The continuing evolution of the ‘best interests’ duty for superannuation trustees from Cowan v Scargill to the current regulatory framework 
9 March 2018

This session will address whether anything has really changed for the ‘best interests’ duty since the decision of Megarry V-C in Cowan v Scargill.  Consideration will be given to:
•	The statutory construction of the duty as a SIS covenant and whether anything useful might be drawn from statutory prescriptions of a ‘best interests’ obligation on financial advisers;
•	How the duty might be compared and contrasted with the proposed new obligation to annually assess appropriate outcomes for ‘MySuper’ members.

Speaker:
Justice Mark Moshinsky
Federal Court of Australia

Introduction
I am grateful for the invitation to present the David Maclean Plenary Session.  I had the privilege of knowing David at the Bar and acknowledge the substantial contribution he made to the law of trusts and superannuation.  The topic for today’s paper, involving principles of both trust law and superannuation, is particularly fitting given his areas of interest and expertise.
The purpose of this paper is to examine the ‘best interests’ covenant in s 52(2)(c) of the Superannuation Industry (Supervision) Act 1993 (the SIS Act).  A best interests covenant was included in s 52 when the SIS Act was enacted in 1993.  Section 52 was replaced by the Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Act 2012 (Cth) (the TOPS Act), with effect from 1 July 2013.  While the wording of the best interests covenant was changed, the differences do not appear to be material.  In its current form, the best interests covenant is in the following terms:
to perform the trustee’s duties and exercise the trustee’s powers in the best interests of the beneficiaries
Although this provision – in one form or another – has now been in place for a considerable period, there is only limited case law on the meaning of the covenant. A number of interesting questions arise as to the meaning of the covenant.  As the covenant is one contained within, and given effect by, a statute, these questions are essentially ones of statutory construction.  Some of the questions are:
•	How does the superannuation context affect the construction of the best interests covenant?
•	Does the covenant reflect the general law duties of trustees?  If so, which general law duties does it reflect?
•	Does the best interests covenant apply both to individual decision-making (ie, decisions that affect a particular beneficiary) as well as to general decision-making (ie, decisions affecting the beneficiaries generally)?
•	What content is to be given to the word “best”?  Does it add anything?
I note that a best interests obligation also exists in the context of managed investment schemes.  The duties of a responsible entity under s 601FC of the Corporations Act 2001 (Cth) include to “act in the best interests of the members and, if there is a conflict between the members’ interests and its own interests, [to] give priority to the members’ interests” (see also s 601FD).
A best interests obligation also applies in the context of the provision of financial advice to retail clients.  As part of the Future of Financial Advice (FOFA) reforms, a new Div 2 of Pt 7.7A of the Corporations Act was introduced (by the Corporations Amendment (Further Future of Financial Advice Measures) Act 2012 (Cth)).  The provisions include s 961B(1), which provides:
The provider must act in the best interests of the client in relation to the advice.
Further questions arise, such as: what are the similarities and differences between the best interests covenant applicable to superannuation trustees and the best interests obligations imposed on responsible entities (in the context of managed investment schemes) and providers of financial advice? 
It is not the purpose of this paper to provide any concluded views on these questions.  Rather, I will endeavour to provide a framework in which these questions may be considered, and to make some observations that may assist in considering these questions.  In the course of doing so, I will refer to the cases that have considered the meaning of the best interests covenant.
General principles of statutory construction
The general principles applicable to statutory construction are well established, and have been set out in a number of recent decisions of the High Court.  A frequently cited passage is the following passage from the judgment of French CJ, Hayne, Crennan, Bell and Gageler JJ in Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503.  Their Honours said at [39]:
“This Court has stated on many occasions that the task of statutory construction must begin with a consideration of the [statutory] text”.  So must the task of statutory construction end.  The statutory text must be considered in its context.  That context includes legislative history and extrinsic materials.  Understanding context has utility if, and in so far as, it assists in fixing the meaning of the statutory text.  Legislative history and extrinsic materials cannot displace the meaning of the statutory text.  Nor is their examination an end in itself.
(Footnotes omitted.)
See also Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at [69]-[71]; Certain Lloyd's Underwriters v Cross (2012) 248 CLR 378 at [23]-[24]; Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27 at [47]; Thiess v Collector of Customs (2014) 250 CLR 664 at [22]-[23]; Military Rehabilitation and Compensation Commission v May (2016) 257 CLR 468 at [10]; Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd [2018] HCA 4 at [34].
The importance of context was emphasised in SZTAL v Minister for Immigration and Border Protection (2017) 347 ALR 405.  In that case, Kiefel CJ and Nettle and Gordon JJ observed at [14]:
The starting point for the ascertainment of the meaning of a statutory provision is the text of the statute whilst, at the same time, regard is had to its context and purpose.  Context should be regarded at this first stage and not at some later stage and it should be regarded in its widest sense.  This is not to deny the importance of the natural and ordinary meaning of a word, namely how it is ordinarily understood in discourse, to the process of construction.  Considerations of context and purpose simply recognise that, understood in its statutory, historical or other context, some other meaning of a word may be suggested, and so too, if its ordinary meaning is not consistent with the statutory purpose, that meaning must be rejected.
