The BDBN v Reversionary Pension controversy

This controversy is whether which of the following benefit succession devices takes precedence: a reversionary pension or a binding death benefit nomination (assuming that they are inconsistent and both are valid).  Consider the situation of where a member has commenced a pension which is reversionary to their spouse and has also made a binding death benefit nomination which nominates their estate.   Clearly the pension and the nomination are inconsistent.  It is assumed that both are valid.  In this situation which takes effect?

The answer depends entirely on the terms of the relevant superannuation fund.  SUPERCentral Governing Rules have been drafted to expressly make the reversionary pension take precedence.  The governing rules of other superannuation funds may expressly specify the death benefit nomination takes effect while the governing rules of some superannuation funds simply do not address the issue and so are relevantly silent.

Sometimes it is argued that a reversionary pension cannot be valid as it constitutes a “fetter” on the trustee’s discretionary powers and, therefore, the binding death benefit nomination takes effect.  

However in the view of SUPERCentral’s lawyers – Townsends Business and Corporate Lawyers – the “fetter” argument is flawed.

But first – what is a “fetter”?  While it may sound like the past tense of some deep fried delicacy, it is a real name of a long standing legal rule applying to trustees (and certain other persons) who have a discretion to exercise.  In short, a trustee must exercise a discretion at the proper time and having regard only to relevant information.  A trustee cannot in advance of the proper time decide to exercise a discretion in a particular manner.  

The “fetter” argument is that the trustee has decided in advance of the proper time (the proper time being the date of death of the member) to allocate the death benefit to a particular beneficiary (namely the person named as the reversionary pensioner) without regard to the possibility of allocating the benefit to other eligible beneficiaries.  

However, when a member selects to receive their benefit in the form of a pension, the member can also select whether the pension is to be reversionary.  It is the member exercising their rights under the governing rules as to whether the pension is to be reversionary and not the case of the trustee exercising its discretion.  So the “fetter” argument has no “legs” as they say in court.

In the view of SUPERCentral’s lawyers a reversionary pension will “take precedence” over a valid and inconsistent binding death benefit nomination where the superannuation fund has adopted the SUPERCentral Governing Rules.  

Where a pension is reversionary, a binding death benefit nomination is still relevant as:

• the nominated reversionary pensioner may predecease the member – in which case the “reversion” cannot operate and so the binding death benefit nomination will apply;
• if the member has superannuation interests in addition to the reversionary pension (eg accumulation interests or non-reversionary pensions) – the binding death benefit nomination will apply to these other superannuation interests; or
• where the nominated reversionary pensioner is not eligible to receive the pension benefit (eg they have ceased to be a dependant of the member) – the binding death benefit nomination will apply.