Darryl Pereira, Helen Mentiplay and Aimee Thompson | May 2012 | Insurance & Financial Services
The recently released exposure draft Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Bill 2012 (draft Bill) includes key details regarding the provision of insurance benefits to members of a regulated superannuation fund. Unfortunately the draft Bill does not make clear the extent to which group insurance policies will need to adopt insurance definitions that are identical with the relevant conditions of release.
Who does this impact? Group life insurers and trustees of a regulated superannuation fund.
Key provisions 1. Default insurance for permanent incapacity and death
The draft Bill introduces a new section 68AA to the Superannuation Industry (Supervision) Act 1993 (SIS Act) to apply to regulated superannuation funds which provides that each trustee of a regulated superannuation must ensure:
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(a) that the fund provides a benefit, to each member of the fund, that is payable only if the member is suffering permanent incapacity; (b) that the fund provides a benefit, in respect of each member of the fund, that is payable only in the event of the death of the member.
Regulated superannuation funds will be required to offer these benefits for each member by taking out an insurance policy. Failure to do so will be a breach of a condition of the trustee’s RSE licence.
The term ‘permanent incapacity’ referred to in proposed section 68AA(1)(a) will be defined in the SIS Act by reference to how it is currently defined in the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations), namely:
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. The requirement to provide default death and permanent incapacity cover will not apply to eligible rollover funds, self-managed super funds or defined benefit funds.
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2. Reasonable conditions can apply to the provision of a death and TPD benefit
The draft Bill provides that a trustee may determine ‘reasonable conditions’ to which the provision of a permanent incapacity or death benefit is subject. Significantly, proposed section 68AA(4) of the draft Bill sets out that conditions determined by a trustee in relation to a benefit are reasonable ‘if they are the same as the terms and conditions of the policy of insurance taken out to provide the benefit.’ A trustee is not required to provide a death or permanent incapacity benefit if the reasonable conditions determined by a trustee are not met by a member of the fund. The conditions that apply to life and permanent incapacity insurance can be different.
3. Opt out requirement
A trustee of a regulated superannuation fund must ensure that each member of the fund may elect to opt out of either or both of life and TPD insurance unless they are MySuper members and the circumstances that are to be prescribed by the regulations are met. It is also proposed that the regulations will provide an exception to the opt-out requirement where a trustee is unable to obtain opt out insurance at a reasonable cost.
4. Types of benefits The SIS Act will be amended to introduce a new operating standard to regulated superannuation funds that will prescribe: (a) the kinds of benefits that must not be provided by taking out insurance, or insurance of a particular kind; and (b) the kinds of benefits that must not be provided other than by taking out insurance, or insurance of a particular kind.
It is proposed (but not yet drafted) that one operating standard will limit trustees to only taking out risk insurance policies for insured benefits that satisfy the conditions of release in the SIS Regulations for death, terminal medical condition, permanent incapacity and temporary incapacity. The other operating standard that will be made will be to prohibit funds (with some exceptions) from providing insured benefits of this nature unless backed by an insurance policy. The proposed commencement date in the draft Bill for the above key provisions is 1 July 2013.
Analysis The form of the draft Bill is unsurprising in as much as it requires a trustee to provide default life insurance and TPD cover insurance to members on an opt-out basis. Similarly it was expected that group insurance policies would need to provide TPD cover that was aligned to the permanent incapacity condition of release, and therefore TPD definitions such as an ‘own occupation’ TPD definition, would no longer be permissible.
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Third Tranche of Stronger Super Legislation Darryl Pereira, Helen Mentiplay and Aimee Thompson | May 2012
Regrettably the draft Bill does not expressly indicate whether group insurance policies will need to adopt a standard TPD definition identical to the definition of ‘permanent incapacity.’ However, the wording in the draft Bill permitting trustees to apply ‘reasonable conditions’ to the provision of a permanent incapacity benefit suggests that the TPD definition in a group insurance policy need not replicate the definition of ‘permanent incapacity’. The Explanatory Memorandum to the draft Bill gives examples of ‘reasonable conditions’ as ‘working a certain number of hours per week; the member accruing a particular balance; or a member or their employer making a certain level of contributions in a specified period.’ These examples have the character of eligibility conditions. To the extent that the ‘reasonable conditions’ a trustee can impose on the provision of a TPD benefit is intended to be limited to eligibility for TPD cover, the draft Bill appears to have confused the distinction between eligibility for cover and eligibility for a benefit. The wording of
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the draft Bill would entitle ‘reasonable conditions’ to be imposed within a TPD definition provided that the TPD definition used is capable of meeting the permanent incapacity test. In other words group insurance policies could continue to have TPD definitions that are more difficult to satisfy than the ‘permanent incapacity’ test. For example a cumulative TPD test that requires satisfaction of a waiting period and the definition of permanent incapacity would, on this reading of the draft Bill, still be allowed in group insurance policies. Hopefully the yet to be released operating standards will clarify the extent to which the draft Bill seeks to prescribe a standard definition for TPD. The Explanatory Memorandum outlines that the operating standards will further define what kinds of insurance benefits can be offered within superannuation, including income protection insurance, which was not dealt with in the draft Bill. The Explanatory Memorandum also indicates that the operating standards will provide details regarding a transition period for the phasing out of benefits within group insurance policies that are not consistent with the definitions used in the conditions of release in the SIS Regulations. This will be of great interest given that phasing out of benefits may have an adverse impact on the insurance cover of existing members.
For more information, please contact:
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Third Tranche of Stronger Super Legislation Darryl Pereira, Helen Mentiplay and Aimee Thompson | May 2012
Darryl Pereira Partner T: 02 8257 5718 M: 0418 223 798 darryl.pereira@turkslegal.com.au
Helen Mentiplay Senior Associate T: 03 8600 5604 M: 0409 043 642 helen.mentiplay@turkslegal.com.au
Aimee Thompson Lawyer T: 02 8257 5700 aimee.thompson@turkslegal.com.au
We will provide an update on the proposed operating standards when they are released.
www.turkslegal.com.au Syd | Lvl 29 Angel Place, 123 Pitt St, NSW 2000 T: 02 8257 5700 | F: 02 9239 0922 Melb | Lvl 10 North Tower, 459 Collins St, VIC 3000 T: 03 8600 5000 | F: 03 8600 5099