Just when you thought it was safe to take a breath from the latest round of superannuation reforms, a recent change which was part of the Protecting Your Super Package (PYSP) reforms, may ironically be having the reverse effect.
The problem is a result of a new provision, s 68AAA of the Superannuation Industry (Supervision) Act 1993 (SIS Act). However, the cause of the problem may in fact lie with the actions of certain industry participants rather than the Government, as the example below will illustrate.
Intended operation of s 68AAA of SIS Act
The previous “opt-out” rule for insurance within superannuation was removed with effect from 1 July 2019. Now a trustee of a choice or MySuper product must stop providing insurance on an opt-out basis when a member has been inactive for 16 months or more. In other words, s 68AAA requires that to continue to provide the insurance, an inactive member must “opt-in” for the insurance cover.
This opt-in insurance rule was introduced via the Treasury Laws Amendment (Protecting Your Superannuation Package) Act 2019, which received Royal Assent on 12 March 2019 after being passed by the Senate with 22 amendments: see 2019 WTB 7 [198]. This suite of laws was part of the PYSP reforms, which were designed to prevent the erosion of individuals’ retirement savings from excessive fees and inappropriate insurance.
As far as is relevant, s 68AAA(1) and (2) provide, in summary form, as follows:
- A trustee must ensure that a benefit is not provided by the fund to a member by taking out or maintaining insurance if the member’s account has been inactive for a continuous period of 16 months and the member has not elected that the benefit will be provided to the member by taking out or maintaining insurance, even if the member’s account is inactive for a continuous period of 16 months;
- Each trustee must ensure that each member of the fund may elect, in writing, that a benefit specified in the election is to be provided to the member by taking out or maintaining insurance, even if the member’s account is inactive for a continuous period of 16 months. [emphasis added]
So how was s 68AAA designed to operate?
While it can sometimes be difficult to discern Parliament’s intention from enacted legislation, s 68AAA gives a clear hint as to how it is designed to operate. That is, in terms of maintaining insurance coverage (which will be one of the material facts in the example below), s 68AAA(2) requires a trustee to ensure that each fund member can elect, in writing, to continue insurance coverage.
So the question becomes – how would one expect a trustee to achieve this? Well, clearly by sending out a form to a member asking them if they wish to maintain their insurance coverage and generally complying with any related regulations promulgated to achieve this aim. A companion regulation was recently inserted to achieve this aim, as follows.
Protecting Your Super Regulations
The Treasury Laws Amendment (Protecting Your Superannuation Package) Regulations 2018 inserted the relevant regulations into the Corporations Regulations 2001. The explanatory statement to the Regs states:
“The Protecting Your Super reforms looks to ensure that arrangements for insurance in superannuation are appropriate and that members are not paying for insurance cover that they do not know about or premiums that inappropriately erode their retirement savings.”
Relevantly, reg 7.9.44B of the Corporations Regulation 2001 was inserted to require a trustee of a superannuation fund to provide an “insurance inactivity notice” to a MySuper or choice member whose account has been inactive for 9 and 12 months if the member has not elected to take out or maintain insurance.
The insurance inactivity notice needs to be provided to the member within 2 weeks of the end of the 9 and 12 month periods of inactivity. The Regulation also requires a trustee to provide a “final inactivity notice” to a MySuper or choice member whose account has been inactive for 15 months and the member has not elected to take out to maintain insurance.
In terms of the actual election, APRA’s website Q&A states as follows:
“15. Does an election made by a member for their insurance to continue in respect of their inactive account last indefinitely?”
Yes. APRA considers that once a member makes an election in relation to the member’s insurance under a particular product, that election continues indefinitely until the member advises the trustee otherwise. Trustees are required, at regular intervals, to notify members that have made an election how they can subsequently cease their insurance.”
This now leads us into the Example.
Example
A rather distraught client presents at our office brandishing a letter from their industry super fund. An extract from that letter follows:
“Dear Member [name deleted]
Your insurance cover has ended on 1 July 2019
We have not received any contributions or rollovers into your superannuation account for the last 16 months. In accordance with section 68AAA of the Superannuation Industry (Supervision) Act 1993, we are required to cancel your insurance cover, if your account has been inactive…for 16 months or more and you did not elect to keep your insurance cover”.
Discussions were had with the fund and the following facts were established:
- Our client had continued to maintain her insurance coverage as she continued to pay the relevant premiums.
- Our client never received any communication or documentation from the fund as required by the Regulations or, in our view, as required by s 68AAA itself.
- The fund stated that their modus operandi was to not have any contact or communication with fund members prior to the expiration of the 16-month period.
- Instead, once the 16-month period was achieved, they simply cancel the fund member’s insurance coverage.”
Clearly, in terms of s 68AAA, the trustee of the fund had fallen into error by failing to create the circumstances in order to ensure that each member of the fund may elect in writing that their insurance coverage be maintained. This, as is plain from the Corporations Regulations, is achieved by complying with reg 7.9.44B.
Apart from this communication, no other document or notice was sent to the fund member as required by reg 7.9.44B. When pressed, the fund agreed to reverse their decision and to reinstate the member’s insurance coverage. However, they did admit that they simply do not have any communication with fund members before taking this decision.
In our opinion, this is arguably unsatisfactory conduct on the part of the fund. What about the many fund members who will not question this decision when it happens to them where insurance was an important component of their retirement plans?
The super fund appears to have operated in complete contravention of reg 7.9.44B of the Corporations Regulations, and arguably s 68AAA of the SIS Act, which had the effect of summarily forfeiting a right that was very important to the fund member, and comprised a material part of their retirement strategy.
Conclusion
No doubt the Hayne Royal Commission went to great lengths to clean up the conduct and practices that did not meet community expectations. Unfortunately, some super funds are still arguably falling below community expectations in this regard. Irrespective of the reasons, breaches of the intent behind the recently enacted Corporations Regulations have the potential to deprive unsuspecting super fund members from a variety of insurance entitlements. Such practices must be stamped out so that members’ interests are put first.
In the meantime, advisers should remind all clients to review their insurance cover within superannuation. Where appropriate, consideration should be given to proactively giving a written direction to their super fund to opt-in to continue their insurance cover. Of course, not everyone needs to maintain insurance cover within their super fund, especially if they have multiple accounts, but it is critical that clients understand the implications of this cover ceasing unexpectedly.
General Advice Disclaimer
General advice warning: The advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.
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