The federal government has confirmed the majority of the Cooper review recommendations it supported in relation to self-managed superannuation funds (SMSF) will be implemented.
The final SMSF recommendation made by the Cooper review panel was in relation to a requirement for SMSF trustees to consider life and total and permanent disability (TPD) insurance for fund members.
The specific recommendation was that such consideration be included as part of the process when trustees were developing the fund’s investment strategy.
In other words, the operating standards for SMSFs would be amended so that when SMSF trustees are formulating their investment strategy they would need to give due consideration not only to risk, return, diversification, objectives, liquidity and cash-flow requirements of their investments, but they would also need to determine whether life and TPD insurance are appropriate for the SMSF members.
Commentary on the issue has focused on its relative effectiveness in increasing the levels of insurance in Australia.
It does not compel trustees to take out insurance, but it is designed to compel them to consider such a move.
Most industry observers believe while it may not be particularly successful in increasing the level of those taking out insurance, it can’t hurt.
The legislation requiring an investment strategy to be formulated does not require a written document to be created, although the fund’s auditor will require a written document.
This is largely to provide them with evidence that an investment strategy has indeed been formulated, as well as inform the auditor that the investments have been undertaken in accordance with the strategy.
Therefore, a written document is often created for audit purposes and not as the actual driver of the investment strategy.
This does not imply that trustees do not have an investment strategy – it’s just not necessarily formally documented until it is requested by the auditor.
It is, therefore, questionable as to whether or not the inclusion of a requirement to consider insurance as part of the investment strategy will achieve its objective as a driver of greater levels of insurance.
The real question is whether a compliance action to consider insurance will be as effective as better levels of education and financial literacy. It is generally accepted Australians are underinsured and it’s clearly apparent more needs to be done.
The Cooper review report identified that less than 13 per cent of SMSFs have insurance for their members. It also acknowledged SMSF trustees may hold insurance outside of super.
The Australian public – not just SMSF trustees – need to better understand why insurance may be necessary, why they need to consider it and the risks associated with not having adequate levels of insurance.
Insurance in an SMSF or in superannuation generally may not always be appropriate or the most cost-effective way of taking out insurance compared with insurance outside the super environment.
For many, insurance may be entirely inappropriate, particularly where they have no dependants or could be considered self-insured.
The Cooper review panel was right in identifying that Australians need to appropriately consider the insurance issue. It remains to be seen how effective its suggestion to address the issue will be.
