The Westpac Case

Legal Principles

The power to amend the terms of a trust must be used to promote the purpose of the trust and not for an improper or ulterior motive.This is the equitable doctrine of a “Fraud on a Power” also known as the doctrine of an “improper exercise” of a power.

When a “Defined Benefit” Superannuation Fund has been in existence for many decades it is common for a substantial actuarial surplus to develop which leads to the question of what should be done with the surplus.

The question arose in a case concerning the staff superannuation fund for the Westpac Banking Corporation.

The Case

Lock v Westpac Banking Corporation & Others [1991] 25 NSWLR 593

The actuarial surplus in the staff superannuation fund had grown to approximately $600 million and a proposal was prepared to use half of the surplus to increase member benefits with the other half to be returned to the sponsoring employer – the bank.

The trust deed did not include an exclusionary provision to prevent any assets of the fund from being returned to the bank.

The question the Supreme Court of New South Wales had to consider was whether an amendment to the trust deed to allow the return of some $300 million to the sponsoring employer and the consent required from the trustees would be prohibited under the doctrine of a Fraud on a Power?

In the course of the judgement Waddell J said:

“As has been pointed out in a number of decisions, pension plans are different in nature from traditional trusts. They are based upon a contract between the employer, the trustee, and the employees pursuant to which both the employer and the employees contribute to the fund for the purpose of providing defined benefits in defined circumstances to employees. The usual form of trusts involve the creation of a benefit by the settlor for which the beneficiary gives no consideration. Pension schemes are created in the context of the employer/employee relationship and are part of the terms of engagement. The provisions reflect the provisions of laws relating to income tax which are intended to encourage the creation of such schemes. They also reflect the nature of competition between employers for the engagement of suitable staff. An employer who has a power to amend a scheme would naturally take into account the effect of the amendment upon its industrial relations with its staff and the terms of the scheme provided by other employers in the same sphere of activity.

I agree with the following comments of Warner J in Mettoy Pensions Trustees Ltd v Evans…

.. the court’s approach to the construction of documents relating to a pension scheme should be practical and purposive, rather than detached and literal…although there are no special rules governing the construction of pension scheme documents, the background facts or surrounding circumstances in the light of which those documents have to be construed – their “matrix of fact” (to use the modern phrase coined by Lord Wilberforce) include four special factors. The first factor is that, as the Court of Appeal pointed out in two unreported cases.. namely Kerr v British Leyland (Staff) Trustees Ltd (unreported) 26 March 1986…and Mihlenstedt v Barclays Bank International Ltd… the beneficiaries under a pension scheme such as this are not volunteers. Their rights have contractual and commercial origins. They are derived from the contracts of employment of the members. The benefits provided under the scheme have been earned by the service of the members under those contracts and, where the scheme is contributory, pro tanto by their contributions”

Waddell J concluded that since the proposal would benefit the members and beneficiaries of the fund and because there was no exclusionary provision in the trust deed prohibiting the return of any surplus funds to the sponsoring employer, the trustees could consent to the proposed amendment to the trust deed.

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This tab updated on 24 March 2015