As of 1 July 2014, a regulated superannuation fund can only provide an insured benefit, such as income protection, to a new member if that member satisfies a ‘condition of relief’ under Schedule 1 of the Superannuation Industry (Supervision) Regulations 1994 (“SISR”) (“the Regulations”). Relevantly, the conditions of relief are:
- Death;
- Terminal illness;
- Permanent incapacity; and
- Temporary incapacity.
Income protection relies on (at least) the temporary incapacity condition of relief. For example, an individual must be unable to work due to sickness or injury to be entitled to income protection. Only then does the legislation allow for an income stream to be released from the regulated superannuation fund.
Two main areas of concern in regard to the amendments have been identified, which to date remain unanswered.
Temporary incapacity and “gainful employment”
Temporary incapacity relates to a member who has “ceased to be gainfully employed (including a member who has ceased temporarily to receive any gain or reward under a continuing arrangement for the member to be gainfully employed)”, and means “ill-health (whether physical or mental) that caused the member to cease to be gainfully employed but does not constitute permanent incapacity” (regulation 6.01 of the Regulations)
The result of this definition is that an individual is not entitled to receive income protection if he or she was not “gainfully employed” in the period immediately prior to the individual incurring ill-health. Gainful employment is defined as any employment or self-employment “for gain or reward in any business, trade, profession, vocation, calling, occupation or employment” (regulation 1.03 of the Regulations).
Accordingly, if an individual is unemployed, on unpaid leave such as sabbatical or maternity leave, or a home-maker and consequently not earning an income in the period immediately prior to disability, then the member is no longer entitled to receive any payments or benefits from their superannuation fund, even though that individual has been paying premiums for the insurance cover. This is on the basis that an individual cannot “cease gainful employment”, if he or she is not receiving an income from employment.
Pre-disability earnings
Upon satisfying the temporary incapacity condition of relief, an income stream is released to the member for “the purpose of continuing (in whole or in part) the gain or reward which the member was receiving before the temporary incapacity…”
The issue here is that pre-disability income is not defined. Accordingly, there is a concern that insurers will have a degree of flexibility in how to calculate these earnings. For example, insurers could choose to calculate earnings over a year, the past three years or perhaps even longer. As a result, a member might receive less than what he is she is entitled to.
Hopefully guidance will be provided by the Australian Prudential Regulatory Authority (“APRA”) on these important issues in the near future. Until then, if you are concerned about how these legislative changes might affect you, please come into our office and speak to one of our experience solicitors.