House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Minister for Employment and Workplace Relations and Minister for Financial Services and Superannuation, the Hon Bill Shorten MP)

Chapter 2 - Insurance

Outline of chapter

2.1 This chapter explains the amendments relating to the provision of benefits that are supported by an insurance policy to MySuper members.

Context of amendments

2.2 Insurance is a key element of the benefits provided to members of a superannuation fund.

2.3 These benefits protect members against the risk of not being able to accumulate sufficient retirement savings, for themselves or their dependents, due to having to cease work as a result of injury or illness or as a result of death.

2.4 For this reason, the Government has announced that trustees will be required to provide minimum levels of default life insurance and total and permanent disability (TPD) insurance to members of their fund that hold the MySuper product on an opt-out basis. Trustees that cannot obtain opt-out insurance at a reasonable cost must provide MySuper members with compulsory insurance.

2.5 Currently, some members are being charged premiums for various types of insurance that may not be released to them when an insurance payment is made for them, because the circumstances do not meet a condition of release. The Government announced that it would end this practice and believes that it is in best interests of members to align the insurance definitions with the conditions of release so that insurance is consistent with the purposes of superannuation and that monies are available to members when the insurer makes a payment to the fund under the relevant insurance policy.

2.6 Following the Review, the Government announced that, following a suitable transition period, funds would be prohibited from self-insuring any benefits of the fund, including life and TPD insurance benefits. An exception to this prohibition will be defined benefit funds that are permitted to self-insure. The ban on self-insurance will address the risks of any short fall in insurance benefits being funded from other member balances and also ensures that insurance benefits are paid from authorised insurance institutions that are required to comply with relevant prudential regulation.

Summary of new law

2.7 A trustee of a superannuation fund must provide MySuper members with benefits by way of insurance that are for death and benefits that are consistent with the definition of permanent incapacity in the SIS Regulations. This definition of permanent incapacity will continue to be prescribed by the SIS regulations as it will also be used to define the types of insurance that can be offered.

2.8 A relevant member must have the option to opt-out of life and TPD insurance unless the fund meets conditions prescribed in the regulations. It is intended these include where a trustee is not able to obtain opt-out cover at a reasonable cost. An RSE licensee may require a member that wishes to opt-out of these benefits to opt-out of both the life and TPD insurance.

2.9 Reasonable conditions will be able to be imposed in relation to qualifying for life and TPD insurance given to the member. It would be reasonable for the trustee to reflect conditions in the underlying insurance policy in the benefits that are provided to members.

2.10 The existing requirement for a fund to offer a minimum level of life insurance in order to accept contributions for employees that do not have a chosen fund will be retained. This amount of insurance provided to a MySuper member must be at least to that minimum unless the member elects that the benefits not be provided or, if permitted by the fund, the member elects to hold a lower amount of life insurance.

2.11 Operating standards will be able to be made in the SIS Regulations on the kinds of benefits that may be offered by way of insurance and the kinds of benefits that must be offered by way of insurance. New regulations will be made to ensure that trustees only offer insurance that is consistent with benefits that can be released under the conditions of release in the SIS Regulations and to prohibit self-insurance. Exceptions to these rules will be contained in the regulations, including an exception from the prohibition on self-insurance for defined benefits funds that self-insure for defined benefit members.

Comparison of key features of new law and current law

Detailed explanation of new law

Minimum level of life insurance for SG Act purposes

2.12 The sole purpose test permits benefits to be provided to members of a superannuation fund, including on the member's death and on the cessation of gain or reward in any business, trade, profession, vocation, calling, occupation or employment on account of ill-health of the member. Trustees that provide these benefits will typically purchase insurance policies that provides for additional benefits on the realisation of these risks.

2.13 Currently, to accept contributions from an employer on behalf of an employee that does not have a chosen fund, a fund must offer a minimum level of life insurance as set out in the SG Regulations. This requirement will be changed so that a fund that accepts contributions for employees must actually provide benefits to each MySuper member in respect of death at the minimum level set out in the SG Regulations. However, this amount will be subject to the member electing that the benefits not be provided or, if it is permitted by the fund, the member electing to hold a lower amount of life insurance. [Schedule 2, item 1, paragraphs 32C(2)(d) and (e)]

Default insurance

2.14 There will be a general requirement for RSE licensees to provide each member of a fund that holds the MySuper product benefits by taking out insurance on permanent incapacity and in the event of the death of the member. In other words, a fund that offers a MySuper product will have to give life and TPD insurance as a default within their MySuper product. [Schedule 2, item 6, section 68AA ]

2.15 This will provide a safety net to members who are least likely to give consideration to their insurance needs. To avoid doubt, to meet this requirement it is not sufficient for trustees to simply release the member's accrued superannuation balance. Rather, the trustee must provide benefits by taking out an insurance policy or through self-insurance, where the fund is permitted to self-insure under the operating standards. A failure to comply with this requirement will be a breach of a standard condition of the RSE licence. [Schedule 2, item 6, subsection 68AA(1)]

2.16 Permanent incapacity will be defined using the existing definition in the SIS Regulations. This definition will be prescribed by regulations to maintain consistency with present conditions of release and because the definition will also be used to define the types of insurance, particularly TPD insurance, that may be offered within superannuation. [Schedule 2, item 3, subsection 10(1)]

2.17 Trustees may determine reasonable conditions under which the provisions for death and permanent incapacity benefits may be made. Reasonable conditions may include, but are not restricted to: the member working a certain number of hours per week; the member accruing a particular balance; or a member or their employer making a certain level of contributions in a specified period. Where a trustee has taken out insurance, a condition is also considered to be reasonable if it is the same or corresponds with the terms and conditions of the underlying insurance policy. Should a member not meet any reasonable condition set by a trustee, the trustee will not be required to provide the insured benefits to the member. The conditions that apply to life and TPD insurance may be different. For example, a member may not qualify for TPD insurance under a certain condition but may still qualify for life insurance. [Schedule 2, item 6, subsections 68AA(3 - 5)]

