- Can trustees invest based on personal preferences and beliefs?
- What are a member’s best interest?
- Is a failure to invest trust money correctly a breach of trust?
Recent media reports suggest that the Retail Employees Super Trust (REST) reached an out of court settlement with a litigant who wanted to force the REST trustees to take climate change seriously.
It has been claimed that REST agreed that it should commit to net-zero emissions by 2050 for its investments.
How trustees invest members’ money has always been a tricky issue and is clearly about to become more difficult. It has been a long standing trustee obligation that they should invest monies in their beneficiaries best interests. The government plan to change this to be members’ best financial interest.
If the purpose of a trust is to provide financial benefits then the beneficiaries’ best interests are “normally their best financial interests”.
For some investors, taking into account climate change issues will be of fundamental importance when investing their retirement monies while others take an opposite view.
In my book, The Essential SMSF Guide 2020/21 (published by Thomson Reuters) I discuss this investment issue by looking at a famous UK Court case:
How does a superannuation fund trustee determine what their beneficiaries’ best interests are? The courts have addressed this issue. Arguably the most famous decision involves Arthur Scargill who for many years was the leader of the United Kingdom National Union of Mineworkers (NUM) and also a NUM representative trustee for the mineworkers’ pension fund. During the 1980s, Scargill led massive and prolonged coal miners’ strikes in an attempt to overthrow the Thatcher government.
In 1983 all the NUM trustees of the mineworkers’ pension funds refused to approve investments which contained exposure to international and coal-competing assets. They argued that such investments were “to the detriment of coal and would be against the interests of the … beneficiaries”.
All the pension funds’ employer trustees disagreed. After much argument between both sides the employer trustees sought a judicial resolution of the resulting stalemate.
The following points contain extracts from Cowan v Scargill  Ch 270 which are highly relevant to the understanding of what is meant by the beneficiaries’ best interests:
- if the purpose of a trust is to provide financial benefits then the beneficiaries’ best interests are “normally their best financial interests”. A trustee’s power to invest trust monies “must be exercised so as to yield the best return for the beneficiaries, judged in relation to the risks of the investments in question”. The likely income and capital appreciation must be used to assess the return from an investment;
- “Trustees must not refrain from making the investments by reason of the views that they hold”;
- “Trustees may even have to act dishonourably (though not illegally) if the interests of their beneficiaries require it”;
- it may be that in a trust all the actual and potential beneficiaries are adults “with very strict views on moral and social matters, condemning all forms of alcohol, tobacco and popular entertainment, as well as armaments”. In the unlikely event this occurs it may not “benefit” these beneficiaries to know that they are obtaining a larger financial return because the trust has some investments which they would find objectionable. These beneficiaries may believe that it would be better to receive less than to receive more from what they consider to be evil and tainted sources. “I would emphasise that such cases are likely to be very rare, and in any case I think that under a trust for the provision of financial benefits the burden would rest, and rest heavily, on him who asserts that it is for the benefit of the beneficiaries as a whole to receive less by reason of the exclusion of some of the possibly more profitable forms of investment”.
The judge in the Scargill case approvingly cited the findings of Buttle v Saunders  2 All ER 193 in which a property had to be sold and the trustees involved in Buttle had accepted an offer, but the actual sale had not been completed when another higher offer was made. The trustees rejected the later offer because they felt honour bound to accept the first lower offer. The judge in the Scargill case said, “The duty of trustees to their beneficiaries may include a duty to “gazump” however honourable the trustees”, in relation to Buttle v Saunders.
It would seem therefore that trustees need to put their personal views and ethics to one side when deciding how their trust monies are invested and therefore act in their beneficiaries’ financial best interests.
Polling over a period of time has shown that while the majority of Australians believe humans are causing the planet to warm and the climate to change, they remain remarkably reluctant to pay more than a very small amount to reduce their emissions.
And trustees must act impartially between members and their various interests. Jacobs’ Law of Trusts in Australia (a book referred to very often in court cases involving all trusts including super funds) says at paragraph 18-11 in its 8th edition that when exercising their power to invest beneficiaries’ money trustees must hold “the scales impartially. It is not enough merely to avoid harming them.”
Somehow out of all this trustee of all super funds need to find a way to keep everyone happy including their lawyers!