Published in The Melbourne Age, 2 September 2018, https://www.theage.com.au/business/consumer-affairs/super-changes-could-leave-thousands-without-enough-insurance-20180830-p500r1.html
The new Prime Minister and new Treasurer are off to quick starts addressing significant challenges. Here’s another one: the place of insurance in superannuation.
Before the Senate is the innocuously sounding Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 that impacts millions of Australians’ insurance cover and directly impacts hundreds of thousands.
Independent experts predict that the unintended result of the legislation, if enacted, would see ballooning insurance premium costs, fewer workers covered, a more complex system, likely lower payouts, and many hundreds of thousands left worse off.
As independent Chair of the Association of Superannuation Funds of Australia (ASFA), the peak body of the superannuation industry, I respectfully request the government to withdraw or substantially amend those sections of the Bill dealing with insurance.
The stated aim of the government’s Bill is to protect member balances, curb certain fees and costs being charged and so forth.
Without getting into the nitty gritty of the entire Bill, it is the insurance changes that demand critique.
The Bill proposes to stop superannuation trustees from providing opt out insurance to new members aged under 25 years, as well as to members with balances below $6000 and members with inactive accounts, unless directed by the member.
The changes need to be thought through.
For most Australians, life, disability and income protection insurance is provided within a person’s superannuation account. Pooled insurance cover and shared risks over groups of lives has led to lower premium rates – lower than what could be the case for myriad individuals each taking out their own cover.
Workers who do not normally take out insurance, or could not otherwise qualify, have it automatically provided to them when they join a superannuation fund. Importantly, however, they can cancel it if they wish.
This has resulted in over 70 per cent of life insurance in Australia being held in superannuation.
According to government statistics, approximately $7 billion was paid out in claims to approximately 80,000 people during 2016/17.
Impact of the Legislation
Recognised industry consultants KPMG and Rice Warner estimate that up to 50 per cent of existing insurance cover in superannuation would be removed if the Bill before Parliament, and associated legislation, was passed unamended.
This is because the measures not only target insurance held on duplicate and inactive low balance accounts, where the problems with insurance arise. The proposed changes also introduce restrictions on new insurance being issued when people join a fund and cancel cover on existing accounts if their super balance is below $6,000 or if contributions have not been made in 13 months regardless of the account balance.
Unfortunately, the majority of people affected by these changes need their insurance; it is the only death and disability insurance they hold – or could obtain.
Some already suffer ill health, some have left the workforce for a period of time to care for family or are on extended leave and some are simply on a career break or establishing a new business.
Unintended Consequences
Younger people and those working in high-risk occupations such as the police, health care, construction and heavy industry are particularly vulnerable to losing valuable insurance if the proposed legislation is not amended.
Average automatic insurance premiums are approximately $3 per week and about half of that for younger people. This is a small price to pay for peace of mind or to benefit from a claim should catastrophe strike.
In addition to millions of Australians losing existing cover or access to insurance that they could not otherwise obtain, those that remain insured through their super will be impacted.
One large fund presented evidence to the Royal Commission that approximately hundreds of thousands of members would have their insurance cover cease if new legislation was passed. Additionally, terms and conditions for policies would be reviewed and tightened such that premium rates increase. There are differing views on the likely size of the increase with estimates ranging from 10 to 26 per cent. Any increase reduces the retirement benefits of those who remain insured – which is the opposite of what the reforms are meant to achieve.
There is the risk that the unintended consequences of the proposals undermine the intent of the changes and the very nature of group insurance and the benefits of pooling risk.
The proposed 1 July 2019 start date means funds will have very little time to renegotiate contracts with insurers and update administration systems. This provides potential for added pressure on premiums due to the lack of competitive tension and administrative chaos.
The Way Forward
The industry agrees that change is required to prevent unnecessary erosion of super accounts by insurance premiums.
It is estimated by Treasury that there are six million duplicate accounts in Australia that are not receiving superannuation contributions with many of these having insurance premiums deducted from them. The government should target laws that eradicate the insurance held on these accounts and not disrupt the majority of super fund members who have much needed insurance provided in an affordable and straightforward manner.
Insurance is a complicated system involving balances and trade-offs. Substantial tinkering to one part adds complexity and administration costs elsewhere. More needs to be done to clean up discrepancies, reduce overcharging in some cases and ensure low income and low super balances members are not disadvantaged.
The industry itself has created a Code of Practice to tackle such issues and it should be given the required time to take effect.
The rationale for the proposed legislation sounds reasonable – improving retirement savings and tackling duplicate cover. The unintended impact, however, is to leave too many Australians uninsured.
Note on publication:
Dr Michael Easson AM is the Independent Chair of ASFA.
