Regulatory definitions for total and permanent disability (TPD) create problems for super fund trustees, according to the Association of Superannuation Funds of Australia (ASFA). 

“The limited, somewhat ‘all or nothing’ nature of the regulatory definition of TPD has led to difficult, and sometimes protracted, decision-making for trustees,” ASFA says in a submission to a Productivity Commission study into super efficiency and competitiveness.

“To determine whether the member meets the regulatory definition, the trustee must be reasonably satisfied the member’s ill health makes it unlikely they will ever again engage in gainful employment.”

The submission says this is a hard decision to make.

The trustee is required to consider often conflicting reports from medical and occupational specialists as part of the process.

“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.

“There is evidence that framing a person’s medical condition in terms of their ‘disability’, as opposed to their ‘ability’, can have a deleterious effect on their psychological condition.”

ASFA says “one-time” assessment of a person’s disability can act as a disincentive to recover, for fear of missing out on a lump sum payment. To counter this, some funds are instigating instalment payment systems after the initial assessment.

But despite group life’s issues, offering insurance through super is a significant benefit for members, ASFA says.

“Insurance in super provides fund members and their dependants with valuable, cost-effective, protection against financial hardship.

“There is an old adage to the effect that insurance is not bought, it is sold, which reflects a tendency in the behaviour of most consumers to fail to take action to effect appropriate insurance cover without some form of ‘nudge’.”

ASFA says group life cover is cost-effective for members because the underwriting is across a number of lives, rather than just one.

“Operationally, this provides significant cost savings and has the additional value of sharing the risk across as broad a population as possible.

“This can correct for potential market failures in insurance, where higher-risk individuals may be unable to obtain appropriate insurance cover.”