Employment superannuation is compulsory savings for workers who would otherwise not save enough for their retirement and would be a burden on the age pension system.
A proportion of those workers will not accrue enough superannuation because of disability or death. Insurance within Super is designed to top up their retirement income so that they (or their dependants) will not be an unnecessary burden on the age or disability pension system.
Insurance is default rather than compulsory. That is, to account for workers who have adequate insurance outside of superannuation while also providing options for workers for whom insurance is not well targeted. For example, it’s too expensive or they have a sufficient accrued superannuation account balance.
Both are predicated on the notion of a lack of engagement by workers; which was acknowledged by the Cooper Review in 2010 and was the basis for the introduction of MySuper in 2014.
As superannuation account balances have risen, information has become more targeted and consumer-friendly and superannuation and insurance has received more mainstream public attention. Consumer awareness and engagement has increased gradually and will continue to do so.
However, in the meantime, compulsory employment superannuation with default insurance remains an important component of the Australian retirement incomes system. It is simply not correct to suggest that workers should be left to their own devices about insurance, or for that matter superannuation.
The danger of moving from “opt-out” to “opt-in”
A shift away from “opt-out” to “opt-in” default insurance cover would disrupt these policy settings and result in a dramatic reduction in the proportion of Australians with insurance within superannuation. Those that choose to opt-in for insurance cover would represent an anti-selection risk which would result in greater underwriting and increased premiums which would in turn cause more people to withdraw from insurance cover and put group insurance in superannuation into a death spiral.
Given that 70% of all life insurance is currently held in superannuation, this would mean that millions of Australians would lose the only insurance they have.
Insurance within superannuation has had its problems in the last few years; problems which need fixing. The proposed superannuation code of practice is an important step in the right direction.
The draft code imposes obligations on super funds regarding communications with members, improved mechanisms to opt-out of cover and claims handling timelines. It also includes measures to prevent unnecessary account erosion and duplicate insurance, whilst guarding against the unintended loss of valuable insurance cover that could be worth hundreds of thousands of dollars.
Together with proposed changes to standard definitions and enhanced rehabilitation, these measures should go a long way to improving the efficiency and cost-effectiveness of insurance in superannuation.
Today’s blog writer is John Berrill, Principal in Superannuation and Insurance at Berrill & Watson – the Super specialists.