Need to know
- The complicated process of nominating beneficiaries in super is flawed and may not work well for blended families
- Super Consumers Australia is calling for a review of this process to simplify it and ensure it operates fairly
- In the first of a multi-part series, we look at improving the process of death benefit nominations in super
In the last financial year, the Australian Financial Complaints Authority (AFCA) received 366 complaints about death benefit nominations in super. It's the third-most complained about area in super, behind account administration and insurance.
And behind each complaint there is stress for those involved, such as pressure on relationships or tension between family members.
Disputes can also leave those who might be relying on the money out of pocket while they wait for the process to be completed.
Making a death benefit nomination
A death benefit nomination directs where any leftover super goes when you die. Nominations can be binding or non-binding.
- In a binding nomination, the super fund has to follow your wishes.
- In a non-binding nomination, the super fund has discretion over where to distribute the money.
Nominations can also be lapsing or non-lapsing.
- Lapsing nominations expire after three years and the member has to renew them for them to remain valid and binding.
- Non-lapsing nominations don't expire.
When a nomination isn't binding, has lapsed, or isn't valid for any reason, the fund has some discretion over who gets the money.
Not everyone can be a beneficiary
"The biggest mistake people make in this area is thinking that they can give their super to whoever they nominate as beneficiaries," says Dr Natalie Peng, lecturer in accounting at the University of Queensland.
You can only give your super to certain types of people, namely your spouse (or de facto spouse), your children or someone with whom you have an interdependent relationship.
One way a nomination can go wrong is when someone wants to leave their super to a person not in this group, such as a friend or sibling.
The biggest mistake people make in this area is thinking that they can give their super to whoever they nominate as beneficiariesNatalie Peng, University of Queensland
There is a workaround – you can leave your super to your estate, where it becomes part of your will. In this case, it can go to a broader range of people, including people outside the allowed list of beneficiaries in your super. But, as we'll see later in this series, making your super part of your estate has its own complications and drawbacks.
As Peng explains, it's possible to join a super fund without ever completing a nomination form, or a super fund may not check that a nomination is valid. In both cases where there is no valid nomination the fund would be responsible for distributing the funds as they see fit.
"I think it would be good to check for validity at the time the members create the nomination," Peng says.
Pros and cons of binding death benefit nominations
Not all super funds offer binding death benefit nominations. In that case, a fund still has to follow the relevant law (and its own trust deeds) when giving out the money – it's not the case that they can send it wherever they please.
But this may not give peace of mind to someone hoping to control where any leftover super ends up.
Peter Christensen, honorary lecturer at the Australian National University College of Law, believes all funds should allow their members to make binding nominations.
There may be very good reasons why the person who's passed wants to make sure certain assets (or more assets) go to certain people based on need or family historyPeter Christensen, ANU College of Law
"I always advise my students to advise their clients to do a binding death nomination… if you want to guarantee where your super goes," he says.
Mark Tanner, an associate lecturer at the University of Queensland, says a situation where a member can't make a binding nomination is particularly disadvantageous for blended families.
"There may be very good reasons why the person who's passed wants to make sure certain assets (or more assets) go to certain people based on need or family history."
Binding nominations can lapse into non-binding nominations
Binding nominations generally lapse after three years and become non-binding unless they are updated. The reason for this is that relationships or circumstances may change, and a person's nomination may no longer reflect where they want their remaining super to go.
Many people forget or don't know they need to update their nomination, meaning they lose the ability to dictate where their super goes when their lapsed binding nomination becomes non-binding.
Another potential problem is that relationships end or begin, or the member's family circumstances change and the nomination no longer reflects their wishes.
"There's a real risk, with binding nominations, that they don't get varied (when a member ends or starts a relationship). And yet, the whole thing changes," says Christensen. "One would hope someone would get legal advice when they start a new relationship, but it's easy to forget to do this stuff."
Should funds have discretion on where to send money?
There are two schools of thought on the question of whether funds should have a say in the matter. One argument is that super is your money, and you should be able to leave any remaining funds to whoever you like. The other is that it's valid for the fund to have some role in distributing the money as this is in line with the purpose of a death benefit.
Josh Mennen, a spokesperson for the Australian Lawyers Alliance, highlights the potential problem of nominations not reflecting the member's wishes when they die.
