The Treasury Laws Amendment (Protecting Your Superannuation Package) Act 2019 (PYS) received royal assent in March 2019. The effect of the Act will be to cancel insurance from 1 July 2019 for all members who are classed as inactive. It defines an inactive member as simply one for whom an eligible contribution was not received into their account for 16 consecutive months.
Superannuation funds will scramble to implement the legislation in the limited time provided by the late passage of the legislation and write to all affected members by 1 May 2019, to let them know that their insurance will cease unless they opt-in. Due to their sustained efforts, funds will in most cases succeed in this requirement.
However, there are cohorts of members for whom the consequences will be dire if they do not opt in by 1 July 2019. We know that if a member is on claim for income protection, or they are sick or injured, that they have a much higher likelihood of becoming totally and permanently disabled or even dying. They will, in the majority of cases, be inactive members unless they are entitled to a superannuation guarantee component, while not at work, which is normally only payable in limited circumstances. Members who have been paid a TPD benefit may also have a residual death benefit component. Amidst the distraction of serious illness or injury, these members must now respond to a single communication required under the legislation in order to retain their insurance cover.
This is a consequence that could have been avoided by a simple and considered amendment to the definition of inactive member to exclude members who are on claim.
We know that there are other cohorts of members who have actively engaged in attaching insurance onto their inactive account. This includes members who have been through underwriting, members who have made a choice under various life events cover options and transfer-in provisions as well as members who have set up a pension account and chosen to keep an inactive accumulation account for insurance purposes.
The post 1 July 2019 communication requirements—which specify three notices to members prior to cancellation—should provide ample opportunity for members to opt-in to cover. However, while the one communication by 1 May 2019 will comply with the legislation, it may not fit well with a possible moral imperative to contact members who are most affected by a cancellation of cover, or who we know have actively sought insurance cover.
We are all aware of many cases where members have complained regarding the deduction of premiums from their account without their consent and have requested to be reimbursed for these premiums. These amounts are usually at the most in the thousands. Claims which will not be paid from 1 July 2019 as a result of the PYS legislation will in many cases be in the hundreds of thousands. The incentive to litigate will be much higher and funds will need to deal with members who are in dire financial difficulty due to illness or injury and who maintain they did not receive the communication or, as will be the case in some instances, they have changed address and have been uncontactable.
The intention of the legislation—to protect the retirement savings of members whose accounts are being eroded by unwanted insurance—is well understood. We also know that through other consolidation measures, the number of inactive accounts—and the level of duplicate insurance—will in the future reduce significantly.
The exclusion of members who are on claim or who have elected to increase their insurance cover (either through underwriting, life events cover options or a transfer-in of cover) in the definition of an inactive member would have taken the legislation from a blanket and indiscriminate cancellation of insurance cover at 1 July 2019, to a sensible plan of action that would have protected members who are in the most need. It would have also reduced the level of engagement that is now required by funds by 1 July 2019 and potentially also protected superannuation funds from entering into a costly and time consuming cycle of litigation.