Does income protection trump TPD?

Many superannuation industry commentators believe that products such as income protection insurance provides a better and more flexible answer than TPD. This is part five of a Super Review TPD roundtable.

Brett Clark, chief executive, TAL: The introduction of a top-up super contribution for income protection is probably now more common than it isn't, but it is also true that not a lot of funds have embraced default income protection in a meaningful way. I think we may see more of that in the future and we may see more of these sort of aggregate income lump sum type disability benefits.

Geoff McRae, actuary, Rice Warner: And there's a trend towards it but affordability is still the major issue.

BC: Affordability is the big issue.

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GM: And you're not going to be able to have an adequate TPD lump sum and adequate income protection at the same time unless there's more than the current level of contributions going in or affordability and diminishing of retirement income are going to be real issues.

Angie Mastrippolito, chief executive, NESS Super: And to get income protection you need an income. So a lot of our members don't have income. Like you have a lot of inactive members who don't actually have incomes. You have spouse members, you have all these groups of members, so you'd have to have a bit of a baseline.

John Berrill, lawyer: It presents design difficulties.

AM: No, you'd have to have a baseline to give an income if you don't have an income...¨

JB: And the other design problems with SG top-up are some of the designs are if your employment's terminated the SG stops, the SG top-up stops.

Most people do not remain with the employer for 20, 30 years after they've ceased work. The other one is that the SG usually only goes with an income protection payment and, as has been said before, if you've got someone who's on compo, Centrelink, motor vehicle accident payments or other benefits, they're not entitled to the IP or maybe entitled to only a reduced component, and therefore that affects the SG top-up.

GM: But of course where say a workers' comp or accident case goes to court, part of the settlement is for loss of super.

JB: It is.

GM: And so there is provision for that in those other domains.

JB: You talking in terms of common law claims?

AM: You don't have to offset either. Policies are offset but you don't have to offset. I think if you start from square one with TPD, would you design an income protection with an offset or without an offset? I think we need to go back to those first principals as well. You don't have to do it.

JB: From an underwriting point of view, the offsets are there because otherwise someone will be getting more than 100 per cent of their salary, so it's inevitable that...¨

Jocelyn Furlan, consultant: You can't earn more able than you can when you're disabled.

AM: But is TPD for income replacement or is it because they're TPD and they need to live?

Finding an affordable solution

BC: I think at the end of the day some of these detailed issues are solvable. It just requires us to think about the problem a little bit differently.

I just want to go back to this affordability, member affordability, member value issue. I think this is something funds are very conscious of and I know we are at TAL very conscious of it as well in that the insurance arrangements in the fund need to look fair and they need to look valuable from a member's perspective and they need to balance the trustee's requirements and duties around retirement savings versus retirement protection as well.

Ultimately the price will revert to the claims experience plus expense and profit margins. That will always happen in the long-term, so if we are and we should be genuinely concerned and thinking about member value and member affordability and getting that equation right, then we have to think about what level of claims experience supports the premium which addresses that equity and fairness and affordability and value equation.

JF: And I think for trustees the other part of that is the quickest way to disengage young members is to continually reduce their balance to zero because of insurance premiums. And once you've lost them the first time you've lost them for life so from a trustee's point of view, I completely agree with everything you've said, but I think there's that other dimension coming in and I think that the new covenants and I wouldn't be at all surprised if you're getting a bit more pushback from trustees to say, "We really need to engage our young members, and if," as I say, "continue to reduce their balance to zero because of the insurance premiums, we're going to lose them forever...¨

JB: Well we shouldn't be doing that.

JF: ¨...and they're never going to be wanting to get involved with their super. And so I think that's part of the conversation.

Russell Mason, partner, Deloitte: This is where we need to recognise the problem because we need to redesign it, we need to have more a bell curve type of cover. For a twenty-year-old, a death benefit should be, frankly, enough to bury them; nothing more.

AM: And no default...¨

RM: So we've got to decouple them, we've got to rethink at various stages in their life...

JF: Completely agree.

RM: ¨...what's the most important?

AM: And what's their needs?

RM: And that's going to have an impact I'm sure, Jocelyn, on the premiums.

AM: And also you have the benefit actually tied to the disablement need, [that] would be helpful too. Because I think there's such a range of disablement and there's stuff that you just have to pay because the person's really catastrophic, but do you need to pay someone who can be retrained the same benefit? I think we need to somehow rethink...¨

JB: But that's where the industry's heading now with the introduction of retraining clauses. Brett's got it.

AM: Yeah, but I think almost the level of benefit needs to change, I think.

JB: That's happening too.

AM: According to the actual need, so that would be interesting.

BC: More flexibility I think is what we're talking about and more personalised and customised levels of cover within a superannuation fund arrangement.

JF: The proximity and time between the disabling event and making the claim.

AM: The issue that you're talking about with regard to affordability, there's an equity issue here too. I think sometimes the fact that you give such high, not you personally, but there be such high automatic cover...¨

BC: We have done some of that in the past

AM: The greater the automatic cover, the greater the premium. And what high automatic cover does is that it benefits people who will claim to the detriment of anyone at the other level of it, so setting automatic cover to benefit five per cent of the membership is an equity issue because that drives up the premiums and the other 95 per cent pay for it. So there is an equity issue here in how you actually set the level of cover.

BC: Someone said to me once and I think it's a really interesting and powerful insight, that when you're designing the insurance benefits you need to design it not just for the members who claim. You need to design it for the whole membership and that means 90 per cent of the members who don't end up claiming as well. Because all they will end up doing is paying premiums, so what's the right design for the 90 per cent and the 10 per cent who do claim, and that's really...¨

JF: And I think that's particularly relevant because the money that's paying premiums is a diversion of their income that's compulsory diversion into the system, and I think sometimes we forget that when we're talking about premiums we're actually talking about people's income that's paying for it.

BC: It's people's savings.

JF: And they don't get a choice about whether they put their money into that system and that pays for that insurance.

RM: Well they do get a choice, they can opt out if they want to.

JF: Yeah, they can opt out if they want to, that's true, but I think that in terms of thinking about the balance that you're talking about, Brett, for me we always have to remember this is money that by law is taken out of people's pockets and put into a system. I get the bit about engagement. Most Australians shouldn't have to be engaged for their retirement incomes not to be inappropriately eroded.