The Federal Government has released its Stronger Super recommendations, indicating it will investigate standardising the definition of insurance cover within superannuation.
In the Stronger Super information pack, released on 21 September, the Government outlined plans to legislate the definitions of life, total and permanent disablement (TPD) and income protection insurance, and that policy definitions within superannuation will have to align with these definitions.
Specifically, the Government will put an end to insurance cover that does not meet a condition of release, preventing a payment being made to the member (for example: TPD Own Occupation cover).
According to the Government… ‘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.’
Further consultation will be sought from the industry on:
- The definitions to be incorporated into the legislation
- A timeline for the phasing-out of existing policies that are inconsistent with the legislated definitions, and
- An approach to ensure that the policy terms are disclosed in a standard way
Other insurance reforms outlined in the package include:
- A requirement for all APRA-regulated funds to offer life and TPD cover on an opt-out basis, where opt-out must be allowed within the first 90 days, and on the anniversary, of the member joining the fund
- The option for trustees to include income protection or group salary continuance insurance inside super at their own discretion
- A requirement for all MySuper products to offer a standard, default level of life and TPD cover, however it will be possible for employers to specify a tailored insurance strategy if it is in the best interests of its employees
Industry Response to the Reforms
The response from industry bodies and associations has been largely positive, with most praising the Government for making improvements to the original reforms package.
However, the Government’s decision to automatically consolidate super funds with balances of less than $1,000 (unless the member opts-out) raises questions over the impact this may have on a member’s existing insurance cover.
The Corporate Super Specialists Alliance (CSSA) cautioned that members who are forced by the Government to leave their low-fee corporate super plans will lose the insurance policies they already hold. The insurance cover could include important benefits such as salary continuance which the member may not be able to replace.
“These are low cost policies with superior benefits, thanks to group insurance rates and other benefits and discounts negotiated by corporate super specialists,” said CSSA President, Douglas Latto.
“The other problem is that with members leaving corporate super plans en masse, the cost of insurance policies for members remaining in the fund will have to increase. That’s obviously a poor outcome for those who stay, as well as for those who go.”
The CSSA was also worried about consumer complacency, calling MySuper a ‘dumbed-down’ approach to superannuation.
Similar concerns were raised by the Financial Planning Association (FPA), which argued that MySuper would deliver a false sense of security to Australians. FPA CEO, Mark Rantall, said: “It is obvious that MySuper, with a potential benefit of $40,000 at retirement, will not meet the retirement income needs of the majority of Australians.
“Retirement income adequacy is the real issue in superannuation, which MySuper fails to address and could, in fact, damage.”
