Australia: Post-retirement default investment strategies: a ticking bomb for trustees?

Last Updated: 10 December 2012
Article by Jane Paskin and Sonia Lopes

Key Points:

Trustees who use the same default investment strategy for post-retirement as for pre-retirement accumulation products could be sitting on a ticking time bomb.

The "sole purpose test" in the Superannuation Industry (Supervision) Act (SIS Act) requires superannuation trustees to maintain their fund solely to provide retirement and death benefits (and some ancillary benefits) to members.

However, while most trustees have good processes for investing members' benefits during the pre-retirement (accumulation) phase, they have paid less attention to the post-retirement phase.

One concern is that most trustees use the same default investment strategy for post-retirement as for accumulation products. Rice Warner has found that most trustees have not even considered designing an appropriate default fund for retirees.

This could be a ticking time bomb for trustees.

The importance of default options

Default options are very important for retirees:

  • default options are overwhelmingly the most common investment strategy used, for many reasons including difficulties in engaging and educating members about superannuation and general decision-making inertia;
  • members often see default options as a trustee "endorsement". This particularly affects older retirees when the quality of their decision-making decreases; and
  • trustees are seen as best-placed to ensure optimal retirement outcomes because they understand the risk profile of the overall fund membership and of specific membership sub-groups. This was recognised by the Cooper Review.

Can't you simply use the same default option for pre- and post-retirement products?

Using the same default option for both pre- and post-retirement products may not be optimal for retirees. Retirees face issues that either those still working do not, or that impact more heavily on retirees. For example:

  • Longevity risk — the risk that a person outlives their savings or must draw lower pension payments and become frugal;
  • Inflation risk — inflation dilutes fixed incomes in real terms;
  • Capital losses and volatile investments —many retirees are risk averse and want "peace of mind";
  • Liquidity risk/uncertain expenses —it is virtually impossible to predict individual health expenses;
  • Bequest motives — many retirees wish to leave money to their children or favourite charity;
  • Mental faculties — retirees may not be able to manage money adequately in later life; and
  • Legislative risk — superannuation, taxation and pension rules are constantly changing.

Further, individual retirees regard each risk differently. Those with retirement balances under $250,000 don't have sufficient assets to fund themselves to their life expectancy, let alone to an advanced age. They must necessarily focus on liquidity risk, not longevity risk. More complex considerations are required for those with balances above $250,000. Those with balances over $750,000 should be able to live off their investment earnings and draw down capital only later in life.

Accordingly, the use of a single default option not only insufficiently handles the particular issues facing retirees, but also implicitly combines highly individual investment needs and aspirations into an "average" strategy.

Trustee duties impacting on investment strategy

Currently, the SIS Act effectively requires a superannuation trustee to implement an investment strategy that considers the whole of the fund's circumstances, including certain prescribed circumstances (Investment Covenant).

The SIS Act and the general law also require a trustee to:

  • exercise the same degree of care, skill and diligence as an ordinary prudent person would exercise in dealing with the property of another person for whom they felt morally bound to provide;
  • exercise their powers in beneficiaries' best interests; and
  • treat different classes of beneficiaries fairly.

Section 55(5) of the SIS Act provides a defence to an action for loss or damage in relation to an investment, if the trustee can show that the investment was made in accordance with an investment strategy formulated under the Investment Covenant.

Under the Stronger Super reforms, trustees will have to:

  • exercise the same degree of care, skill and diligence as a prudent superannuation trustee would exercise (which is a higher standard than the ordinary prudent person test described above);
  • review and give effect to an investment strategy for each investment option;
  • exercise due diligence in developing, offering and reviewing each investment option; and
  • ensure investment options are adequately diversified.

In addition, a trustee will have to establish they have complied with all relevant covenants and MySuper obligations (not just the Investment Covenant) to access the section 55(5) defence.

New duties on trustee directors

The Stronger Super reforms will also require trustee directors to:

  • exercise the same degree of care, skill and diligence as a prudent superannuation entity director would exercise;
  • perform and exercise the director's duties and powers in the best interests of the beneficiaries; and
  • exercise a reasonable degree of care and diligence to ensure that the corporate trustee carries out its duties under the SIS Act.

These changes will hold trustee directors to a higher standard than currently.

A person who suffers loss or damage because a director contravened these obligations may bring an action against the director, or any other person involved in the contravention, within six years after the day the cause of action arose. However, under the proposed Stronger Super reforms, a person will need to seek the Court's leave to bring the action. The Court must take into account whether the person bringing the action is acting in good faith and whether there is a serious question to be tried.

The defence under section55(5) (as amended and as discussed above), applies to such an action.

Complying with trustee duties

It is possible that a retired member (or a group of retired members in a class action) could argue that the failure to have a separate post-retirement default strategy constitutes a failure to give effect to an investment strategy that has regard to the whole of the fund's circumstances.

This argument could be successful, given that retirees face different issues to accumulation members. If so, the trustee may not have the defence under section55(5) available to it, on the grounds that it did not consider one of the fund's relevant circumstances.

Once the Stronger Super reforms apply, a member, or group of members, could argue that the trustee had failed to meet its duty to:

  • exercise the required degree of care, skill and diligence;
  • exercise its powers in the best interests of beneficiaries; and
  • treat different classes of members fairly.

If the trustee fails to meet just one of those duties, the defence under section55(5) falls away.

Also, importantly, the individual trustee directors will be subject to their new duties and will be directly and personally liable to fund members that suffered investment loss where the trustee directors breached those duties.

The Directors and the Trustee would need to consider whether a defence under section 323 of the SIS Act was available to them.

Way forward

The Stronger Super reforms will hold trustees and corporate trustee directors to higher standards. Trustee directors must be on their toes in relation to the post-retirement space to ensure compliance with both current and future duties.

You might also be interested in...

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.