TOTAL AND PERMANENT DISABILITY INSURANCE AS A SUPERANNUATION BENEFIT

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1 TOTAL AND PERMANENT DISABILITY INSURANCE AS A SUPERANNUATION BENEFIT ABOUT IUS (INTERNATIONAL UNDERWRITING SERVICES PTY LTD) IUS is a major provider of income replacement insurance to the Australian market. Coverage is provided to members of Superannuation Funds and employer sponsored plans. Claims are acknowledged with 24 hours of lodgement and benefits are usually paid within 28 days of lodgement. SCOPE OF SUBMISSION This submission is limited to superannuation related, permanent disablement entitlements arising through injury or illness but not including those covered by workers compensation insurance. Currently the payment of total and permanent disability benefit (TPD) is classified as an ancillary benefit (s 62(1)(b)(ii) Superannuation Industry (Supervision) Act 1993 ( the SIS Act). IUS supports TPD insurance as being a requisite offering, along with death cover, in order for funds to qualify under s32c of the Superannuation Guarantee (Administration) Act This should be introduced by an amendment to section 32C(2)(c) of that Act adding the words or permanent incapacity. The submission also recommends consideration be given to a fundamental change in approach towards the way in which TPD cover is offered. It is assumed that work related injury or illness are matters for State and Federal workers compensation legislative coverage. While it is acknowledged that there may be some problems posed in the relationship between workers compensation coverage and superannuation entitlements that is peripheral to the main thrust of this submission and is not a topic we have addressed. PRESUPPOSITIONS This submission presupposes the following propositions: in a Superannuation Scheme which gives universal coverage for all employees, an adequate retirement benefit should be available to all including those who suffer disablement; and default income replacement insurance cover should be an essential element of a compulsory superannuation scheme; and the member is not suffering a terminal medical condition where different considerations arise ( as provided for in Reg. 6.01A of the SIS Act Regulations); and the term permanent incapacity of a member means that. the trustee is satisfied that the member is unlikely to be able to engage in gainful employment because of physical or mental ill-health for which the member is reasonably qualified by education, training or experience.(regulation 6.02 of the SIS Act Regulations) permanent incapacity is referred to as TPD in this submission; and a waiting period of six months is usually imposed in insurance policies as a term before payment of a TPD benefit can be made. This is to permit time for the illness to settle so that permanence can be assessed. Anecdotally, we believe the industry average actual time elapse before payment of TPD benefits is 11 months or more. An income replacement insurance policy generally operates after a thirty (30) day waiting period.

2 CURRENT TPD INSURANCE COVER The SIS Act Regulations in Schedule 1 item 103 provide that upon a member becoming TPD then he/she is entitled to payment of their accumulated contributions including any insured portion. This results in a lump sum payment which is currently tax free. Premiums for TPD insurance are determined on actuarially calculated risks. Obviously in cases of industries where there is high risk of injury the premium is likely to be greater than in a low risk industry. Historically the benefit has been paid on a sliding scale with maximum payments being made at a younger age with decreasing payments from about the age of 40 years It was generally supposed that younger members would need larger payments because of a lack of accumulated assets ( including insufficient contributions) to meet expenses. By the age of 40 years accumulated superannuation benefits and other assets were assumed to be sufficient to offset the need for payment of the maximum insured TPD benefit.

3 DISADVANTAGES OF THE CURRENT TPD BENEFIT SYSTEM The application of these assumptions has been questioned in recent years. In particular research results provided at the 2008 Superannuation and Insurance Forum (organised by AIST) demonstrated that demographic and economic circumstances no longer supported a universal one size fits all approach. Additionally uncertainty exists over whether lump sum income replacement benefits should remain tax free. Lump sum payments, even in those cases where the maximum is paid, is proving inadequate to meet all but immediate costs and, in many cases, an inability to do even that. In cases of younger workers becoming permanently disabled there is clear disadvantage in the payment of a lump sum based benefit on present value principles as its worth is quickly diminished and there is no ongoing support. The original purpose of paying a benefit by way of lump sum is now inappropriate. TPD is a hang over from an era of employer sponsored superannuation, when there was no wish or merit in keeping a member in a fund if he/she was not able to work for the employer. Modern superannuation, and in particular industry funds, have an interest directly opposed to that. Their aim is to retain members throughout life and thus fulfil the member s lifetime financial needs no matter what his or her circumstances may be. Further to this not all people who receive a lump sum payment are aware of accompanying limitations. Some do not appreciate the imposition of preclusion periods during which they are unable to access social security disability support payments. Some spend the money without appreciating the long term consequences of having to rely solely on social security payments without any supplementation capacity. This results in a severely curtailed lifestyle which can subsist over a long period of time extending into retirement. The major drawback of the predominantly current lump sum payment system is that upon payment of the benefit the worker s entitlement to participate in a retirement benefit scheme ends. It cannot be assumed that a worker who is incapacitated from work will not survive into retirement. Universal employee superannuation coverage presupposes continuous participation in the payment of at least the superannuation guarantee until retirement. It is based on including all employees, and is not exclusionary. In particular it is unfortunate that those who suffer disability through no fault of their own should be abandoned from participating in a scheme designed to provide universal retirement benefit coverage. The social cost of exclusion of the disabled is incalculable and reflects adversely on a country with a first world economy. Additionally there are difficulties to claimants in establishing TPD. Often claims are the subject of disagreement between specialist medical practitioners as to the permanence of the disablement. Expense and time in securing medical consultations and obtaining reports can become an issue delaying the payment of the benefit well beyond the minimum six month waiting period before a claim can be considered. The most commonly used definition of TPD requires that the claimant be unable to secure work according to his/her education training or experience. Issues arise as to what work may be suitable in compliance with that definition of requiring referral to an occupational physician or other employment placing authority. Clearly undue delay in paying the benefit can result in mortgagee sale of a family home and uncertainty as to the payment adds to financial and personal stress resulting from disablement thus undermining the benefit of our current superannuation system.