(Footnotes omitted.)
In the same case, Gageler J said at [37]:
[T]he statutory text from beginning to end is construed in context, and an understanding of context has utility “if, and in so far as, it assists in fixing the meaning of the statutory text”.
(Footnote omitted.)
In some situations, an aspect of the context is the pre-existing state of the law.  This was referred to by the High Court in CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384.  In an oft-cited passage, Brennan CJ, Dawson, Toohey and Gummow JJ said at 408:
It is well settled that at common law, apart from any reliance upon s 15AB of the Acts Interpretation Act 1901 (Cth), the court may have regard to reports of law reform bodies to ascertain the mischief which a statute is intended to cure. Moreover, the modern approach to statutory interpretation (a) insists that the context be considered in the first instance, not merely at some later stage when ambiguity might be thought to arise, and (b) uses "context" in its widest sense to include such things as the existing state of the law and the mischief which, by legitimate means such as those just mentioned, one may discern the statute was intended to remedy. Instances of general words in a statute being so constrained by their context are numerous. In particular, as McHugh JA pointed out in Isherwood v Butler Pollnow Pty Ltd, if the apparently plain words of a provision are read in the light of the mischief which the statute was designed to overcome and of the objects of the legislation, they may wear a very different appearance. 
(Footnotes omitted; emphasis added.)
In a recent article (“Choosing Principles of Interpretation” (2017) 91 ALJ 881), Justice John Basten said (at 882):
Some statutes clarify what was in doubt; most either change, or do not change, the pre-existing law. Some provisions are simple to understand; others have a clear core and are only uncertain at the penumbra. Whenever uncertainty arises, legal advice may be sought for the very reason that lawyers are trained in the law. No lawyer would construe a statute without reference, whether conscious or unconscious, to his or her understanding of the pre-existing law. So much was expressly recognised by the High Court in Fortress Credit Corporation (Aust) II Pty Ltd v Fletcher (2015) 254 CLR 489, [10] in construing s 588FF of the Corporations Act 2001 (Cth). The Court stated “[b]efore considering the text of s 588FF, it is useful to have regard to its legislative history, which, in this case, informs its construction”.
The High Court has also emphasised the importance of purpose.  For example, in Thiess v Collector of Customs (2014) 250 CLR 664, French CJ, Hayne, Kiefel, Gageler and Keane JJ said at [23]:
Objective discernment of statutory purpose is integral to contextual construction. The requirement of s 15AA of the Acts Interpretation Act 1901 (Cth) that “the interpretation that would best achieve the purpose or object of [an] Act (whether or not that purpose or object is expressly stated ...) is to be preferred to each other interpretation” is in that respect a particular statutory reflection of a general systemic principle.  For:
“it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary; but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning.”
(Footnotes omitted.)
I note for completeness that, although s 52 of the SIS Act sets out covenants that are taken to be included in the governing rules, rather than directly imposing statutory obligations, it seems to me that the meaning and effect of the covenants in s 52 is essentially a question of statutory construction.  As discussed below, part of the purpose of s 52 was to set out fiduciary duties of trustees from which derogation would not be possible.  Consistently with this purpose, the meaning and effect of the covenants is a matter of statutory construction.  See also Herzfeld P, Prince T and Tully S, Interpretation and Use of Legal Sources: The Laws of Australia (Thomson Reuters, 2013), [25.3.800].
The legislative history of the best interests covenant
With these principles in mind, I turn to consider the best interests covenant in s 52(2)(c) of the SIS Act.
Section 52(1), as originally enacted, provided:
If the governing rules of a superannuation entity do not contain covenants to the effect of the covenants set out in subsection (2), those governing rules are taken to contain covenants to that effect.
As originally enacted, the list of covenants in subsection (2) included:
•	to act honestly in all matters concerning the entity (paragraph (a)); 
•	to exercise, in relation to all matters affecting the entity, the same degree of care, skill and diligence as an ordinary prudent person would exercise in dealing with property of another for whom the person felt morally bound to provide (paragraph (b)); and
•	to formulate and give effect to an investment strategy that has regard to the whole of the circumstances of the entity (paragraph (f)).
The focus for present purposes is the covenant in paragraph (c), which was in the following terms:
to ensure that the trustee's duties and powers are performed and exercised in the best interests of the beneficiaries
The term “beneficiary” was (and is) defined as meaning “a person (whether described in the governing rules as a member, a depositor or otherwise) who has a beneficial interest in the fund, scheme or trust …” (SIS Act, s 10(1)).
Section 7 of the SIS Act provided (and provides) that the Act “applies to a superannuation entity despite any provision in the governing rules of the entity, including any provision that purports to substitute, or has the effect of substituting, the provisions of the law of a State or Territory or of a foreign country for all or any of the provisions of this Act”.
The background to the introduction of s 52 was described by the NSW Court of Appeal in Manglicmot v Commonwealth Bank Officers Superannuation Corporation Pty Ltd (2011) 282 ALR 167 (Manglicmot) at [110]-[115].  
