Opinion
Significant risk of the default investment option for TPD claimants
26th Mar 2020
Financial markets have fallen significantly following the COVID-19 outbreak, which has led to a serious and costly problem for many recent total and permanent disability (TPD) insurance claimants.
When a TPD claim is approved, in many cases it is directed into the claimant’s superannuation account and into their default ‘balanced’ or ‘growth’ investment option. During times when financial markets have fallen significantly, as we are seeing now following the outbreak of the COVID-19, some claimants have lost tens of thousands of dollars before they even realise their claim has been approved. This is a serious issue and will likely result in many complaints to superannuation trustees and prompt superannuation funds to review their processes following a TPD claim.
Various processes applied by superannuation funds following TPD pay-outs
All superannuation funds have different processes when TPD claims are approved. There are three main ways a superannuation fund will deal with the TPD proceeds:
- Hold the funds in a holding account (not market linked) until the member makes a withdrawal/payment direction (good practice);
- Direct the proceeds into a cash option within the member’s superannuation account (best practice); and
- Direct the proceeds into the member’s default investment option in their superannuation account (NOT best practice!).
Roughly 50% of superannuation funds will follow the third option and this is causing huge issues at the moment. The bulk of Australian superannuation members will be invested in the default investment option, which will be a ‘balanced’ or ‘growth’ option. This can mean when a TPD claim is approved a huge sum of money is being placed straight into the market on one day – and as we know, many TPD claimants haven’t been able to work for years and plan to withdraw all or the bulk of their TPD settlement following a claim. This being the case, investing these funds in the market is not appropriate.
Many Australians have the time to ride out periods of significant negative returns and high volatility like we are seeing now. However, as TPD claimants have access to all of their superannuation and TPD money immediately and tend to be vulnerable people, they should be given time to consider their options before their insurance proceeds are invested in the market. Financial markets tend to increase gradually and can fall very quickly. Even a sophisticated investor would be unlikely to invest a huge sum of money into the market on one particular day; a common strategy is to average funds into the market over time to avoid market timing issues.
There is no reason TPD funds should be invested straight into the market and this likely highlights a lack of consideration given by superannuation fund trustees to the processes around TPD claims. Below are some recent examples of how this issue has impacted claimants.
Example 1
Simon’s $250,000 TPD claim was approved two weeks ago. His wife, Sarah, has been working with their law firm to help manage the claim. Sarah is a professional and very savvy – she and Simon didn’t even realise that his TPD claim had been approved, let alone had been invested into Simon’s default balanced investment option and had fallen $24,000 over the past two weeks. Sarah plans to make a complaint to the superannuation fund to see if they will provide compensation.
Example 2
Jennifer managed her own TPD claim which was approved two months ago, and the insured amount of $600,000 was paid into her superannuation account and invested directly into her ‘growth’ default investment option. She was planning to make a full withdrawal to put the funds into her mortgage offset account, though given her significant health issues she hadn’t made the time to complete the paperwork. In the meantime, her balance has fallen over $60,000.
What can be done?
This issue won’t impact every client and is currently exacerbated by the significant fall we have seen in financial markets around the world. Many TPD claimants could have a valid claim for compensation against their superannuation fund.
This issue is likely to prompt changes to superannuation funds processes, but in the meantime it would be useful to warn TPD claimants of this issue and instruct them to get financial advice if they have questions or concerns.
Andrew Reynolds is an ALA member and a member of the ALA Superannuation & Insurance Special Interest Group. Andrew runs a financial advice business which assists personal injury law firms and their clients. For more information visit his website.
The views and opinions expressed in these articles are the authors' and do not necessarily represent the views and opinions of the Australian Lawyers Alliance (ALA).
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