The treasurer has announced proposed changes to superannuation which mainly relate to the provision of insurance. While the changes cannot be categorised as ‘core’ changes, they are significant and could impact on all members who have Death, Income Protection or Total and Permanent Disability (TPD) insurance within super.
If legislated, the most significant changes would be that default Death, Income Protection and TPD insurance would be offered on an ‘opt in’ basis rather than an ‘opt out’ basis which is currently the case for:
• members with balances of less than $6000
• members under 25, and
• members with inactive accounts that haven’t received a contribution for 13 months.
Clearly the government is attempting to protect fund members with low account balances in order to grow balances faster, however, there is a possibility of unintended consequences if the measures receive legislative support and are passed.
Certainly members with multiple inactive accounts will benefit as there is no point in paying for insurance that cannot be used. For example, Income Protection insurance held in multiple accounts will not be paid as a member cannot insure a salary greater than their current salary. Total and Permanent Disability and Death cover, however, can be paid from each account if the insurance is up to date.
It is a fact that default insurance cover provides Death cover for millions of Australians who would otherwise have no cover. This initiative (default cover) has gone a long way to filling in the under-insurance gap in Australia. The removal of automatic default cover for large numbers of members will add to the underinsurance gap and place added pressure on the social security and health systems.
Default insurance provided in superannuation for eligible members has sometimes been criticised by politicians and the media and has on occasion been the subject of member complaints. What is often misunderstood is the legal structure of super funds. Industry funds operate under a trust structure with the trustee responsible for providing the best retirement outcomes for members.
In its capacity as a fiduciary, the trustee can make decisions which benefit the majority of members without being required to ask individual members it they don’t want all or part of the cover. The ‘opt out’ provision is provided for these members. Automatic insurance for Death, TPD and Income Protection (up to a five year payment period to age 65) has assisted hundreds of thousands of Australian families in times of distress due to illness, accident or the death of a family member. Perhaps funds have not been pro-active enough in telling their ‘good news’ stories about the families who have benefited from having default insurance in place through their super fund.
The removal of a significant number of insured members from the pool could impact young members with families, mothers on leave or returning to work and certainly new employees who will not have the required $6000 in their account for insurance to kick in. And due to a potentially smaller number of insured members in the pool, it is likely that insurance premiums will increase.
Under MySuper funds must provide default Death and TPD insurance so it is clear that on some levels the government recognises the universal benefit of insurance for the social security and health systems. However, the constant media criticisms and government interventions make insurance rules opaque and difficult for members to understand that insurance through super is a true member benefit after all.
