In the Budget handed down in May 2018, the Federal Government introduced removing default insurance through Superannuation where account balances were below $6,000.
Read our previous article “Federal Budget sees large numbers of Australians losing valuable insurance cover through Super” for background information on this.
The proposed changes form a Bill; “Treasury Law Amendment (Protecting your Superannuation Package) Bill 2018”.
In June 2018, we wrote to Treasury to share our views on a number of the proposed changes; some of which we agree with and others we do not. In particular, we are concerned about the impact removing default insurance cover on accounts of less than $6,000 would have on the more vulnerable workers.
For a number of reasons, we believe removal of this cover adversely and disproportionately affects vulnerable workers in communities like:
- Indigenous Australians;
- Migrant workers;
- Single mothers or parents returning from maternity/paternity leave;
- People working in the gig economy; short term contract workers, freelance workers etc; and
- Casual workers and those with irregular work.
More recently, on 9 July 2018, we wrote to the Senate Standing Committees on Economics to reiterate our standpoint.
You can read our direct correspondences of 5 June and 9 July, below.
Our views are also aligned with those of the Consumer Action Law Centre (“CALC”), the Financial Rights Legal Centre (“FRLC”) and Financial Counselling Australia ("FCA").
You can view their submissions:
We will be following the progression of this Bill closely as we strongly believe the protection of rights for the most vulnerable in our community is paramount.
Want to know more about the proposed changes?
Transcript of letter of 5 June 2018 from Berrill & Watson Lawyers to The Treasury
Manager, Regulatory Framework Unit
Retirement Income Policy Division
Parkes ACT 2600
Protecting Your Super: Exposure Draft
We have had the benefit of considering the joint submission of the Consumer Action Law Centre (CALC) and the Financial Rights Legal Centre (FRLC) in relation to the issue of insurance in superannuation.
We agree with the joint submissions of CALC and the FRLC and provide the following to compliment and highlight some of the issues identified by CALC and the FRLC.
For too long consumers have been subject to duplication of fees and costs associated with having multiple superannuation accounts. The measures announced will, we believe, make a substantial change to those costs which should mean substantial further retirement savings for consumers into the future.
However, insurance in superannuation is not merely a cost (in the way an administrative fee is), it also provides valuable benefits to sick, injured and vulnerable people and is good value for money for most super fund members, as confirmed by the Productivity Commission’s recent draft report.
The Productivity Commission’s draft report is one of the most comprehensive bodies of work undertaken in relation to superannuation and insurance, and the recommendations and findings contained in the draft report ought to be given strong consideration. Importantly, removing insurance cover for accounts under $6,000 has not been recommended by the Productivity Commission.
In relation to certain specific provisions in the Protecting Your Super package, we are concerned that there could be unintended consequences, including increasing the cost of insurance premiums for fund members if all of the proposed measures are fully implemented in their current state. Nonetheless, we support the vast majority of the measures in their current form.
Proposed s.68AAA – Inactive accounts
We support the introduction of this provision entirely. We believe that insurance cover should only be provided to active superannuation funds or those funds where a member has elected to retain their cover.
In the past there has been excessive account erosion. Removing insurance on inactive accounts will, we believe, lead to substantial savings to fund members, that is particularly so given the improved account consolidation measures that also form a part of this package.
Whilst we acknowledge that there will be some people who will lose insurance cover as a result of this measure, and many of those are likely to be people who are already vulnerable, it is the case that excessive account balance erosion on inactive accounts has been a significant problem in the past and action is necessary to prevent that continuing.
Proposed s.68AAB – Accounts under $6,000
We do not support the proposed s.68AAB. The implementation of this proposed measure could have deleterious effects on both the consumer side, and the insurer side. That is, insurance for many vulnerable low-income Australians would be lost. From the insurer perspective, removing insurance cover from all accounts under $6,000 (including active accounts) would remove a very significant number of people from the risk pool, and will likely lead to higher premiums rates for the remaining insured population.
In addition, we recognise that one of the concerns in superannuation is that it is too complex, and consumers are not engaged. It is important that the new measures are simple to navigate for every day people. If insurance is simply provided to an active employment superannuation account, then we believe that is easy for consumers to understand.