2.18 These insurance provisions mean that an RSE licensee may apply reasonable conditions to the insured benefits that are provided to members that hold a MySuper product that result in certain members not being entitled to the benefits or that have the effect that certain members are not entitled to the same level of benefits or are entitled to different terms and conditions, notwithstanding the requirement of paragraph 29TC(1)(b) of the MySuper Core Provisions Bill that entitles members to access to the same options, benefits and facilities. Similarly, as these provisions mean that an RSE licensee has the discretion whether to provide MySuper members benefits for temporary incapacity, otherwise known as income protection insurance, the conditions that apply to the provision of that income protection insurance may also be determined by the RSE licensee. These conditions may mean that members are no longer entitled to the same insured benefits when they cease being an employee of their current employer.

2.19 A member who holds the MySuper product may elect to opt-out of the provided life and TPD insurance. An RSE licensee may require a member to elect to opt-out of both life and TPD insurance. However, a RSE licensee may also provide members the flexibility to opt-out of one type of insurance if they wish.

2.20 Providing members with the option to opt-out of life and TPD insurance allows them to protect their balance whilst accepting the financial risks of death and permanent incapacity if they choose. It also provides members with the option of obtaining this cover outside of superannuation. If a member elects to opt-out of either life or TPD insurance, the trustee is not required to provide this insurance to the member. Funds may also permit members to increase or decrease their insurance cover from the default amount. [Schedule 2, item 6, subsection 68AA(6)]

2.21 However, trustees will not have to comply with the opt-out requirements should they meet the conditions prescribed in the regulations in relation to the taking out of insurance. It is intended that the regulations will provide an exception where a trustee is unable to obtain opt-out insurance at a reasonable cost. Should a trustee meet the conditions prescribed in the regulations, it will be required to offer compulsory insurance for any member who holds the MySuper product. [Schedule 2, item 6, subsections 68AA(7) and (8)]

2.22 Trustees will have the discretion to determine the minimum levels of insurance they may provide for their members depending on what is in members' best interests. Trustees may offer each member of the fund the same minimum level of default life and TPD insurance or they may vary the minimum level either across different workplaces or at the member level. There are no additional restrictions applying to default insurance. For example, this gives trustees the option of providing different levels of default insurance cover to different categories of employees within a particular workplace, reflecting their different insurance needs.

2.23 The requirement for trustees to provide opt-out life and TPD insurance to MySuper members does not apply if that member is a defined benefit member of the fund. [Schedule 2, item 6, subsection 68AA(9)]

Operating standards for types of insurance and self-insurance

2.24 Operating standards will be able to be made in the SIS Regulations that relate to the kinds of benefits that must not be provided by taking out insurance and the kinds of benefits that must not be provided other than by taking out insurance. It is expected there will be two new operating standards on insurance under these provisions. [Schedule 2, item 5, paragraphs 31(2)(ea) and (eb)]

2.25 First, an operating standard will be made to define the types of insured benefits that can be offered through superannuation, where the fund has taken out an insurance policy to provide these benefits. [Schedule 2, item 5, paragraph 31(2)(ea)]

2.26 The operating standard will limit trustees to only taking out risk insurance policies for the provision to beneficiaries of insured benefits that satisfy the conditions of release in the SIS Regulations for death, terminal medical condition, permanent incapacity and temporary incapacity.

2.27 By using an operating standard, the types of insurance will be directly aligned with the existing definitions of these concepts that are used in the conditions of release in the SIS Regulations. This means that members can only have premiums deducted to the extent that the trustee is able to release the proceeds of that insurance policy to the member. This ensures members are able to have the proceeds of insurance policies released to them at the time a risk that they are insured for occurs. At present, insurance that is not consistent with these definitions cannot be released to members when the insurer makes a payment to the fund under the relevant insurance policy. It is intended that these types of insurance policies will have to be phased out over a transition period, which will be prescribed by the operating standard. The operating standard will also specify any exceptions to the restrictions on types of insurance. [Schedule 2, item 5, paragraphs 31(2)(ea) and (eb)]

2.28 Second, an operating standard will be made prohibiting a superannuation fund from providing insured benefits consistent with the conditions of release for death, terminal medical condition, permanent incapacity or temporary incapacity in the SIS Regulations unless it is backed by an insurance policy. This operating standard will ensure that a superannuation fund cannot self-insure unless it satisfies an exception contained in the operating standard. In particular, an exception will be made for defined benefit funds or schemes that are permitted to self-insure in respect of defined benefit members by a condition on their RSE license. Prohibiting self-insurance will reduce the risk for other members should the fund not maintain adequate capital resources to release unforseen member claims as well as ensuring that the insurance provided complies with the prudential requirements relating to insurance. [Schedule 2, item 5, paragraph 31(2)(eb)]

Application provisions

2.29 An election by a member made prior to 1 July 2013 to opt-out of life and TPD insurance will mean that they do not have to be provided with life and TPD insurance after the commencement of these provisions. The election must still be in force as at 1 July 2013. [Schedule 2, item 7 ]

2.30 If an election of a member made prior to 1 July 2013 only related to one type of insurance then the requirement to provide life and TPD insurance continues to apply for the other type of insurance. For example, a member may have already elected not to be provided with life insurance. However, if the fund did not offer TPD insurance at that time and the election remained in force at 1 July 2013, the RSE licensee would not have to provide life insurance, but would have to provide TPD insurance unless the member subsequently made an election not to be provided with that benefit. [Schedule 2, item 7 ]