Risk of Default Investment Option for TPD Claimants

Hi All,

I hope you and your family’s are all well and staying healthy during this crazy time.

I wanted to write you a quick note to make you aware of a common issue I am seeing at the moment with recent Total & Permanent Disability (TPD) claimants during a time when financial markets have fallen significantly following the coronavirus outbreak – some claimants I have spoken with recently have lost tens of thousands of dollars as their TPD proceeds have been automatically directed into their superannuation account and into their default investment option.

I have been receiving many calls from concerned TPD claimants who have been impacted by this issue, it would be great to get your thoughts on this issue, as I think this will prompt many superannuation funds to review their processes following a TPD claim.

Various processes superfunds apply following TPD pay-outs

As you may be aware, all superannuation funds will have different processes when TPD claims are approved. There are 3 main ways a superfund will deal with the TPD proceeds:

1. Hold the funds in a holding account (not market linked) until the member makes a withdrawal/payment direction (good practice),
2. Direct the proceeds into a cash option within the members super account (best practice),
3. Direct the proceeds into the member’s default investment option in their super account (NOT best practice!).

I estimate roughly 50% of super funds will follow the above option 3 process – which I have always believed is not good practice. The bulk of Australian superannuation members will be invested in the default investment option, which will be a “balanced” or “growth”. 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 plan to withdraw all or the bulk of their TPD settlement following a claim, and that being the case investing these funds is not appropriate.

While many of us have the time to ride out periods of significant negative returns and high volatility like we are seeing now, TPD claimants have access to all their super and TPD money immediately, they tend to be vulnerable people and should be given time to consider their options before their insurance proceeds are invested in the market. Market’s 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 1 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 I think this highlights a lack of consideration superfund trustees have given to their processes around TPD claims.

Example 1

Yesterday I spoke with a lady who is a professional and very savvy, her husbands $250,000 TPD claim was approved and paid into his super account 2 weeks ago and invested into his default balanced invested option. This lady didn’t know the claim had been approved until yesterday, in the meantime her husband’s TPD proceeds have fallen $24,000 over the last 2 weeks. Once all is settled this lady wants to make a complaint to the superfund to see if they will provide compensation.

Example 2

A lady I spoke with on Friday managed her own TPD claim which was approved 2 months ago, the insured amount of $600,000 was paid into her super account and invested directly into her growth default 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 $60,000.

What can we do?

As I have said, this won’t impact every client. Though I think it would be prudent to make sure TPD claimants are aware of this issue and if they have any question please refer them to us.

I think in some cases TPD claimants could have a valid claim for compensation against their super fund, though would appreciate any thoughts you have on this.

I have a list of 70 superfunds I have dealt with over the last 3 years and continually aim to capture key information on processes superannuation funds apply to try and better support claimants – this investment of TPD proceeds is 1 of the key pieces of information I track. So let me know if you or your clients have any questions or concerns.

Thank you

I hope you have found this information useful. Thank you for your time and continued support.

Wishing you all the best during this uncertain time.

Kind regards,

Andrew Reynolds

The TPD Insurance Advice Specialist