As Giles JA (with whom Young and Whealy JJA agreed) explained, the origin of s 52 can be traced to the joint Report of the Australian Law Reform Commission and the Companies and Securities Advisory Committee, Collective Investments: Superannuation (1992) (the ALRC Report).  Of particular relevance for present purposes is ch 9 of the report, which dealt with the duties of the responsible entity.
In the introduction to ch 9, it was stated:
This chapter identifies the principal fiduciary duties owed by responsible entities to members of superannuation schemes. The Review recommends that they expressly be included in a statute as obligations from which a responsible entity cannot be excused by the governing document of the superannuation scheme.
The next section in ch 9 discussed the legal structure of superannuation schemes.  It explained (at [9.2]) that: 
(a) 	all of the superannuation schemes established by employers in the private sector were established as trusts; and 
(b) 	superannuation schemes covering public servants were established by Acts of Parliament, most of which were run as trusts. 
The ALRC Report noted that, in a discussion paper, the issue had been raised whether some other structure would constitute a more appropriate form for superannuation.  It stated that very few submissions had addressed this issue and that “those that did considered that the trust was the most appropriate legal structure for superannuation schemes” (at [9.2]).  The trust concept was then outlined, including the use of the trust concept in superannuation.  The Report outlined some of the distinctive features of employer-related superannuation trusts (at [9.7]-[9.8]).  The Report then stated (at [9.9]):
While superannuation schemes have features that distinguish them from traditional trusts, it does not necessarily follow that trust law applies differently to the superannuation trustee or that the duties and responsibilities of trustees are inappropriate for trustees of superannuation schemes.  The duties of trustees have been developed, along with the concept of the trust, over many years and their fiduciary nature is highly appropriate to the needs of superannuation schemes.
I note the choice of the trust structure for the regulation of superannuation in Australia is discussed by Dr M Scott Donald and Dr Lisa Butler Beatty in the Introduction to The Evolving Role of Trust in Superannuation (The Federation Press, 2017), a collection of past papers from this conference.  The editors write that the papers “help to illuminate a question for which the formal historical record has no definitive answer, but which remains an important question today: why was trust law chosen in 1993 as the legal infrastructure for the compulsory superannuation system, and does this reason (or reasons) remain valid today?” (pp 6-7).  The learned authors continue:
The choice appears … to have been influenced by the recognition that the law of trusts offers a set of high level principles that are both capable of practical application and infused with a powerful normativity.  In respect of the latter it is clear that the rhetoric so often employed by the courts when articulating the law of trusts in favour of beneficiaries resonated in the policy deliberations leading to the choice.
(Footnote omitted.)
Returning to the ALRC Report, the next section set out four fundamental fiduciary duties of trustees, followed by other important duties (at [9.9]).  Interestingly, none of these duties was expressed in terms of acting in the best interests of the beneficiaries.  It was then stated (at 9.10]):
Trustees cannot depart from or act inconsistently with these fiduciary duties unless [expressly] permitted to do so by the trust deed.  The Review considers it to be of great importance that the deed not permit derogation from the proper duties of trustees and that those duties ought to be clearly identified.  
Having said this, the following proposal was set out (at [9.11]):
The Review is firmly of the view that it is inappropriate for the trust deed to contain clauses that allow a significant reduction of the duties imposed upon the responsible entity.  It proposed in DP 50 [ie, the discussion paper] that a minimum set of fiduciary responsibilities of the responsible entity be clearly identified and, where appropriate, included in legislation applying to superannuation schemes with a requirement that the deeds or other instruments constituting a superannuation scheme would not be able to derogate from these obligations.  This was supported by submissions.
(Footnotes omitted.)
The ALRC Report discussed the overseas experience relating to the codification of superannuation scheme trustee duties and the model trustee code that was under consideration at that time in Australia.  The Report also referred (at [9.15]) to the duties imposed by the Corporations Law on trustees of prescribed interest schemes.  These included that the trustee would:
perform its functions and exercise its powers under the deed in the best interests of all the holders of the prescribed interests and not in the interests of the management company or the trustee if those interests are not the same as those of the holders of the prescribed interests generally [Corporations Regulations reg 7.12.15(1)(f)(i)]
Interestingly, as this passage indicates, a duty expressed in terms of “best interests” had already been introduced in the context of the regulation of “prescribed interests”, as they were then called.
The ALRC Report made the following recommendation (at [9.17]):
Accordingly, the Review recommends that the law should include a set of fiduciary obligations for responsible entities of superannuation schemes, [approved deposit funds] or [pooled superannuation trusts].  The duties should be paramount.  To the extent that they conflict with other provisions of the governing document, the other provisions should be void.
The ALRC Report then discussed the essential duties of responsible entities, under a series of headings.  One of these headings was: “Duty to act always in the best interests of the members of the scheme” under which the following was stated (at [9.22]):
Ford & Lee describe this duty as the duty which ‘marshalls’ the trustee’s duty of loyalty to the service of the economic wellbeing of the trust fund and of the personal welfare of the beneficiaries [Ford HAJ and Lee WA, Principles of the Law of Trusts (2nd ed, The Law Book Co Ltd, 1990), p 400]. This is a general duty that complements the more specific obligations to act honestly and to exercise care, diligence and skill.
