The Productivity Commission (PC) has been urged to take into account the problems encountered by superannuation funds around the provision of total and permanent disability (TPD) insurance, not least those relating to regulatory definitions.
The Association of Superannuation Funds of Australia (ASFA) has used its latest submission to the PC Inquiry into the Competitiveness and Efficiency of the Superannuation Industry to warm that “the limited (‘all or nothing’) nature of the regulatory definition of TPD has led to difficult, and sometimes protracted, decision‐making for funds”.
“In particular, the regulatory definition does not provide for the possibility of subsequent rehabilitation or recovery, or for future changes in technology, that may permit a member to return to work,” the submission said.
It said there was evidence that framing a person’s medical condition in terms of their ‘disability’, as opposed to their ‘ability’, could have a deleterious effect on their psychological condition. “Furthermore, the ‘one time’ assessment as to disability can, in some circumstances, act as a disincentive for a member to recover some ability, as this may cause them to miss out on being paid a lump sum TPD benefit,” the submission said.
It said that ASFA considered that members’ best interests could be served by modifying or removing the regulatory impediments that prevented insurers from providing targeted rehabilitation benefits and/or staged payments to members that would assist them to return to the workplace.
The ASFA submission also urged more consistent payment outcomes between insurance inside and outside superannuation, pointing out that it was important to consider the distortive effect of the regulatory settings with respect to the taxation of insured benefits inside and outside superannuation.
“While it is more cost efficient to provide death and TPD lump sum insurance through superannuation, the differing tax treatment of benefits paid out can lead to significant differences in the amount of the net benefit received by the member/beneficiaries,” it said.
“Part of lump sum TPD benefits (before age 60) and all of death benefits (to non‐dependants) paid from superannuation funds are subject to tax at a rate up to 32 per cent, whereas death and TPD insurance payouts made outside superannuation are generally tax free in the hands of the recipient.”
The submission said the benefits of insurance in superannuation could be improved by making the tax treatment equivalent to non‐superannuation insurance arrangements.