The Senate Economics Legislation Committee report into the latest bill restricting default insurance in superannuation was released a few months ago.
The majority recommend the “Putting Members Interests First” bill be passed with one change - pushing back the commencement date two months, to 1 December 2019.
One of the justifications in the report for the removal of default cover is the availability of other support mechanisms for protection against illness or injury through:
- sick leave;
- Centrelink payments;
- workers compensation schemes;
- compulsory third-party motor vehicle accident insurance; and
- the National Disability Insurance Scheme.
This was consistent with the submission made by the Grattan Institute and perpetuates a myth which needs busting.
Default insurance benefits designed to contribute to retirement income, not for income support during normal working life
The default insurance benefits under MySuper and choice superannuation products are death and Total and Permanent Disability (TPD) lump sums, although monthly income protection benefits may also be provided. The default death and TPD benefits "top-up" a member's accumulated superannuation in the event of premature death or disability.
A TPD lump sum is designed to contribute to a member's retirement income whilst a death insurance benefit is designed to provide for a deceased member's dependents who would otherwise have been financially dependent on the member had he/she worked until retirement.
Neither TPD or death insurance benefits are designed to provide income support during a member's normal working life - they top-up superannuation for retirement/death.
Workers compensation and road accident compensation are not designed to provide savings for retirement income
In contrast, statutory workers compensation and motor accident compensation payments provide income support during a person's working life. They do not contribute to a person's superannuation for retirement and at the end of the benefit period, the person has not accumulated anything more towards superannuation for his/her retirement. Also, most only pay weekly payments for up to 130 weeks.
For example, a member who ceases work at age 40 and is paid workers compensation weekly payments for the maximum period of two years (or perhaps even up to age 65), will at the end of the benefit period still only have a retirement income based on superannuation contributions up to age 40 and no more. That person will almost certainly not have an adequate retirement income and will likely be welfare-dependent.
One exception to the above is the Victorian workers' compensation scheme which provides superannuation contributions on top of income replacement weekly payments - but even this is usually only for a maximum 18-month period.
It can be argued that income protection insurance in superannuation also only provides working life income support and does not contribute to a disabled person's retirement income. However, many funds have at least partially addressed this by coupling superannuation guarantee contributions with income protection payments e.g. REST and PSSAP.
Centrelink income support does not provide retirement income top-up
The same myth applies to Centrelink income support; whether through Newstart or the Disability Support Pension (DSP). Both provide working life basic income support (very basic in the case of Newstart), both end at retirement age and neither provides any retirement income top-up. It is also noteworthy that since 2011 eligibility for the "more generous" DSP has been severely curtailed, particularly under the functional impairment points tables.
The inclusion of the NDIS is even more baffling given that does not provide any income support; only medical supports and services.
Accordingly, to equate insurance in superannuation with income support benefits under compensation schemes or Centrelink is, in fact, comparing apples with oranges.
Many disabilities are ‘non-compensable’
It is also a myth that most superannuation fund members who become disabled or die will be eligible for compensation benefits. Statutory compensation schemes covering work-related injuries or illnesses or motor vehicle accident-related injuries are beyond the reach of most superannuation fund members whose working lives are cut short because of cancer, heart attack, stroke, mental illness, Multiple Sclerosis, Parkinson's disease or Motor Neuron Disease.
Insurance in superannuation plays a vital role in supplementing the retirement incomes of members whose working lives are cut short because of disability or death.
There is no doubt that changes were needed to deal with affordability and availability to ensure insurance in superannuation provides value for money without excessively eroding members accounts.
As policymakers seek to strike the right balance, it is important that there be a robust exchange of ideas but that myths must be.... busted.
This article was written by John Berrill - Principal at Berrill & Watson Lawyers. It was originally published online at Conexus Financial.