Stronger super insurance challenges
The Government’s recent Stronger Super announcement that it intends to align disability definitions has merit. However, there is more to this than may be understood by its proponents. Phasing out of 'own occupation' TPD arrangements is not only going to cause a significant headache and cost for the industry, it also carries considerable risk. There is also considerable risk that many thousands of members in tailored employer insurance arrangements will lose their current cover, should Stronger Super legislation proceed as currently proposed.
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Alignment of disability definitions
The Stronger Super Information Pack released on 21 September 2011 stated “The Government believes it is in the best interests of members to align insurance definitions with the conditions of release so that insurance is consistent with the purpose of superannuation and that insurance monies are available to members at the time of their disability.” This means there must be a phasing out of 'own occupation' TPD definitions. Before this occurs, serious attention and consideration needs to be given to what this means for affected members’ cover, and to what alignment is appropriate. It would be fairly safe to say the trust deeds of most of the larger accumulation funds now have their fund’s TPD definitions aligned to the fund’s insurance policy definition, to avoid any discrepancies at claim time. However, this has only ever been half of the exercise in determining if the claiming super fund member should be paid the benefit. The other half being the need for Trustees to ensure, prior to the member’s 'preservation age', that the condition for release of a superannuation benefit due to permanent incapacity is met. The relevant definition of permanent incapacity under SIS Regulation 6.01 (2) is as follows: "permanent incapacity, in relation to a member, means ill‑health (whether physical or mental), where the trustee is reasonably satisfied that the member is unlikely, because of the ill‑health, to engage in gainful employment for which the member is reasonably qualified by education, training or experience.” It would be far less safe to say all funds take the further step of ensuring a claiming member meets this permanent incapacity definition, once the Trustee board has determined whether or not it agrees with the insurer’s determination and prior to paying a benefit to the member. The most commonly seen base definition of TPD in the group insurance policies of superannuation funds is similar to, though rarely the same as, the SIS permanent incapacity definition. However, there are also a substantial number of policies, owned by sometimes sizeable superannuation funds, with the 'own occupation' definitions the Government is intending to eliminate. It is unclear if the Government also intends for definitions of total and temporary disablement to be aligned with the definition of temporary incapacity. After all the recent work which has been undertaken in determining the percentage of premiums for TPD cover under superannuation which would be tax deductible, across the various definitions, the Government has announced its intended banning of 'own occupation' definitions just prior to issuing regulations on the deductible percentages of that type of cover. This seems odd to say the least. Alignment of definitions makes sense, and trustees have readily recognised the need for this between their trust deed and their insurance policy. The Government recognises insurance policy 'own occupation' definitions are more expensive than 'own or any occupation' definitions and are not always payable if the member is under their 'preservation age'. What it seems not to have recognised, however, is the impact this change will certainly have on members currently covered under 'own occupation' definitions when they are removed. In the best interest of members?...would make an interesting test! Many of these members will have paid higher premiums for such definitions for many years and, in the meantime, the one certainty is that their insurability is likely to have lessened since their cover commenced. They may not be able to secure, or afford, replacement cover outside super. Tailored insurance in employer plans Stronger Super will almost certainly have an adverse effect on the members of the thousands of employer sub-plans in multi-employer superannuation funds (including industry funds and master trusts) and stand-alone corporate funds, with specially negotiated insurance arrangements. The Government has announced funds will have the flexibility to offer employers with more than 500 employees a MySuper product tailored to the needs of the particular workplace in respect of investment strategy, member services and fees. Separately, it has announced it will be possible for a MySuper product to have a default insurance strategy tailored to the needs of the employees of a particular employer. However, what is missing is consideration of the potential impact on the many thousands of members of existing special employer insurance arrangements, many of which will have less than 500 employees, and different benefit designs for different categories of employees. The loss of these members’ current cover, coupled with those impacted by the proposed definition changes is well likely to be one of the biggest single issues to come out of MySuper. If only insurance in superannuation had received the attention it deserved earlier! And, if only the ramifications of the proposed legislative changes on insurance were better understood by the proponents. The Government has indicated it will continue to consult with the industry between now and mid-2012. Let’s hope it gains a better appreciation of the issues in that time.
Rhonda Virtue |
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