The members affected by this proposed change are likely to be the most vulnerable communities who are likely to have low account balances. Those communities include:
- Indigenous Australians;
- Migrant workers;
- Single mothers, or parents returning from maternity/paternity leave;
- People working in the gig economy or who are working in casual or irregular work.
If s.68AAB is implemented some of the people in these communities will be actively employed, receiving super contributions, but will have no insurance cover for over 2 years. Many people from these communities will be working in physically demanding or high-risk roles. Sickness and Disability are inherently unpredictable, and we are not aware of any sound policy reason for allowing these vulnerable communities to be exposed to this risk in this way.
The Productivity Commission has made recommendations including that working Australians have one superannuation fund which moves with them when they change employer. Given the potentially significant consequences on the cost of premiums that the proposed s.68AAB could have, we think that at it would be prudent and sensible to monitor the effectiveness or otherwise of the account consolidation measures (s.68AAA) over a 2 year or longer period before implementing the proposed s.68AAB.
s.68AAC – opt-in insurance for under 25’s
We agree with the views of CALC.
We hope that the above submissions can be considered as a part of the deliberations in relation to these proposed changes.
Berrill & Watson Lawyers
Transcript of letter of 9 July 2018 from Berrill & Watson Lawyers to The Senate Economics Legislative Committee
Re: Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018
Dear Senate Economics Legislative Committee,
Berrill and Watson Lawyers is a consumer law firm practising solely in the areas of superannuation, insurance and financial services law.
We support the general policy setting of the Bill to enhance people’s retirement savings specifically by reducing the number of multiple accounts, reuniting people with inactive accounts, and better targeting life insurance within superannuation.
We resubmit our submission made to Treasury regarding the exposure draft dated 5 June 2018. We also endorse the submission of the Consumer Action Law Centre (CALC) and the Financial Rights Legal Centre FRLC) dated 9 July 2018.
In particular, we agree with their submission that the removal of default insurance for superannuation accounts with balances below $6000 should only apply to inactive accounts and not to active accounts.
The removal of default cover for under 25’s and the measures to consolidate and repatriate inactive accounts will mean that when many young people reach their 25th birthdays, they will have active accounts with more than $6000 entitling them to default insurance cover.
However, there is a significant cohort of people over the age of 25 who will not be eligible for default insurance cover either because their superannuation accounts are very low or because they are new entrants into the Australian workforce and joining their first superannuation fund.
People such as:
- indigenous Australians with limited work histories
- new immigrants
- single mothers or parents entering or returning to the workforce after maternity/paternity leave
- people with disabilities with limited work histories
- casual workers with limited work histories or problematic employer compliance with superannuation obligations
- people with work histories in the Gig economy or other self-employment or independent contract arrangements
will often have very small account balances on turning 25 or open their first superannuation fund after age 25. This would mean that such people would be ineligible for default insurance cover for upwards of two years or more, depending on the level and regularity of their income and when they accrue sufficient superannuation to hit $6000 after deduction of administration fees and taxes.
Many people from such vulnerable communities work in physically demanding or high-risk occupations and their only opportunity to obtain affordable insurance cover would be through group insurance in superannuation. If they are locked out of default insurance cover for a significant period of time, they could be struck down by a disability or die without any insurance to top up their meagre account balances and thereby they (or their dependents) would almost certainly be reliant on Centrelink income support.
Whilst we agree that small accounts could be unnecessarily eroded by insurance premiums, this is really only true of inactive accounts. Indeed, there have been many examples in the media of such accounts reducing to nil with a combination of administration fees and insurance premiums.
However, active superannuation accounts fed by ongoing Superannuation Guarantee contributions will in all likelihood grow and not be eroded by insurance premiums to nil. If there are significant periods of inactivity, that would be protected by the triggering of the 13-month inactive account provision under section 68AAAA or perhaps by some lesser measure of inactivity on small accounts.
Accordingly, we strongly endorse the recommendation of CALC and FRLC that section 68AAB should be amended to exempt active accounts under $6,000 from the removal of default insurance.
We would be happy to expand on the submissions in any public hearings.
Berrill & Watson Lawyers