The super headache that is TPD

The definitions around Total and Permanent Disablement have created a headache for superannuation fund trustees and answers are still being sought. This is part four of a Super Review roundtable.
 
Mike Taylor, managing editor, Super Review: Tax concessions on super are apparently going to be one of the focal points of the tax white paper.  It keeps coming down to this:  are the concessions too much; just enough; do we need better concessions?  I notice a couple of submissions To treasury going through at the moment suggesting that perhaps the government should be targeting the wealthier people with high account balances and who are using it as an estate planning tool, so...

Leeanne Turner, CEO, MTAA Super: But there's definite inequity in it.  I mean the tax concessions have got to be looked at, and part of the problem is that I think we've had changes, changes, changes, but not holistic changes bringing in the tax regime at the same time.  There's absolute inequities, and people on million dollar balances shouldn't be able to go and get a part pension.  I mean that's just wrong.  

Paul Cahill, CEO, ClubPlus: Industry funds of all people will agree to that.  We want to see our people retire with a decent standard of living but where you see people getting $2 and 3 million in there, they don't need the old age pension.  

LT: No, it's just wrong.

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PC: Let's be clear about that.  That's just using the system to your advantage.  And when you hear people who are going out there and actively saying, "I'm taking all my assets here and I'm taking over there and giving them to my kids and selling all that just so I can get the old age pension," that's a big disconnect there.

MT: Paul?

Paul Rohan, head of Sandhurst Trustees: No disagreement from me at all.  Let's go back to why it was set up by companies, governments, the early work done by the unions to introduce broad superannuation to the community.  It was never intended to be used in that manner.

MT: Andrew?

Andrew Creber, COO, JP Morgan Asset Management: Nothing more to add really.  I mean Australia has a highly complex tax regime.  There needs to be simplification, but nothing specific to add.  

MT: I think one of the things that came in our last round table was that there are financial planners out there who are savvy enough to actually direct their clients into particular industry funds for the insurance cover, and by definition that kind of goes in its way to the estate planning scenario.  I mean what can be done about that, if anything?

LT: Well, you're getting into insurance now.  

PR: And that's monumental--

LT: It is.  Look, we've done something fairly brave.  We went to tender.  That's not brave, but in doing that we had some really robust discussions about okay, so claims experience has gone up, what are we going to do about this?  And we set some guiding principles basically, and it goes through a cycle.  Insurance goes through a cycle and you come to the end of the cycle where premiums are high, claims are high, you're going to be in a world of pain, so you've got to try and choose the best of a bad bunch.

In trying to arrive at that decision, we set some guiding principles and one of the key ones which I think is a really, really good one is we were saying, "Okay, well how much do we think is right that should come out of an SG component?"  We're talking to people on low salaries.  "What are we prepared to do for that in terms of the coverage?"  And we put an emphasis on death benefits over total and permanent disablement (TPD), again looked at the member demographic and the cohort and where things were falling out there, so we went through that through a series of guidelines and tried to stick to those principles in coming up with what was the best of a bad bunch of options basically.

What we also did was to look at the definition and we were being brave by actually doing something about tightening up a definition that probably, to the membership, to anybody who looked to a financial adviser, to a ratings agency whoever would be looking, they'd be going, "Well, their offering doesn't look great."  Well, we went okay, yeah, it doesn't, but if somebody doesn't do something about these definitions and stop that tail risk you're just perpetuating the problem.  

PR: Yeah, and I think it goes to the point, you know, we're back to where we started almost.  Why compare Chile to Australia?  The work and effort that goes in from whatever model you use as a trustee or a management reporting through a trustee to make sure those "I"s are dotted, "T"s are crossed, that conditions or holes don't emerge in the policies that govern our insurance arrangements is enormous.  Do you get credit for it to say, as Leeanne said, clause (1B) subsection (2A) is now really rounded out a problem, fixed a problem, but you don't get credit for that.

PC: I think you'll find funds, and we're just starting the exercise now, where TPD's a risk in the market.  It is seriously a risk because of two things:  one, I'm going to put myself out there.  The shutting down of the workers' comp bit has meant lawyers are now looking for a new avenue for money.  Drive down Parramatta Road, there is a billboard the size of half this building that says, "Got super?  Might have a client."  So all that's going to do is force people into a particular way.  And funds are going to say this is all too hard or the rates are just going to skyrocket, and the members of the fund who are in there for the right reasons are going to get penalised.  In the end funds are going to have to drop TPD.  Death is death right, you can't...

PR: Fudge it.

LT: Yeah, you can't fudge it.

PC: You're in a box or not.  But TPD has now become the new battle ground and it is just becoming a nightmare.

LT: It is.  And it's definitional.  So to the average Joe Blow, TPD says okay, I can't work again, but it's definitional, so it depends on where you go.  

PC: And the lawyers' behaviours--

LT: And the lawyers just milk it.

PC: The behaviours of the lawyers is deplorable.  Absolutely deplorable.

LT: Absolutely yeah.  I agree.  I agree.