Total and Permanent Disablement (TPD) insurance is only one product option available to superannuation funds and there are question marks about whether it is the right product option. This is part four of a Super Review TPD roundtable.
Russell Mason, partner, Deloitte: Doesn't this beg the question though, is TPD the right disability insurance? Or should it be continuous disability income insurance?
In my mind one of the problems with TPD is an insurer like Brett has to draw a line in the sand and say, "Yes or no." Salary continuance normally cuts in earlier, it's an ongoing process, it encourages rehabilitation. I know it can be more expensive but I think all of us sitting around this table if we had a choice between TPD insurance, personally, or longer term salary continuance. I would.
Jocelyn Furlan, consultant: I don't know that I would.
RM: And I wonder if that should be the insurance we have in place with death insurance, that it basically compliments it better.
Brett Clark, chief executive, TAL: I think there is a possible better benefit design where there is a package of disability benefits provided to a member which is a combination of an income benefit and then a lump sum benefit when it is very clear that there's a permanent and total disability.
That's the way I think we need to think about possibly evolving this, then it allows things like rehabilitation and back to work and these sort of things to be far more effective than they are today. And the insurance industry is moving to, "How do we get people healthy and back to work?" Because it's actually better for them. No one is better off, or very few people are better off when they're paid a total and permanent disability claim, a genuine total and permanent disability.
JF: Particularly if they have to fight for $70,000 benefit for four years when they're fifty-three. That's the way it works.
BC: That's right, so I think there is a better way and it is through thinking more holistically about what does a range of disability benefits and support services look like for a member to get them healthy and back to work, and if they cannot do that then ultimately what does a lump sum potentially look like?
JF: The big issue for me around that is pricing and erosion of retirement incomes. This system is actually designed to provide income in retirement or income prior to retirement if someone becomes disabled prior to that. I think the challenges with an income protection type benefit are that first you've got a whole lot of offsets, and secondly, if people are members of more than one fund, you can't get more than one benefit.
There are some funds that give automatic opt-out income protection benefit to casual workers who are 20 years old, who will never be paid anything and will never get their premiums back, because the insurer's going to quite rightly say, "Well I was on risk, there was no income because it was a casual worker," or even if they're not a casual worker, another fund they had three lots of insurance or WorkCover's paying it or TAC's paying it, and because of the moral hazard that you can't earn more when you're disabled than when you're abled, the potential to seriously drain retirement incomes from a lot of income protection insurance across the industry. The way super fund members are members of super funds today I think presents a real risk and I think that the trustee covenant about unnecessary erosion of retirement incomes becomes incredibly relevant around this because, as I say, if you're not on risk for a TPD benefit you refund the benefit or you pay the benefit, it doesn't matter what other money the person gets for a lump sum TPD. If you're on risk for an income protection benefit, which fund is going to pay first? What's the protocols around if they're multiple fund members and what's the protocols around how you treat a lump sum WorkCover payment versus a string of income payments and any income protection benefit?
RM: You're addressing two questions. One, the 9.5 per cent [super guarantee] is inadequate; it isn't. Everyone around this table says it should be a lot higher and perhaps higher to account for insurance premiums as well. Secondly, and I've seen it over many, many years of experience, if I'm a twenty-five or thirty-year-old or a 50 year old and disabled, and with the current advances in medicine with illnesses that may have made them fatalities in five or ten years, they're now living 25, 30 years, that long-term indexed income makes a huge amount...¨
JF: Oh that I don't disagree with, but the price of it for the member..¨
RM: And I agree with Brett, maybe building in some lump sum if they have to make certain adjustments to their life, but for those younger long-term disabled...¨
JF: They should only pay for it once though. I don't disagree with you, but they should only have to pay for it once.
Angie Mastrippolito, chief executive, NESS Super: I'd like to be a bit left-field on the TPD scenario because I think we talk about TPD in one sort of scenario. There's a whole range of TPD which as Russell was talking about, so I think we need to re-think how we see TPD.
There's a TPD which is catastrophic, there's that middle ground where Russell's talking about where there is a prospect that perhaps they can live for 20 years but they're still disabled. There's that other one, that they are disabled at the moment but they're likely to recover, and then there's that wear-and-tear scenario which I come across a lot in my industry because people are so broken they can't do their trade and they find it hard to adjust.
I think we need to rethink the whole concept of TPD and actually design a system which meets the needs of the members at a particular point on the basis of their particular disability. I think we need to really go back because I think we lump it all in one lot and then we change definitions and people miss out because we've changed definitions. I think we need to go back to what are the needs of our members in particular disability situations and I think we need to rethink the whole process and we can go back.
John Berrill, lawyer: The fundamental problem with income protection payments or long-term salary continuance is that it's not a retirement income benefit and that's what we're stuck with, that's what we have to provide.
That's what insurance has to provide; it's supposed to provide a retirement income benefit so what TPD does or what it's traditionally done was top-up your retirement income if you have to leave the workforce prematurely because you're otherwise going to be unfit for work and won't otherwise accumulate superannuation. Income protection benefits do not do that. The only component that does is the SG component if it's there. That's if it's there, first of all. Secondly, the rest of it, the other 75 per cent, is not a retirement income benefit.
I think that the issue in relation to benefit design with TPD is, as I said before, the definition of TPD hasn't really changed much in the group market in the last 20 years. The only real change has actually occurred very recently which is the introduction of the retraining clause that's been introduced very recently by a number of funds. Although if you go back, some of the old corporate funds and a lot of the old government funds, for example state super in Victoria, have a retraining clause in their TPI benefit forever and a day, so the retraining clause has been there.
What's happening is the courts have introduced this concept of "de minimis retraining" on top of this "unfit for suitable employment" and the benefit design now is introducing a full retraining clause, if you like. In my view that's not inconsistent with what TPD is designed to cover, which is it's designed to protect or compensate if you like, people for superannuation that they would not accrue because they are disabled.
If you got someone who can be retrained and can go back to work, on balance, would a TPD benefit be appropriate for them? Arguably not. But if you've got a retraining clause in there that encompasses the retraining prospect on balance of probabilities, it is consistent with what the policy setting for TPD is. So in my view, TPD, as the benefit design changes that are occurring now, is actually a good fit with what the policy setting of it is. Income protection is not because it does not provide a retirement income.
RM: One; John, it can, and two; I don't believe a TPD benefit for most people provides a retirement income either. Because giving someone at thirty, thirty-five, $300,000 and expecting that's going to last, is a myth.
JB: But that's the size of the benefit, it's not the way it's designed.
RM: Well, you're saying it's the design. The same applies to salary continuance. Make it mandatory to put in a 10 per cent so it's 75 to the member, 10 per cent to super, and you've solved the problem.
JB: But you haven't. You've solved it in relation to the 10 per cent but not the 75. That is being funded through premium and that is not a retirement benefit. That doesn't go to someone in retirement; that goes to someone as an income replacement benefit, not a retirement benefit.
Geoff McRae, actuary, Rice Warner: But if they'd been working they would have been earning a salary and the employer would have been putting 10 per cent towards their retirement benefit, so if the 10 per cent towards retirement is coming from the policy¨.
JB: I agree, that's fine, that's consistent, but the 75 per cent is not.
RM: What's the difference between that as a lump sum that they can spend well before retirement, John? It's a replacement for income with a supplementary payment that goes to retirement
GM: And affordability becomes an issue there. If the lump sum is big enough to fully replace salary and make account of other necessary changes to lifestyle, it's going to cost even more than the income protection benefit.