Referral of the inquiry
The Treasury Laws Amendment (Putting Members' Interests First) Bill 2019 (the bill) was introduced in the House of Representatives and read a first time on 4 July 2019.
On 4 July 2019, the Senate referred the provisions of the bill to the Senate Economics Legislation Committee (the committee) for inquiry and report by 18 October 2019.
Purpose of the bill
The bill seeks to amend the Superannuation Industry (Supervision) Act 1993 and the Superannuation (Unclaimed Money and Lost Members) Act 1999 to improve the provision of default insurance in superannuation.
In his second reading speech, the Hon. Michael Sukkar MP, Assistant Treasurer, stated:
Given the significance of superannuation to Australians' retirement, the government wants to ensure that people's hard-earned savings are not unnecessarily eroded by inappropriate insurance arrangements. This bill will address the provision of insurance through superannuation. This bill requires that insurance be provided on an opt-in basis only for members with balances below $6,000 and any new members from 1 October 2019 who are under the age of 25.
Background – Protecting Your Super Package
Superannuation is a major part of Australia’s retirement income system. Together with the Age Pension and savings outside superannuation, it supports Australians in their retirement years.
Superannuation is now the second-largest savings vehicle for Australian households (accounting for 17 per cent of household assets). It is projected to grow rapidly in the coming decades, as the superannuation system matures.
In the 2018-19 Budget, the Commonwealth Government announced the Protecting Your Super Package. The package consisted of a number of regulatory reforms designed to protect Australians’ superannuation savings from undue erosion by fees and insurance premiums.
To implement the package, on 21 June 2018, the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 (the prior bill) was introduced in the House of Representatives by the Hon. Kelly O'Dwyer MP, Minister for Revenue and Financial Services, and read a first time.
The three schedules to the prior bill are as follows:
Schedule 1—Fees charged to superannuation members
Schedule 1 prevents trustees of superannuation funds from charging administration and investment fees exceeding three per cent per annum on the balance of accounts below $6,000.
Schedule 1 also prevents trustees from charging exit fees on any superannuation product, no matter the member's balance.
Schedule 2—Insurance for superannuation members
Schedule 2 addresses the provision of insurance through superannuation. Schedule 2 of the bill requires that insurance be provided on an opt-in basis only for:
members with balances below $6,000;
accounts which have not received a contribution for 13 months or more; and
new members from 1 July 2019 who are under the age of 25.
Schedule 3—Inactive low-balance accounts and consolidation into active accounts
Schedule 3 provides the Australian Taxation Office (ATO) the ability to return the balances of inactive accounts, along with existing unclaimed superannuation moneys, to their rightful owner. Further, funds are required to transfer all inactive accounts without insurance cover and with a balance below $6,000 to the ATO.
Prior Inquiry—Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 [Provisions]
On 21 June 2018, the Senate referred the provisions of the prior bill to the committee for inquiry (the prior inquiry) and report by 13 August 2018.
Although generally supportive of the prior bill, a number of inquiry participants raised concerns with the proposed reforms to default insurance in superannuation. Specifically, these concerns related to:
premium increases resulting from the proposed changes;
inadequate insurance coverage for young people employed in high-risk occupations;
new members, particularly those on lower incomes and part-time workers, who would be excluded from default insurance until their balances reach $6,000; and
the proposed commencement date of 1 July 2019 not providing adequate time for trustees to renegotiate the terms of contracts with insurers.
While mindful of the concerns raised by inquiry participants, the committee recommended the prior bill be passed.
Notwithstanding the recommendation of the committee, on 14 February 2019, the prior bill was amended by the Senate on motions moved by Senator Whish-Wilson (Tasmania, Australian Greens). The amendments, among other things, removed the default superannuation reforms held within schedule 2 of the prior bill.
During the second reading debate, Senator the Hon. Mathias Cormann, the Minister for Finance and the Public Service, stated:
The remaining aspects of this bill, including in relation to superannuation, remain government policy, and the government will continue to work in good faith to secure the passage of these further reforms through the parliament.
The prior bill, as amended, finally passed both Houses on 18 February 2019, and received Royal Ascent on 12 March 2019.
As indicated by Minister Cormann during the second reading debate on the prior bill, on 4 July 2019, the government, through Minister Sukkar, introduced the bill in the House of Representatives to alter the provision of default insurance through superannuation.
The bill aims to implement the remaining aspects of the Protecting Your Super Package and, similar to Schedule 2 of the prior bill, requires that insurance be provided on an opt-in basis only for members with balances below $6,000 and any new members from 1 October 2019 who are under the age of 25.
Provisions of the bill
The bill contains one schedule:
Schedule 1—Low balance accounts and members under 25
The measures proposed in the bill come into effect on 1 October 2019.