4 Disagreement between trustees and insurers, or between members and trustees over liability to pay the benefit can extend the waiting time before the benefit can be paid (where liability is found to exist), involve obtaining expensive medical reports and may end up in the Superannuation Complaints Tribunal or before the courts. The costs involved can exceed the amount of the benefit. Litigation imposes additional strain on the claimant who is already suffering from a disability. As well as a detriment to the individual there is a detriment to the revenue in the current system of TPD benefit payments. This is not so much because the payment of a TPD lump sum is tax free but rather arises from the inevitability that those excluded from participation will be reliant on the public health system, the payment of disability support and, ultimately, the age pension for their survival.

5 THE PROPOSED CHANGE TO LUMP SUM TPD BENEFIT PAYMENTS The income replacement benefit does not decrease as a member grows older. It is offered as a percentage of the actual income and is therefore relevant to satisfy each members particular needs, as opposed to a one size fits all lump sum. Income replacement option is likewise an ancillary purpose under the SIS Act and meets circumstances of temporary total disablement as opposed to the need for permanency of total disablement. IUS advocates that the Enquiry recommends the abandonment of the current TPD lump sum payment system and over time its replacement with a continuing income stream as the preferred disablement benefit payment system. It would be more consistent with current approach to superannuation benefits for a TPD recipient to receive a smaller trauma type benefit to enable medical or immediately arising expenses to be met combined with income replacement support. IUS provides salary replacement insurance to members of superannuation funds, and Australian workers generally in all occupational categories. IUS benefits include a two year income replacement of between 75% and 90% of the claimant s salary along with a continuing SGC payment and lump sum TPD payment if permanent disablement is established. While IUS also offers TPD cover without income replacement coverage it is our experience that income replacement delivers a far superior default insurance service than that which can be delivered by lump sum TPD cover. As earlier pointed out there would be greater benefit to the superannuant in the payment of a smaller lump sum trauma benefit combined with income replacement. THE BENEFITS ARISING FROM THE PROPOSED CHANGES The greatest benefit to the claimant is security knowing that payment commences immediately - there is no six month waiting period. The member and the member s family have security and certainty of income. There is no uncertainty over issues connected with the determination of suitable employment or of medical disagreements over permanence. The need for multiple medical consultations and reports is reduced as the benefit is paid initially on the basis of temporary incapacity. The Government revenue does not suffer because tax continues to be payable as the benefit is classified as income. A feature of the insurance is that the income level is designed to automatically keep pace with the member s pre-disablement income. Accordingly the value does not diminish over the two year period.

6 SHOULD COVER BE EXTENDED FOR THE WORKING LIFE OF A TPD RECIPIENT? There is a real issue as to whether the coverage should be extended not just for the current two year period but to cover a claimant s working life i.e. to age 65 or 67. This would ensure continued inclusion in the superannuation system and ensure that a claimant s retirement benefit and that of any of his/her dependants is secure. WHO SHOULD MEET THE COST? The source of revenue for the payment is not strictly a matter for this submission. The submission is concerned with advancing a position which enhances and results in a fairer and more inclusive universal employee superannuation and insurance scheme. The current system, where insurance costs are deducted from the members account, would seem a fair and equitable answer. However, should this be deemed insufficient, one source may be from an increase in the levy imposed on the total superannuation and insurance industries. Another may be from interest accumulating on unclaimed superannuation funds or from a change of forfeiture procedures so that unclaimed funds become regulated by the Federal Government instead of being returned to the revenue office of the State where the fund was incorporated.

7 CONCLUSION Our current superannuation system is underpinned by a 9% guarantee levy from which members retirement benefits are accumulated. Ensuring the continuity of that income (levy) and resultant retirement accumulation is critical for the member s (and family s) security and the Government s longer term social goals. TPD provisions incorporated in our superannuation legislation no longer provide adequate protection to Australian superannuation members, nor assist the Government in its desire to build a population of broadly self funded retirees. Income replacement insurance, where a member is rendered unable to work due to illness or accident should be a default requirement in all universal funds.