Table of contents
Frequently asked questions
Insurance in Superannuation
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Current31 August 2015
Insurance in superannuation
Is it possible for an RSE to continue to have a permanent incapacity (TPD) definition which is a combination of the definition in the SIS Regulations plus another test, in order to be eligible to be paid a TPD benefit? (added 1 April 2014)
SIS Regulation 4.07D(2) states that a trustee of a regulated superannuation fund must not provide an insured benefit in relation to a member of a fund unless the insured event is consistent with specified conditions of release that are specified in Schedule 1. Permanent incapacity is one of the specified conditions of release. SIS Regulation 4.07D(3) makes certain exceptions to this prohibition, to permit the continued provision of other benefits to members who joined a fund prior to 1 July 2014 (see below).
The definition of permanent incapacity
The definition of permanent incapacity in subsection 10(1) of the Superannuation Industry (Supervision) Act 1993 (SIS Act) states that a member of a superannuation fund will be taken as suffering from permanent incapacity for the purposes of the SIS Act if the member’s incapacity falls within the definition of permanent incapacity as defined in the SIS Regulations. Under SIS Regulation 1.03C, the trustee must be reasonably satisfied that the person’s ill-health (whether physical or mental) makes it unlikely that the member will engage in gainful employment for which the member is reasonably qualified by education, training or experience for a member of a superannuation fund to be taken to be suffering permanent incapacity. (SIS Regulation 4.07D(3) makes certain exceptions to the prohibition in SIS Regulation 4.07D(2), and provides in particular that the prohibition does not apply to the continued provision of benefits to members who joined a fund prior to 1 July 2014).
Where TPD insurance (referred to as permanent incapacity in the SIS Act) is provided by an RSE to a member under section 68AA of the SIS Act and the exceptions do not apply, a benefit is generally only accessible to the member on the grounds of permanent incapacity if the member meets:
- the permanent incapacity definition (to access the money); and
- the TPD definition under the insurance contract (for the insurer to pay the claim).
Application of the permanent incapacity definition
The definition of TPD under the insurance contract may differ to the definition of permanent incapacity under the SIS Act, depending on the contract negotiated between the trustee and the insurer. Such a difference will not contravene the SIS Act if the difference is not inconsistent with the condition of release under SIS Reg 1.03C. As outlined in the explanatory statement to Select Legislative Instrument 2013 No. 26, compliance with SIS Reg 4.07D is not intended to require the strict adoption of the SIS Regulations definition of permanent incapacity so long as it is consistent with the condition of release.
The context of the RSE licensee’s obligations in insurance
The RSE licensee’s decision on its insurance offering must be taken in the context of the following statutory obligations:
- exercising the care, skill and diligence of a prudent superannuation trustee under paragraph 52(2)(b) of the SIS Act;
- performing the duties of a trustee, and exercising the trustee’s powers, in the best interests of beneficiaries under paragraph 52(2)(c) of the SIS Act;
- acting fairly in dealing with all of the classes of beneficiaries within the fund, under paragraph 52(2)(e) of the SIS Act;
- acting fairly in dealing with beneficiaries within a class within the fund, under paragraph 52(2)(f) of the SIS Act;
- considering the cost to all beneficiaries of offering or acquiring insurance of a particular kind, or at a particular level, under paragraph 52(7)(b) of the SIS Act; and
- to only offer or acquire insurance of a particular kind, or at a particular level, if the cost of the insurance does not inappropriately erode the retirement incomes of beneficiaries, under paragraph 52(7)(c) of the SIS Act.
Under Prudential Standard SPS 250 Insurance in Superannuation (SPS 250), the selection process that the RSE licensee undertakes to choose an insurer must include a consideration of the prospective insurer’s terms of cover and exclusions, the reasonableness of the premiums to be charged and the claims process. It must also be able to demonstrate to APRA that the selection process was appropriate and that the engagement of the insurer was in the best interests of the beneficiaries, under paragraphs 22 and 23 of SPS 250.
In addition, in a MySuper context, such restrictions will only be acceptable if the trustee has also reached the view under subsection 68AA(3) that such restrictions are reasonable and promote the financial interests of the beneficiaries of the fund who hold the MySuper product, under section 29VN of the SIS Act.
In the event of the death of a member, an RSE licensee may choose to invest life insurance proceeds in an investment option with a conservative investment strategy. In the event a member has an interest in a MySuper product will the proceeds need to be invested in the MySuper product?
Insurance proceeds are not a contribution in respect of the member. It is a payment by the insurer to the RSE licensee, which is then allocated by the RSE licensee to non-member beneficiary(ies). On that basis, the insurance proceeds can be held in an investment option in accordance with the RSE licensee’s predetermined policy.
The member’s existing interest in a MySuper product may be moved to another class of beneficial interest in the fund where the member has died and the replacement meets any criteria prescribed in the SIS Regulations (see 29TC(1)(g) of the Superannuation Industry (Supervision) Act 1993). This could be done to reduce risk and preserve the balance accumulated by the member until a beneficiary can be identified and the benefits paid out.
Can an RSE licensee, on receipt of TPD insurance benefits, deposit this amount into a cash option until the member advises the investment option they wish the monies to be transferred to? Where the member does not respond within a reasonable period, can the RSE licensee choose to transfer the monies to the MySuper product option?
APRA is comfortable with an RSE licensee taking this approach. APRA would expect the RSE licensee to disclose its approach to members.: APRA is comfortable with an RSE licensee taking this approach. APRA would expect the RSE licensee to disclose its approach to members.