Schedule 1 – Low balance accounts and members under 25
Schedule 1 to the bill partially implements the Protecting Your Super Package announced in the 2018-19 Budget and, in effect, reintroduces schedule 2 of the prior bill.
Currently, many superannuation trustees automatically provide insurance cover to members upon joining the fund. This arrangement is commonly referred to as ‘default insurance’ and requires a member to ‘opt-out’ of insurance if the member considers the insurance to be inappropriate for them.
Schedule 1 to the bill seeks to amend the Superannuation Industry (Supervision) Act 1993 and the Superannuation (Unclaimed Money and Lost Members) Act 1999 to prevent trustees from providing insurance on an opt-out basis to members who are under 25 years old and begin to hold a new product on or after 1 October 2019 and to members who hold products with balances below $6,000.
The objective of the amendment is to better target default insurance cover and prevent the inappropriate erosion of retirement savings caused by insurance premiums for younger members and those who have low balances.
Members may still be able to obtain insurance cover within their superannuation if they choose to do so.
A comparison between the law currently in place and the amended law is shown in Table 1.1.
Table 1.1: Comparison of new law to current law
Trustees can only provide insurance to a member of a choice or MySuper product if directed by the member where the member:
is under 25 years old and begins to hold a product on or after 1 October 2019; or
holds a product with a balance less than $6,000.
Trustees of choice products are not limited in how they can offer insurance beyond the restriction in the insurance covenant of the Superannuation Industry (Supervision) Act 1993.
For MySuper products, trustees must generally provide death and total and permanent disability insurance on an opt-out basis.
Income protection insurance may also be offered on an opt-out basis at the trustee's discretion.
Source: Explanatory Memorandum, p. 7.
Stakeholder consultation on exposure draft legislation to implement the Protecting Your Super Package commenced on 8 May 2018 and closed on 29 May 2018. During this period, Treasury met with 22 organisations and received 44 written submissions.
The key areas for consultation were consideration of current fee structures of relevant accounts, the effect of altering current insurance arrangements, and arrangements for transferring superannuation accounts to the ATO. In addition, consultation sought views on the best method of communicating to members any proposed changes, as well as on the changes to systems and procedures required by industry to enact and comply with any possible changes.
There was no Treasury-led stakeholder consultation specifically for this bill.
In December 2018, the Productivity Commission released its final report for the inquiry into the efficiency and competitiveness of the Australian superannuation system. This report, among other things, recommended legislation to make insurance through superannuation opt-in for members under 25 years old.
Commencement of the whole of the Treasury Laws Amendment (Putting Members' Interests First) Act 2019 will be the day after the Act receives the Royal Assent.
The bill is estimated to have a gain to the budget of $605.4 million over the forward estimates.
Neither the Senate Standing Committee on the Scrutiny of Bills nor the Joint Committee on Human Rights commented on the bill prior to this report's finalisation.
As required under the Human Rights (Parliamentary Scrutiny) Act 2011, the government assessed the bill's compatibility with human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The government considers that the bill is compatible.
As stated in the Explanatory Memorandum to the bill, the government believes there are significant regulatory costs involved with its implementation, with the majority of these costs being incurred in the first year of implementation.
Costs incurred by industry
The primary cost to industry would be reduced premium inflows for insurers (up to $3 billion, offset by lower expenses from claims). To the extent that this reduction would affect duplicate or otherwise unneeded policies held by disengaged members, the net effect would be a material efficiency gain at the economy-wide level.
Industry would also face additional costs around:
the provision of information to their members regarding the changes;
updating policies and re-negotiating group insurance contracts with insurance providers; and
modifications to administrative and information technology systems to enable the identification of member cohorts at the opt-in and opt-out thresholds.
Costs incurred by members
Relative to the status quo, the Explanatory Memorandum states that the bill will result in circumstances where fewer people receive insurance payouts for an adverse event; some individuals may have no insurance cover as a result of the changes, and others will continue to have cover through a reduced number of policies; and claim rates for affected cohorts are not zero and, therefore, it is expected that some individuals will no longer receive any form of payout.
The government believes these costs will be mitigated by information provided by industry, and the encouragement of members to more actively consider their circumstances and whether or not they should obtain insurance.
Those members that continue to hold default insurance in superannuation may face increased premiums as a result of changes to the number of accounts and risk profile of the group insurance arrangements.
The Explanatory Memorandum identifies transaction costs for individuals who choose to opt-in, especially in cases where opt-in insurance coverage is individually underwritten.
For a breakdown of costs across businesses and individuals, see Table 1.2.
Table 1.2: Regulatory costs
Source: Explanatory Memorandum, p. 27.
Conduct of the inquiry
The committee advertised the inquiry on its website and wrote to relevant stakeholders and interested parties inviting written submissions by close of business Monday 15 July 2019.
The committee received 46 submissions.
The committee thanks all individuals and organisations who assisted with the current and prior inquiries, especially those who made written submissions.