that the entitlement of a pension reversionary beneficiary is invalid as it constitutes an unauthorised fetter on the trustee’s discretion as to the allocation of death benefit of a member.  The argument is that as the reversionary nomination is a fetter it cannot bind the trustee and so the trustee, despite the creation of a reversionary pension, must make up its own mind as to the allocation of the account balance.  In making up their own mind, the trustees could decide that the death benefit be paid to another eligible dependant of the deceased member. 

This argument is that the discretion conferred on the trustee as to the allocation of the death benefit has been 'pre-exercised' by the trustee before the relevant event and therefore the exercise is inconsistent with the fiduciary duties of the trustee.

This argument is predicated upon the trustee having a discretion as to the allocation of the death benefit.  If there is no discretion then there is nothing to fetter.  Does the trustee have a discretion on the death of the member as to the allocation of the death benefit when a pension is reversionary? 

The better view is that the trustee does not have a discretion when the pension is reversionary and the reversion is effective (ie the nominated beneficiary survives the member and the beneficiary is a SIS Act dependant of the member).  If there is no discretion, the issue of “fettering” does not arise.

Reversionary pensions in SMSFs typically are structured as a pension to the member where the member has the right to nominate an individual to whom the pension will transfer when the member dies.  The nomination is subject to the individual surviving the member and being a SIS Act dependant of the member.  The nomination is also revocable at any time by the member during the member’s lifetime.  Understood in this way, there is no discretion to be exercised by the trustee.  Certainly the trustee must determine whether the individual has survived the member and is, in fact, a SIS Dependant of the deceased member.  However, these determinations are matters of fact and not discretions.

Even if the reversionary pension is “hard wired” into the trust deed of the fund, there is still no discretion to be exercised.  In this case the reversionary pension is set out in the trust deed rather than a separate pension document.  On the death of the member the reversionary beneficiary will have a right under the trust deed to receive the transfer of the pension.  Again, there is no discretion to be exercised: merely a determination whether the individual is alive and whether they were a SIS Act dependant of the deceased member.

In short, there does seem to be much ado about fettering but not much to be concerned about.