Ultimately, it was recommended (recommendation 9.2 at p 111) that the law should specify a series of obligations “as basic fiduciary obligations of a responsible entity that cannot be excluded or modified”.  These included:
to exercise its powers, and perform its duties, as responsible entity in the best interests of the members
The covenants enacted in s 52 of the SIS Act differed in some respects from duties set out in the recommendation, but there was a broad overlap.  In Manglicmot, after setting out the full text of recommendation 9.2, Giles JA said at [116]: “The eight covenants in s 52(2) differed in some respects from, and were not an extensive as, those proposed in the report, but the heredity is clear enough.”
Does the covenant reflect the general law?
With this background in mind, I come to the question whether the covenants in s 52 of the SIS Act were intended to reflect the duties of trustees under the general law of trusts.  The statements made in the second reading speech, and during the course of the parliamentary debate, are of limited assistance in this regard: see Manglicmot at [117]-[118].  However, the passages from the ALRC Report referred to above suggest that the covenants were intended to reflect existing duties of trustees under the general law.
This was the view taken in Manglicmot.  Giles JA (with whom Young and Whealy JJA agreed) said (at [118]):
Regard to the [ALRC] report … gives no encouragement to the covenants being more than statements of what were thought to be existing trust obligations, the point of the legislation being to prevent any derogation by the relevant trust instrument.
In relation to the covenant in s 52(2)(b), Giles JA expressed the view that it did not “materially add to breach by the respondent of its general law duty to exercise reasonable care”.  He continued (at [121]):
Nor in my opinion does s 52(2)(c) materially add to breach by the respondent of its general law duty to act in the best interests of members of the fund. The respondent’s general law obligation could be expressed, in the language of s 52(2)(c), as an obligation to perform and exercise its duties and powers in the best interests of the beneficiaries.
Subsequently, in Commonwealth Bank Officers Superannuation Corporation Pty Ltd v Beck (2016) 334 ALR 692, it was common ground between the parties that the covenant in s 52(2)(c) did not expand the general law.  This was noted by Bathurst CJ (with whom Macfarlan and Gleeson JJA relevantly agreed) at [136].  The Chief Justice also referred to the statement of Giles JA in Manglicmot that s 52(2)(c) does not materially add to the general law duty of the trustees to act in the best interests of the fund.
Similarly, the learned authors of Jacobs’ Law of Trusts in Australia have expressed the view that the covenant in s 52(2)(c) corresponds with the general law: see Heydon JD and Leeming MJ, Jacobs’ Law of Trusts in Australia (7th ed, LexisNexis Butterworths, 2006), [2922]; Heydon JD and Leeming MJ, Jacobs’ Law of Trusts in Australia (8th ed, LexisNexis Butterworths, 2016), [29-21]; cf Lehane JRF, “Delegation of Trustees’ Powers and Current Developments in Investment Funds Management” (1995) Bond Law Review 36 at 37; Re VBN and Australian Prudential Regulation Authority (2006) 92 ALD 259 at [326]-[328], [359].
As mentioned, the terms of the covenant in s 52(2)(c) were amended by the TOPS Act, with effect from 1 July 2013.  It will be recalled that the original form of the covenant was as follows:
to ensure that the trustee's duties and powers are performed and exercised in the best interests of the beneficiaries
The new form of paragraph (c) is as follows:
to perform the trustee’s duties and exercise the trustee’s powers in the best interests of the beneficiaries
As will be apparent, the words “to ensure that” have been removed.  Otherwise, the covenant remains substantially unchanged.   The words “to ensure that” had been the subject of judicial commentary and were seen as superfluous: see Invensys Australia Superannuation Fund Pty Ltd v Austrac Investments Ltd (2006) 15 VR 87 (Invensys) at [103]-[105]; Manglicmot at [121].  It does not appear that a material change was intended by the amendment to s 52(2)(c).  (Note that a best interests covenant now applies to directors of a corporate trustee of a superannuation fund: SIS Act, s 52A(2)(c).)
The content of the best interests covenant: cases and texts
Proceeding on the basis that the covenant in s 52(2)(c) is intended to reflect the general law, I turn to the question: what does the best interests covenant require? 
As noted earlier, the ALRC Report described the best interests covenant by reference to the duty of loyalty, which was said to be ‘marshalled’ to the service of the economic wellbeing of the trust fund and of the personal welfare of the beneficiaries.  Interestingly, the passage in Ford and Lee’s Principles of the Law of Trusts referred to in the ALRC Report does not actually use the expression “best interests”: see Ford HAJ and Lee WA, Principles of the Law of Trusts (2nd ed, The Law Book Company Limited,1990), p 400.  The relevant paragraph ([909]) is headed “Duty to act exclusively for the benefit of all the beneficiaries of the trust” and states as follows:
The duty to act exclusively for the benefit of all the beneficiaries of the trust marshalls the trustee’s duty of loyalty to the service of the economic well-being of the trust fund and of the personal welfare of all the beneficiaries.  With respect to the economic well-being of the trust the trustee’s duty of loyalty complements the duty to preserve the trust assets by disabling the trustee from taking any unauthorised profit, from allowing any conflict to arise between the duty the trustee has undertaken and any interest he or she has, from undertaking any duty which may conflict with the duty he or she has undertaken, and from setting up the rights of others against those of the beneficiaries.  With respect to the personal welfare of all the beneficiaries the trustee’s duty of loyalty requires the beneficiaries to be treated impartially, that is, equally where they have similar rights and fairly where they have dissimilar rights.
