Cover changes could make outcomes worse
As the superannuation industry continues to navigate its way through the maze of regulatory changes and industry reviews, one of the most complex areas trustees must consider is the small group of quiet material changes announced within the 2018 Federal Budget.
The most significant budget changes were those relating to insurance within super. The main proposed adjustments include the referral of small, inactive accounts to the Australian Taxation Office for automatic consolidation, which will have a significant impact on some funds’ revenue models and ongoing sustainability. Also, the proposed limits on fees for small accounts will re-introduce the concept of cross-subsidisation, which most thought was not allowed after the introduction of MySuper products and the abolition of member protection some years ago.
As if this wasn’t enough to keep most trustees sufficiently busy, it’s all in addition to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and the Productivity Commission Review into the Competitiveness and Efficiency of the Superannuation System.
Whilst there is no doubt group insurance is not perfect and some tweaking could result in better product tailoring, we remain concerned that the Federal Budget changes in relation to insurance will have a significant number of unintended consequences that could result in worse outcomes for many fund members and their beneficiaries.
We note that three key changes to insurance within superannuation were announced in the Federal Budget:
- Complete removal of default insurance coverage for members under 25
- Removal of default cover for members with balances less than $6000
- Removal of cover for members who haven’t received a contribution for 13 months.
Our review of the impact of these changes suggests that better tailoring of insurance products, which many of the funds have already commenced, would provide better outcomes for fund members than the wholesale removal of cover for certain categories of members.
Based upon our analysis, we estimate that about half of the insurance provided through superannuation could be removed if the Federal Budget’s changes are implemented without amendment.
Whilst much of this relates to insurance for members with accounts that have not received contributions for more than 13 months, we remain concerned that the quantum of insurance removed from the system will have longer-term implications for the economy, given Australia’s already well-known underinsurance issues.
A further concern is the impact of the removal of cover for members under the age of 25, which could have detrimental effects upon those who maintain cover within superannuation going forward. This is because group insurance is a pooling arrangement, in which pricing is based on the risk of the overall insurance pool.
By definition, removing younger, generally lower-risk members from the pool can serve only to increase the risk of the overall pool, probably leading to increases in insurance premiums for the remaining members, to offset this higher risk.
Our estimates have suggested that the overall increase in insurance premiums could be, on average, as much as 26 per cent across the industry, with some funds faring much worse where they have a substantially older demographic or higher-risk membership base. There are a number of other unintended consequences associated with the Federal Budget’s proposed changes to insurance; we also remain highly concerned with the implementation timeframes the government has proposed. A commencement date of July 1, 2019 for the majority of these changes remains too short, particularly given they have yet to pass through both houses of Parliament, creating uncertainty for all funds and their insurers about which areas might become law.
Some of the issues associated with erosion of small accounts due to insurance will probably be resolved by the account consolidations, which will be achieved automatically via the transfer to the ATO. Coupled with this, funds will be undertaking more tailoring of insurance to better suit their membership. Whilst we recognise the government’s intent to ensure insurance within super meets the needs of members and does not unnecessarily erode retirement benefits, the impact of the changes could be far-reaching and result in a material reduction in the number of members with insurance, the cost of which would ultimately fall upon the government.