The intention of these benefits is that they go to the family or other dependents who would have relied on the deceased for financial supportJosh Mennen, Australian Lawyers Alliance
"Many people assume that a fund member's death benefit nomination should be sacrosanct as the highest priority for a trustee in distributing the benefit, but in reality this approach would result in many unjust distributions to people who no longer depended on the member at the time of death," he says.
Mennen says super funds should first look to direct money to those who depended on the member who died for continuing financial support. However, some funds have rules that bind them to preference the member's estate ahead of the beneficiaries, which he says "can be contrary to the purposes of super benefit distributions."
"It's valid for trustees to exercise oversight of the distribution of death benefits as the intention of these benefits is that they go to the family or other dependents who would have relied on the deceased for financial support," Mennen continues.
How funds determine the nature of a relationship
Mennen has acted in cases where adult children from a person's first marriage argue that the later spouse and the member who died weren't in a genuine, long-term relationship and thus shouldn't be getting their super.
Mennen says a relationship can't be judged for these purposes solely based on how long it lasted. Duration is "one factor of many when considering whether there was a genuine commitment to a serious relationship with long-term prospects", he says.
Prue Vines, a professor at the Faculty of Law, University of New South Wales, says it's difficult to determine whether the person making the nomination in relation to a de facto spouse knows the implications of the nomination. Alternatively, she says, they may be "in the throes (of a relationship) and not thinking straight when they nominate that person."
There are issues to consider around de facto relationships and whether they should automatically be put on the same footing as marriages
Ultimately, it's difficult for a super fund (or a tribunal or a judge) to work out the exact nature of a relationship. "Who are we to judge matters of the heart?" says Vines.
There are issues to consider around de facto relationships and whether they should automatically be put on the same footing as marriages. A couple may have chosen to not get married, explains Vines. "Or you could be a de facto who wanted to be married when the partner wouldn't. Such status is sometimes a matter of who had the power in the relationship, so it is difficult to know how to look at these relationships," she says.
Case study: Short-term relationship found to be de facto
A recent Federal Court case illustrates how these disputes can arise and are resolved. In this case, the member met his wife while undergoing chemotherapy. He returned to hospital the day after they were married. They were married less than six months when he died.
There was evidence the member made a non-binding death benefit nomination for half his super to go to his sister and half to his brother.
However, the late member's wife applied to receive all his super, and the fund agreed.
The member's two siblings challenged this decision at the tribunal and later the Federal Court, but were unsuccessful both times.
The siblings had argued the marriage was short-term, and she was aware of his short life expectancy when they married. They also argued they were in an interdependent relationship with the deceased, as they lived together, and it was custom in their culture for the oldest child to look after any younger siblings.
Ultimately, however, the fund's trust deed favoured a payment to the member's spouse and the fund was bound to follow this rule.
The judge followed the tribunal in outlining how these cases are decided: "The question as to whether a decision was unfair or unreasonable cannot be judged otherwise than by having regard to the conformity of the decision with the governing rules of the fund and the terms of the policy."
"I think there'd be a good deal of support for a simplification and a higher degree of uniformity across fund rules which can be confusing," says Mennen.
Both Mennen and Peng noted that trust deeds (which have rules on how to distribute the death benefit) can vary considerably from fund to fund.
Vines also sees value in simplifying the process; her preference is for a single nomination form that offers binding and non-lapsing nominations. This could be changed by the member but wouldn't lapse without them noticing, she explains.
Time for a review?
As we've seen in this article, there's a lot of complexity around death benefit nominations and little clarity on how to improve the process.
One potential way to simplify the process would be to make any remaining super part of the person's estate. But, as we'll see in part two of this series, this has its own problems.
"I've got no doubt (fund) trustees are trying to do their best (when making decisions where there are non-binding nominations]," says Christensen. "But it is quite tricky."
The nomination process is currently extremely complex and puts a lot of onus on members to get it rightFranco Morelli, Super Consumers Australia
Christensen says he would "absolutely" support an independent review of the nomination process to see if it could be improved.
Peng says fund governance has improved in recent years, but she believes an independent review into the death benefit nomination process could help prevent disputes.
Super Consumers Australia policy manager Franco Morelli agrees with the experts that there's value in an independent audit of the nomination system.
"The nomination process is currently extremely complex and puts a lot of onus on members to get it right. A review could determine how we can simplify and improve the process to give Australians peace of mind about what happens to any super they have left over."
This content was produced by Super Consumers Australia which is an independent, nonprofit consumer organisation partnering with CHOICE to advance and protect the interests of people in the Australian superannuation system.