It is convenient at this point to refer to the decision of Sir Robert Megarry, V-C, in Cowan v Scargill [1985] 1 Ch 270.  Although this case is not referred to in the relevant part of the ALRC Report, it arguably formed part of the pre-existing law of trusts at the time the SIS Act was introduced, having been followed in Australia in at least one case (Lock v Westpac Banking Corporation (1991) 25 NSWLR 593).  Moreover, it concerned the duties of a trustee of a pension fund and expressed these duties in terms of “best interests”, the language used in s 52(2)(c).
As is well known, the case concerned a mineworkers’ pension scheme, under the control of a committee of management.  Five members of the committee were appointed by the National Coal Board and five by the National Union of Mineworkers.  The committee of management had wide powers of investment.  The particular issue concerned a plan for the investment of funds in future years.  The five union-appointed trustees objected to investments in oil, investments overseas, and the acquisition of land overseas, and refused to approve the proposed investment plan unless it was amended to take account of these objections.  After protracted discussions failed to produce agreement, the Board-appointed trustees commenced proceedings against the union-appointed trustees, asking the court for directions as to whether the union-appointed trustees were in breach of their fiduciary duties in holding up the adoption of the investment plan.
The critical passage of the judgment for present purposes is the following (at 286-287):
The starting point is the duty of trustees to exercise their powers in the best interests of the present and future beneficiaries of the trust, holding the scales impartially between classes of beneficiaries.  This duty of the trustees towards their beneficiaries is paramount.  They must, of course, obey the law; but subject to that, they must put the interests of their beneficiaries first.  When the purpose of the trust is to provide financial benefits for the beneficiaries, as is usually the case, the best interests of the beneficiaries are normally their best financial interests.  In the case of a power of investment, as in the present case, the power must be exercised so as to yield the best return for the beneficiaries, judged in relation to the risks of the investments in question; and the prospects of the yield of income and capital appreciation both have to be considered in judging the return from the investment.
Later in the judgment, Megarry V-C referred to “the benefit of the beneficiaries”, a matter which “a trustee must make his paramount concern” (at 288).  He also said that, in a trust for the provision of financial benefits, “the paramount duty of the trustees is to provide the greatest financial benefits for the present and future beneficiaries” (at 289).  These statements need to be read in the context of the judgment as a whole.  Elsewhere in the judgment, Megarry V-C injected some qualification into his description of the trustee’s duty.  For instance, at 288, he said: “by way of caveat I should say that that I am not asserting that the benefit of the beneficiaries which a trustee must make his paramount concern inevitably and solely means their financial benefit”.
Megarry V-C considered that “trusts of pension funds are in general governed by the ordinary law of trusts, subject to any contrary provision in the rules or other provisions which govern the trust” (at 292).  He added:
In particular, the trustees of a pension fund are subject to the overriding duty to do the best that they can for the beneficiaries, the duty that in the United States is known as “the duty of undivided loyalty to the beneficiaries”
Megarry V-C also said that “[t]rustees must do the best they can for the benefit of their beneficiaries, and not merely avoid harming them” (at 295).
On the basis of these principles, Megarry V-C held that the union-appointed trustees were in breach of their duties as members of the committee of management by refusing to concur in the adoption of the investment plan.  In relation to Cowan v Scargill, see also Megarry R, “Investing Pension Funds: The Mineworkers Case” in Youdan TG (ed), Equity, Fiduciaries and Trusts (Carswell,1989), and Stone M, “The Superannuation Trustee: Are Fiduciary Obligations and Standards Appropriate?” in Donald MS and Beatty LB (eds), The Evolving Role of Trust in Superannuation (The Federation Press, 2017).
The covenant in s 52(2)(c) was considered by Byrne J in Invensys at [102]-[109], with reference to Cowan v Scargill.  Byrne J considered it to be an “amalgam” of two distinct obligations applicable to trustees at general law and that it was unnecessary to decide whether paragraph (c) was a codification of one or the other or both of these.  His Honour said at [107]:
The covenant inserted into the trust deed appears to be an amalgam of two distinct obligations said to be imposed by law upon trustees of a superannuation fund. The first, which is sometimes referred to as the duty of loyalty or the duty of fidelity to the trust, is that to act in the interests of the beneficiaries; that their interests are paramount and must certainly be placed ahead of the trustee’s own interests. Nor may the trustee have regard to considerations which are extraneous to the trust. The second is to pursue to the utmost with appropriate diligence and prudence the interests of the beneficiaries. This will commonly come into play where it is a question whether the trustee of a trust whose objective is to confer financial benefits on beneficiaries has sufficiently pursued these financial interests. And so, in Cowan v Scargill, Megarry V-C said this: 
…The starting point is the duty of trustees to exercise their powers in the best interests of the present and future beneficiaries of the trust, holding the scales impartially between different classes of beneficiaries.
and later:
Trustees must do the best they can for the benefit of their beneficiaries and not merely avoid harming them. 
