One of the recommendations of the Hayne Royal Commission was for Treasury to investigate whether to set standard definitions, terms and conditions for default MySuper group life insurance, including Total and Permanent Disability (TPD) insurance.
The review is to look at possible minimum and maximum levels of cover and the potential effect changes could have on premiums, which could, in turn, affect retirement incomes.
Death and TPD insurance must be offered as default cover with MySuper products, whilst income protection insurance is optional.
Insurers offer policies on set terms with little or no room to negotiate variations. Consumers for their part have pre-conceived notions of what is insured. With MySuper, they rely on trustees.
Whilst trustees should have a more nuanced understanding of life insurance, they have obligations to the membership as a whole and price pressures which may translate to lowest common denominator cover.
Commissioner Hayne rightly said that the value of an insurance policy is tied to the breadth of its terms and conditions. Evidence before the Commission was that they varied widely and with members often in a knowledge vacuum.
Standard terms and conditions could serve to better match benefits with member expectations and retirement incomes and enhance consumer knowledge.
Some TPD definitions are too narrow
The definition that has attracted the most attention is TPD. Currently, the law requires that a MySuper TPD benefit must be consistent with the "permanent incapacity" definition in the Superannuation Industry (Supervision) Regulations; ie, a permanent incapacity to do your usual occupation or any other suitable work with your education, training or experience.
However, in practice, some MySuper TPD definitions have adopted much narrower definitions.
A worrying trend has been to apply an Activities of Daily Living (ADL) definition to members in "high-risk" occupations; ie, an inability to perform basic activities such as eating, bathing, dressing, toileting and transferring to bed/chair without assistance.
Only a handful of superannuation fund members whose working lives are cut short because of injury/illness would satisfy an ADL definition, thereby disenfranchising many from permanent incapacity benefits, usually without any premium differentiation. Hardly value for money.
This drift away from the legislative permanent incapacity definition must be reined in. However, the current permanent incapacity definition does need reconsideration.
The Productivity Commission, in its December 2018 report on the efficiency of superannuation, noted that the objective of TPD insurance benefits in superannuation was "to insure[s] against the risk that a member's accumulation phase is cut short."
A criticism of the current definition is that some claimants were paid TPD benefits despite returning to regular work, perhaps after some retraining.
This led funds such as Australian Super and 4Super to renegotiate contracts with TPD definitions including an incapacity to do work the member could be reasonably retrained in.
Such retraining clauses remain true to the objective of TPD insurance in superannuation to "top up" accumulation phase contributions but exclude payments if a person is likely to return to work and resume the accumulation phase.
An amendment could also temper affordability problems which have plagued the industry in the last few years and led to concerns about excessive account erosion.
It would be important for a retraining clause to be subject to a “reasonableness test” to ensure the retraining is within the person's abilities and is reasonably available.
It could also be accompanied by a limited offer of assistance with retraining/rehabilitation to ensure it is a practical assessment and not purely theoretical.
All must be subject to a rigorous code of practice.
A standard MySuper TPD definition which includes a retraining clause with limited assistance for retraining/rehabilitation is good policy. It is consistent with the objective of TPD insurance in superannuation as an affordable top-up to retirement incomes whilst also reducing the risk that the accumulation phase is cut short, by promoting rehabilitation and retraining.
This article was written by John Berrill - Principal at Berrill & Watson Lawyers. It was originally published online at Conexus Financial.