'Own occupation' TPD phase-out questioned

The Government's recent Stronger Super announcement states it will be phasing out the option to hold 'own occupation' Total and Permanent Disability (TPD) insurance policies within superannuation - but it's unclear what repercussions this could have for members who hold such policies.

Throughout the Stronger Super consultation process stakeholders have raised concerns that super fund members who hold 'own-occupation' TPD policies are unable to extract claims payments from their superannuation funds until they meet the stricter provisions of 'any occupation' TPD insurance, as required by the Superannuation Industry Supervision Act (SIS), or until they meet conditions for the release of superannuation funds under SIS.

The latest Stronger Super announcement released a fortnight ago states the Government "will end this practice" and indicates this change needs to be made "as rapidly as possible". The Government stated it will consult with industry on a suitable timeframe for the phasing out of existing policies.

The Stronger Super consultation process found that stakeholders felt that for all types of insurance, the definitions should be consistent across the MySuper and choice segments for the release of insurance payments. There should also be a standard definition of TPD across funds.

But the consultation paper did not indicate support for the removal of own occupation TPD, and Australian Institute of Superannuation Trustees chief executive Fiona Reynolds expressed disappointment that the option would be removed.

"This is a valuable benefit and one that some funds have put a lot of effort into negotiating for their members. We will need to ensure that there is sufficient time for those funds to transition to the new regime and phase out existing policies that may not satisfy the new arrangements," Reynolds said.

Holding Redlich partner Jenny Willcocks said there had been a mismatch around TPD in super for some time, but that another solution would have been to alter the release conditions rather than removing the option of holding the policy.

Fund members holding these products will have to be transitioned over to the broader and tougher definition, and it could present a major issue for trustees and the group life sector, she said.

"It appears the Government is taking the view the 'own occupation' definition isn't consistent with the purpose of superannuation, without understanding the extent of it in the market," she said.

That option, which exists broadly throughout the industry, would have to be taken off the market and people would have to buy it outside super and pay a lot more than what they can currently get it for under a group discount, she added.

The Association of Superannuation Funds of Australia (ASFA) was less concerned, stating that while it did not have a policy position per se on whether such policies should be available through super, the industry should be able to cope with a phase-out as policies are reviewed and renewed on a regular basis.

However, there will be an issue with defined benefit funds where the benefit design has been incorporated into the trust deed and some provision will need to be made for these funds, ASFA stated. ASFA added it had previously raised concerns with the Government regarding the unannounced change in the definition of TPD for taxation purposes that occurred as part of the simpler super changes.