It is not altogether clear whether para (c) is intended as a codification of one or other or both of these principles. As will appear, it is not necessary that I unravel this.
(Footnotes omitted.)
In Manglicmot v Commonwealth Bank Officers Superannuation Corporation (2010) 239 FLR 159; [2010] NSWSC 363, Rein J expressed the following views as to the scope and content of s 52(2)(c) at [51]-[53]:
51	… I do not accept that the trustee is made liable for any outcome which turns out to be unbeneficial to members, even if the original decision which led to that outcome was taken with the best interests of all members in mind. Another way of describing this approach is to say that s 52(2) is concerned with process, not outcome. Mr Rayment’s argument entailed, or came close to, a submission that the trustee was subjected to a regime of strict liability, and I do not accept that the legislative regime intended to create such a radical departure from the existing law. The wording does not suggest such an outcome, and the comments made by the Parliamentary Secretary referred to in Byrne J’s judgment provide no support for such an approach: see Invensys at [102]. 
52	Mr Rayment submitted that one matter encouraging an expansive view of s 52 of the SIS Act was the availability in s 323 of a defence. The defence is based on reasonable mistake, or reasonable reliance on information supplied by another person, default of another person, accident or cause beyond the defendant’s control, and reasonable precautions and due diligence to avoid the contravention. I do not accept that the existence of a defence is relevant to how s 52 is to be interpreted, or if it is, that it is of much significance. The onus is on the trustee to “establish” one or other of the grounds. I do not accept that the task of a plaintiff in establishing “contraventions” is thereby made easier.  
53	In short then, I do not accept that s 52 imposes a higher standard on a trustee than the general law. …
The judgment of Rein J was affirmed on appeal: Manglicmot.  The Court of Appeal did not discuss the above passage from the judgment at first instance.  It was sufficient to conclude that the appellant’s position was not advanced by reliance on the covenant in s 52(2)(c) rather than the general law obligation: Manglicmot at [121]-[122].
In Jacobs’ Law of Trusts in Australia, immediately after the statement that the covenant corresponds with the general law, there is a cross-reference to the paragraph dealing with the duty to act impartially between the beneficiaries: see Heydon JD and Leeming MJ, Jacobs’ Law of Trusts in Australia (8th ed, LexisNexis Butterworths, 2016), [29-21], referring to [17-11].
While the covenant in s 52(2)(c) may be intended to reflect the general law, it is important to keep in mind the differences between superannuation trusts and trusts in other contexts.  As discussed in a number of cases, superannuation benefits are not a matter of mere bounty, but rather a form of deferred remuneration.  This point was made by the High Court in Finch v Telstra Super Pty Ltd (2010) 242 CLR 254, a case concerning a decision by a superannuation trustee as to whether the appellant fell within the definition of “Total and Permanent Invalidity” in a trust deed.  The High Court (French CJ, Gummow, Heydon, Crennan and Bell JJ) said at [33]:
Another aspect of the factual context is that the Deed is dealing with the superannuation of employees.  For some people, superannuation is their greatest asset apart from their houses; for others it is even more valuable.  Different criteria might be thought to apply to the operation of a superannuation fund from those which apply to discretionary decisions made by a trustee holding a power of appointment under a non-superannuation trust.  Employer superannuation is part of the remuneration of employees.  Membership of the employee superannuation fund may be compulsory.  Superannuation, unsurprisingly, is a matter of trade union interest.  The question of superannuation entitlements may form the subject of an industrial dispute within the meaning of s 51(xxxv) of the Constitution.  Superannuation is not a matter of mere bounty, or potential enjoyment of another’s benefaction.  It is something for which, in large measure, employees have exchanged value – their work and their contributions.  It is “deferred pay”.  These are propositions which are not falsified by arguments advanced by the Trustee to the effect that the Death and Total and Permanent Invalidity benefits under the Deed involve in part an element of bounty.  Superannuation is a method of attracting labour.  The legitimate expectations which beneficiaries of superannuation funds have that decisions about benefit will be soundly taken are thus high.  So is the general public importance of them being sound.
(Footnotes omitted.)
This point was also made by Nettle JA (as his Honour then was) in Alcoa of Australia Retirement Plan Pty Ltd v Frost (2012) 36 VR 618.  His Honour (with whom Redlich and Davies JJA agreed) said at [59]:
As the decision in Finch has enabled us better to understand, trustees of superannuation funds are no longer to be conceived of in the same way as custodians of charitable or family settlements through the exercise of whose absolute discretion settlors have chosen to channel their beneficence. The economic, industrial and ultimately social imperatives which inform the advent of the superannuation industry, not to mention that beneficiaries of the kind with which we are concerned in one way or the other invariably purchase their entitlements, are productive of legitimate expectations which the law will enforce. Superannuation fund trustees are bound to give properly informed consideration to applications for entitlements and, if that necessitates further inquiries, then they must make them.
