Come July 1, 2014 trustees are faced with an unpalatable choice caused by Australian Prudential Regulation Authority rules on what insurance they can offer. Either they give all members insurance in line with the regulations or they retain the existing offer for those who joined before that date and give the revised deal to new members. Neither is going to make them popular and neither is given full endorsement by APRA, lawyers or actuaries.
There are also a host of unanswered technical difficulties on when exactly trustees can pay out income protection and total and permanent disablement benefits.
Of the two super funds represented in the roundtable discussions at the offices of Investment Magazine, NGS Super was still undecided on a course of action, while QSuper has taken the path of giving all members the same benefits from next year.
Chief of member administration at QSuper, Matthew Halpin, who has responsibility for group insurance, says that trustees at his fund ran the changes through a framework to decide what was in the best interest of members. This looked at nine different design principles when considering insurance, including adequacy and sustainability. “From our perspective, I struggle to see how they can accept grandfathering as in members’ best interests,” says Halpin. Part of the rationale has been the cost of running two different systems, which the trustees reason will erode overall retirement benefits.
There is some sympathy for this view. Phil Patterson, senior consultant leading the group insurance activities at Towers Watson, says. “You can make that decision about whether this is a big enough issue to warrant
the attention of the trustee and the allocation of resources. That’s the point that Matthew’s coming from – ‘let’s make a decision and move on’.”
Tony Nemec, head of legal consulting at Mercer, recommends trustees projecting through the impact on administration and member benefits over the next five years before coming to a decision. Another way of looking at it, he says, is the process trustees would undergo when changing insurer, in which terms of cover might change along with premiums and administrative efficiency.
The best interest test
The problem that funds such as QSuper face is whether their action fails the best interest test for members under the Superannuation Industry (Supervision) Act 1993. The Australian Prudential Regulatory Authority is not currently making life easy for trustees by providing clarity on this.
“Trustees have got a harder time of it because the regulator’s not saying ‘here, you must’. It would’ve been easier, after creating this issue, for the regulator to say – in the same way that it’s overriding trustees that have provisions to the contrary – to say ‘and policies need to reflect that’,” Nemec points out.
The temptation for some trustees might be to defer the decision, but Nemec recommends against it.
“I’m not so sure that that’s the right strategy to say, ‘it’s too hard to deal with this, we’ll grandfather for the moment and we’ll play on and see where things land in the next six months’. That might actually make your decision on dealing with grandfathering more difficult, because you didn’t really use that initial reason for change at that point. Trustees should really grapple with those issues now.”
The communication challenge
Communication of the changes and member comprehension will be just as hard. The worst scenario is one in which someone joins in June 2014 followed by a colleague
in July, and one is grandfathered and the other is not. Both then suffer a similar illness, but one gets the benefit and the other one does not.
Ashley Palmer, a senior consultant and actuary at Aon Hewitt, describes how this might play out. “It’s the last thing that any individual really wants is to have to consider which bucket they are in. ‘Am I in the pre-July 2014 bucket? What does that mean for me?’ It’s a complication waiting to happen.”
There is also the risk that members might not read the new communications and rely on old statements instead.
“If the communications aren’t handled well then a member may think they’re covered under a certain definition when in fact they no longer are,” says Darryl Pereira, a partner at Turks Legal. “The member may have a claim against the trustee because of that not being properly communicated.”
Bernard O’Connor, company secretary and manager of member services at NGS Super, says: “Which one are you covered under? That’s hard enough to comprehend. Getting members to read it and understand it is very difficult.”
Many members will not only fail to understand, but react in unexpected ways.
“Whenever we’ve done re-rates, we’ve written to members and always been worried about the detrimental impact that’ll have on our member sentiment,” says Halpin. “Yet, we find that we have more members actually applying for cover as a result of communicating with them and our original cover’s gone up. That’s been the case in at least three situations where our additional cover’s gone through the roof and applications for income protection’s gone through the roof. Even though the premium rate’s gone up X per cent.”
Comprehension will be low, agrees Palmer. “Significant events notices in most cases are going out by the end of September and because of member fatigue, it’s a real question of how many communications you want out there. How many members are actually going to read? Some are very much more important than others, but you can’t send 20 out in a year and expect your members to be more informed.”
There are several legal issues around communication, but one of the more intriguing is the situation in which a member has a been offered access to a benefit, but does not apply for it until after July 1. Does the member still have a right to it?
Nemec says the member loses the benefit.
“If you have cover in place, you’re entitled to whatever that cover is, even if you increase that amount going forward. If you had it as an option but you didn’t utilise it, you’ve lost it.”
A conundrum is posed by Darren Wickham, a representative of the Actuaries Institute. “If you’re in a retained benefit division and your cover cuts out because your account balance falls below a certain level, then you have a new contribution coming in, so all of a sudden you get cover again. Do you have the old definition or the new?”
Some of these issues are being openly explored with APRA.
“Through the FSC we are trying to better understand some of the intent of some of the legislation and some of the ways that we could be looking to address it as insurers and re-insurers,” says Frank Crapis, head of industry funds segment at Comminsure. “Some of this concern will be on the legacy products.”
One of the biggest technical difficulties facing trustees is the ambiguity over whether benefits can now be paid out to someone who has a progressive illness that will eventually lead to full capacity, but which initially allows them to carry out some other types of work.
What are the positives of regulation on group insurance?
- It has the potential to make schemes easier to benchmark.
- It should make it easier to determine what benefits are covered instead of relying peculiarities in trustee rules.
- It has encouraged industry groups and funds to talk to collaborate more.
- The focus on data requirements will improve trustees’ knowledge of their own schemes and should make
Darren Wickham, representative of the Actuaries Institute
Darryl Pereira, partner at Turks Legal
Frank Crapis, head of the industry fund segment at Comminsure
Tony Nemec, head of legal consulting for Mercer
Bernard O’Connor, company secretary and manager of member services at NGS Super
Phil Patterson, senior consultant leading group insurance activities at Towers Watson
Matthew Halpin, chief of member administration for QSuper
Ashley Palmer, senior consultant and actuary at Aon Hewitt