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Superannuation Choice-Do You Want Insurance With That?
David Kehl
Economics, Commerce and Industrial Relations Group
15 February 2000
Background
A Bill was introduced into the Parliament on 4 December 1997 to
give employees the right to choose their superannuation fund. The measures
in that Bill will enable employers to offer certain employees a choice
of superannuation fund via one of three approved means:
- unlimited employee choice; or
- a choice from a least four funds chosen by the employer; or
- negotiated as part of a workplace agreement (i.e. an Australian Workplace
Agreement, certified agreement or an informal agreement).
Where an employee does not make a choice, their superannuation is paid
into a default fund selected by the employer.
During Parliamentary debates and inquiries by a Parliamentary Committee(1)
on this Bill(2), interested parties suggested that minimum standards apply
to default funds, and in particular, that default funds provide a minimum
level of death and disability insurance cover.
Superannuation funds and Retirement Savings Account (RSA) providers are
not compelled by the Superannuation Industry (Supervision) Act 1993,
the Retirement Savings Accounts Act 1997 or the Superannuation
Guarantee (Administration) Act 1992 to offer their members death and
disability insurance. However, some funds provide the option of death
and disability insurance and in some cases death and disability insurance
is compulsory due to either fund rules or award conditions or both. Premiums
are generally funded out of compulsory employer contributions. Most death
and disability insurance is through a group life policy where groups of
people associated with each other in some way are insured under the one
policy that automatically provides a certain level of cover without having
to provide evidence of good health. The following discussion outlines
arguments for and against mandating death and disability insurance.
Why Insurance Should Be Compulsory
It's Government Policy
The Government made a 1996 pre-election commitment(3) that:
regulated funds (except excluded funds(4)) and RSAs will provide by
year 2000 a minimum premium of $2 per week to cover members with approximately
$80 000 of group life cover. All contributors up to age 45 (with dependents)
will be covered where they are not already insured.
The Government has yet to implement this commitment.
Benefits to beneficiaries
Without life insurance, the nominated beneficiaries of a deceased member
may only inherit the member's entitlement, which may be contributions
plus earnings. For members of industry funds, the average accumulated
benefit is $4881. With insurance c over, a member's beneficiary could,
on the death of the member, receive a much higher inheritance, namely
that $4881 plus the sum insured (normally a minimum of $50 000).
Loss of cover when changing funds
Under the choice of fund Bill, some employees may unwittingly lose access
to their death and disability insurance by deciding to change from a fund
that offers insurance to one that does not.
No cover for new employees
Under the choice of fund Bill, many new employees will not be covered
by death and disability insurance on the commencement of employment. In
many instances, insurance cover commences upon joining the superannuation
fund. Some industry superannuation funds enable workers to be covered
from the first day of employment. Following the introduction of choice,
workers that do not choose such a fund will not have death and disability
cover.
Reduced access to insurance cover
As a consequence of the choice of fund Bill, death and disability insurance
companies may not offer insurance on the same terms and conditions as
present. For example, in many cases, insurance cover is automatically
provided to members on joining the fund, without having to provide evidence
of good health. Under choice of fund, membership of superannuation funds
is likely to fluctuate, which may result in life insurers being unwilling
to cover all employees without them providing evidence of good health.
It's cheap for workers
In some funds, the cost to members can be as low as $1 to $2 per week
for $50 000 of cover. This cover is significantly cheaper than insurance
available for individuals. The premiums of relatively inexpensive group
life policies are aided by the fact that life insurance premiums are tax
deductible to superannuation funds (but not to individuals).
Why Insurance Should Not Be Compulsory
Paternalism
It might be argued that Government mandated compulsory death and disability
insurance would be paternalistic and inconsistent with the rationale of
choice. Choice of fund is about empowering the individual, not requiring
employees to have death and disability insurance.
People may not want it
It might also be argued that some people may not want it, or may already
have it, either privately, provided by their employer (either voluntarily
or due to an award obligation), or voluntarily through another superannuation.
Arguably, the decision about purchasing insurance cover should be with
the individual.
No market failure
There appears to be little evidence of market failure in the insurance
industry. It is arguable that people want superannuation simplified more
than they want choice of fund, let alone compulsory life insurance.(5)
It could also be argued that Government intervention of this kind could
intrude on fund design, which could stifle competition, product innovation
and trustee responsiveness to member needs. Furthermore, if there is a
demand for death and disability insurance market-based solutions will
develop to meet the demand under choice of fund.
Disclosure is adequate
Employees will be aware of the implications of exercising choice of fund
on any death and disability insurance cover prior to changing funds. Proposed
disclosure rules should require funds to disclose whether death and disability
insurance is provided, when the cover commences and when it ceases. It
is also likely that the Government's public education campaign will advise
employers that they need to be aware of the implications for employees'
death and disability insurance where employees exercise choice of fund.
Precedents
Legislative intervention may provide a precedent that may lead to demands
for legislation to force fund trustees to provide other benefits (e.g.,
trauma insurance).
The Cost to Revenue
As death and disability insurance is a tax-deductible item for the fund,
increasing coverage through superannuation funds will cost the Government
revenue.
Lower retirement incomes
Death and disability premiums that are paid out of employer contributions
ultimately reduce members' retirement benefits and increase pension and
social security outlays. Members may prefer contributions to be attributed
to accumulating retirement income.
Implementation
Linking mandatory death and disability insurance with the choice of fund
Bill would be complicated and place obligations and liabilities on employers
with respect to the default fund under the Superannuation Guarantee
(Administration) Act 1992 (as amended).
If it was decided that all workers should have death and disability
insurance, a desirable means of implementation could be through amending
the Superannuation Industry (Supervision) Act 1993 and the Retirement
Savings Accounts Act 1997 to require fund trustees and RSA providers
to offer death and disability insurance to fund members. It may be agued
that restrictions could be placed on premiums or insured amounts and that
failure to offer death and disability insurance could be grounds for making
a fund non-complying.
- See Senate Select Committee on Superannuation, Twenty-Eighth Report,
Choice of Fund, Canberra, March 1998.
- That is, the Superannuation Legislation Amendment (Choice of Superannuation
Funds) Bill 1999.
- See Super For All - Security And Flexibility In Retirement,
February 1996.
- Essentially, funds with less than 5 members.
- See Attitudes on Superannuation, ASFA, October 1999, http://www.superannuation.asn.au/policy/topline.pdf
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