(Footnote omitted.)
Observations on the best interests covenant
Having surveyed the case law, I now make some observations regarding the content of the best interests duty in s 52(2)(c) of the SIS Act.
First, while it may be accepted that s 52(2)(c) was intended to reflect the general law duties of trustees, there may be room for debate as to which general law duties are reflected in the covenant and the scope of such duties.  It may be, as suggested by Byrne J in Invensys, that it is in fact an amalgam of two general law duties.
Secondly, in considering the content of the covenant, it is important to have regard to the superannuation context, as emphasised by the High Court in Finch.  Thus, while the covenant may reflect general law duties, the superannuation context needs to be taken into account in construing the covenant.
Thirdly, the covenant in s 52(2)(c) needs to be considered in the context of the other covenants in s 52.  While there may be overlap between the covenants, it is nevertheless useful to have regard to the matters covered specifically by other covenants.  For example, under the current form of s 52(2), there are covenants:
•	to act fairly in dealing with classes of beneficiaries within the entity (paragraph (e)); and
•	to act fairly in dealing with beneficiaries within a class (paragraph (f)).
In circumstances where these covenants were inserted and the covenant in s 52(2)(c) was retained with immaterial changes, it may be inferred that the covenant in s 52(2)(c) was intended to cover additional ground.
Fourthly, a question arises whether the word “best” adds something.  Accepting that the covenant is intended to reflect the general law, the word “best” may nevertheless give a certain gloss or emphasis to the duty encapsulated by the covenant.  One commentator has suggested that the use of the superlative signifies “that the best possible outcome ought to be targeted while qualified by prudence, as well as reinforcing the additional element of effort, so that any supine attitude on the part of the trustee is to be rejected”: Collins P, “The best interests duty and the standard of care for superannuation trustees” (2014) 88 ALJ 632 at 633.  It may depend on the facts and circumstances.  In some situations, the covenant may operate in much the same way as if it were expressed as a duty to act in the interests of the beneficiaries; in other situations, the word “best” may make a difference, by emphasising that the trustee must do its utmost to further the interests of the beneficiaries.  Nevertheless, as developed below, it is doubtful that the word “best” requires that the best outcome be achieved.
Fifthly, while the covenant may, and perhaps often will, concern decisions that relate to the beneficiaries as a whole, it would seem to be capable of application to decisions that affect an individual beneficiary or a class of beneficiaries.  This would seem to be open on the text of the provision and the legislative materials discussed above do not indicate that the provision cannot apply to such decisions. In a paper presented to this conference in 2007, Professor Geraint Thomas proceeded on the basis that the best interests covenant extends to decisions affecting individual beneficiaries: Thomas G, “Challenging the Exercise of Powers by Trustees” in Donald MS and Beatty LB (eds), The Evolving Role of Trust in Superannuation (The Federation Press, 2017).  For example, he wrote (at 193):
Some duties and powers (eg those relating to the administration of the trust and investment) involve taking action which requires consideration of the best interests of the trust as a whole, but in the light of the different kinds of beneficiaries and objects who have interests and rights under the trust and the different natures of those interests and rights.  Some trusts and powers affect only some beneficiaries or objects (eg powers to distribute trust income, powers of advancement, decisions relating to ill-health pensions) in which case it is their ‘best interests’ that must be advanced.
Sixthly, as already indicated, the way in which the covenant operates will depend on the facts and circumstances of the particular case, and it is difficult to define in advance the precise scope of the covenant.  As Professor Thomas said, in relation to the best interests covenant, “[w]hat this requirement actually means and how it is to be implemented properly depends, of course, on the circumstances of the particular case”: see Thomas G, cited above, p 192.  
Seventhly, while case law in relation to other best interests provisions (such as ss 601FC and 961B of the Corporations Act, and s 7(2)(a) of the Trustee Act 1958 (Vic) and equivalent provisions in other State trustee legislation) may offer guidance, the particular statutory context may affect the construction of those provisions.  For example, subsection (2) of s 961B sets out a series of steps which will be sufficient to satisfy the best interests obligation that applies to the provision of financial advice to a retail client.  There is no equivalent provision in relation to superannuation trustees. Further, the circumstances in which the other provisions call to be considered may well be quite different.
Eighthly, one of the issues that arises is whether the best interests covenant is concerned only with the process of decision-making or whether it is also concerned with the substance or merits of the decision itself.  The latter proposition is not the same as saying that liability is concerned with the outcome of a decision, something that would seem to involve the application of hindsight.  If the test is concerned with the substance of the decision, this would need to be assessed at the time the decision is made, by reference to the facts and matters known and knowable at that time.  Further, the reference to the substance of the decision does not mean that, in a given case, there is only one decision that satisfies the duty to act in the best interests of the beneficiaries.  Depending on the facts and circumstances, there may be a number of alternative decisions that may satisfy the test.  
That the best interests duty is not confined to matters of process but extends to the substance of the decision is supported by Cowan v Scargill.  In that case, as quoted above, Megarry V-C said that: “In the case of a power of investment … the power must be exercised so as to yield the best return for the beneficiaries, judged in relation to the risks of the investments in question; and the prospects of the yield of income and capital appreciation both have to be considered in judging the return from the investment” (at 287).  Later in the judgment (at 294), Megarry V-C said that if trustees make a decision upon “wholly wrong grounds” and yet it subsequently appears, from matters which they did not express or refer to, “that there are in fact good and sufficient reasons for supporting their decision” then he did not think that they would incur any liability for having decided the matter “upon erroneous grounds”, as the decision itself was right.
In a paper presented to this conference in 2007, Justice Stone expressed the view that the principle “as with all other aspects of fiduciary duty, is directed to input not to outcomes”: see Stone M, “The Superannuation Trustee: Are Fiduciary Obligations and Standards Appropriate?” in Donald MS and Beatty LB (eds), The Evolving Role of Trust in Superannuation (The Federation Press, 2007), p 187.  Justice Stone continued: 
It is an aspect of the standard of behaviour that Equity imposes on trustees; it requires them to act in a certain way; to consider all aspects of their duty and to exercise appropriate skill and care. If those requirements are satisfied then it will not follow from the fact that the unexpected happens that the trustee is in breach of his or her duty.
While it may be accepted that liability is unlikely to turn on the outcome of a decision, it does not necessarily follow that best interests covenant is not concerned with the substance of the decision that is made, in the sense described in Cowan v Scargill.
In Manglicmot v Commonwealth Bank Officers Superannuation Corporation (2010) 239 FLR 159; [2010] NSWSC 363 at [51]-[53], set out above, Rein J did not accept that the trustee is made liable for any outcome which turns out to be unbeneficial to members, even if the original decision which led to that outcome was taken with the best interests of all members in mind.  Rein J said that another way of describing this approach is to say that s 52(2) is concerned with process, not outcome.  The same point may be made in relation to this statement.
Interestingly, in the context of the FOFA reforms, the list of matters referred to in subsection (2) of s 961B of the Corporations Act is concerned largely with (what may be described as) matters of process.  Nevertheless, the list includes (at para (g)) that the provider has “taken any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances”, which may be broader than matters of process.
Proposals regarding MySuper and APRA directions
Finally, I mention some of the proposals  contained in the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017 (Cth).  
In relation to MySuper products, the proposed amendments would require each trustee of a regulated superannuation fund to make an annual determination, in writing, as to whether the financial interests of the members in the MySuper product are being promoted by the trustee having regard to a range of factors (proposed s 29VN(1)(b), (2) and (3), explanatory memorandum [2.23]-[2.34]).
The determination would follow a two-step process.
The first step would be for the trustee to make assessments about each of the following matters: 
•	whether the options, benefits and facilities offered under the MySuper product are appropriate to those beneficiaries;
•	whether the investment strategy for the MySuper product, including the level of investment risk and the return target, is appropriate to those beneficiaries;
•	whether the insurance strategy for the MySuper product is appropriate to those beneficiaries;
•	whether any insurance fees charged in relation to the MySuper product inappropriately erode the retirement income of those beneficiaries;
•	whether there are problems of scale in relation to the MySuper product; and
•	any other relevant matters, including those prescribed in the regulations.
The current ‘scale test’ is incorporated into the assessment of whether there are problems of scale in relation to the MySuper product.
The second step would be for the trustee to make a comparison of the MySuper product against other MySuper products using the following metrics:
•	the fees and costs that affect the return of the beneficiaries holding the MySuper products;
•	the return target for the MySuper products;
•	the return for the MySuper products;
•	the level of investment risk for the MySuper products; and
•	any other matter prescribed in regulations.
The determination would be required to be made publically available on the fund’s website within 28 days of the determination being made.
It may be observed that this proposal is concerned with (among other things) outcomes, and would require an assessment to be made after the event.  In this respect, at least, the proposal would seem to go beyond the requirements of the best interests covenant.
Another aspect of the Treasury Laws Amendment (Improving Accountability and Member Outcomes in Superannuation Measures No. 1) Bill 2017 that is worth noting is the proposal to expand APRA’s directions power.  The proposed amendments would give APRA the power to give directions where APRA has “prudential concerns” in certain circumstances (see the explanatory memorandum at [6.12]).  Under the proposed provisions, APRA would be able to issue a direction if it has reason to believe that the direction is necessary “in the interests of beneficiaries” or where the failure to issue a direction “would materially prejudice the interests or reasonable expectations of those beneficiaries” (see the explanatory memorandum at [6.29]).
Concluding remarks
The best interests covenant in s 52(2)(c) of the SIS Act would seem to be intended to reflect the general law duties of trustees of superannuation funds.  But there remain a number of interesting and difficult questions of statutory construction of the covenant, that will need to be resolved in cases on the provision.  Consistently with the general principles described above, the text, context and purpose of the provision will be important in resolving such questions as they arise.