The bill aims to implement the remaining aspects of the Protecting Your Super Package and, similar to 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.
In addition to the 34 submissions received by the committee during the prior inquiry, a further 46 submissions were made by interested stakeholders during the current inquiry.
Although briefly canvassing the relevant issues raised by submitters to the prior inquiry, this chapter will focus on the views held by stakeholders on the provisions, and effects, of the bill. Please note the chapter is intended to provide an indicative, though not exhaustive, account of issues examined during the committee's current inquiry.
Views of submitters to the prior inquiry
As stated in the committee's prior inquiry report, submitters and witnesses were broadly supportive of the policy objective of the bill; that is, to improve Australians' retirement savings by protecting low-balance accounts from undue erosion due to excessive fees and inappropriate insurance arrangements. However, inquiry participants differed in terms of the extent to which they believed the measures proposed by the bill effectively meet this policy objective.
Implementation time frame
A number of industry representatives expressed concerns around the prior bill's application date of 1 July 2019 being a challenge to achieve. These concerns were particularly focused on the ability of industry to action the insurance measures contained in schedule 2 of the prior bill.
Members in high‑risk occupations
In relation to the changes to insurance in superannuation, a number of industry representatives urged caution to avoid unintended adverse consequences on various cohorts of members, such as young members working in hazardous industries who would no longer have default insurance.
Insurance premium increases and long‑term impacts
The matter of premium increases resulting from the proposed changes to default group insurance arrangements was raised as a common concern during the prior inquiry.
Submitters and witnesses highlighted that premiums for members not impacted by the insurance measures would increase due to the fixed costs associated with default group insurance and changes to the demographics of the collective risk-pool of insured members.
No default insurance for accounts under $6,000
A number of inquiry participants expressed concern regarding the proposed changes to opt-out default insurance cover for active accounts with balances less than $6,000.
They argued that this measure would disadvantage new members, particularly by excluding those who work part-time or are on lower incomes, from default insurance and the benefits it provides.
Views of submitters to the current inquiry
General support for the bill
Similar to the prior inquiry, submitters to the current inquiry were broadly supportive of the policy objective of the bill: to better target default insurance cover and prevent the inappropriate erosion of retirement savings caused by insurance premiums.
Notwithstanding this general support, inquiry participants differed to the extent to which they believed the measures proposed by the bill were necessary to, or would effectively deliver on, the government's stated policy objective. Further, a number of submitters opposed the bill in its entirety, or stated they would not support it unless significant amendments were made.
ClearView and Super Consumers Australia (SCA) gave their full support for the government's measures as provided for in the bill. ClearView stated:
…requiring young Australians and those with low account balances to consciously opt-in for life insurance inside super is sensible public policy that will go some way to protecting members and ensuring savings are not eroded by premiums on life insurance they often do not need and commonly cannot even claim on.
ClearView further submitted that the government's measures should only be considered as a first step towards an opt‑in model for all workers.
A number of inquiry participants, such as SCA and the Grattan Institute, supported the Productivity Commission's (PC) recommendation, as stated in its report on the efficiency and competitiveness of the superannuation system, that the government commission an independent public inquiry into insurance in superannuation.
In contrast, Unions NSW and the Australian Council of Trade Unions (ACTU) argued that there is already a regulatory framework in place and that the bill may be unnecessary to achieve its underlying policy intent. Specifically, the ACTU stated:
…the Australian Prudential Regulation Authority (APRA) has an existing authority to ensure that superannuation trustees enhance members’ outcomes by offering appropriate and value-driven insurance products. APRA has the existing authority to strike out any insurance product offerings under the Member Outcomes Test which do not meet members’ best interests. Where there are inappropriate default insurance products, APRA has declined to act.
The most frequently raised concern by inquiry participants related to the 1 October 2019 implementation date. Many submitters stated that the date was unworkable or unachievable, given the information system changes required and the need to contact their membership. This was consistent with concerns raised during the prior inquiry where participants proposed deferring or staging the bill's implementation.
The timelines proposed in the Bill are unreasonable.
Superannuation funds require adequate time to assess and determine the impact of any new requirements to be imposed on them. The funds can then communicate to their members and attempt to engage them as appropriate. Members require an adequate period to assess their individual circumstances, seek advice (if desired) and make an informed decision in their best interests.
Mine Super's position was supported by the Community and Public Sector Union (CPSU), which stated:
The rushed commencement date in the Bill would make it difficult for workers to understand the new rules and what their options are.
Many submitters proposed alternate commencement dates. For example, First State Super (FSS) and the Australian Institute of Superannuation Trustees (AIST) recommended a commencement date no earlier than 1 July 2020; Metlife Insurance recommended at least a 6 month implementation timeframe; and the Australian Prudential Regulation Authority (APRA) preferred a 12 month timeframe.
Metlife also raised the issue that the bill requires trustees to perform a stock-take on 1 July 2019, a date preceding the bill's introduction date, to identify affected members. Further, Metlife noted that the bill also requires that trustees notify identified members on, or before, 1 August 2019 that insurance will no longer be provided. On this second point it stated:
It is also not feasible for trustees to arrange to notify affected members on 1 August, even if the legislation is passed through parliament in late July. Large mail-outs to members take at least several weeks of planning, including drafting the notice and system-mapping.
Members in high-risk occupations
A large number of submitters argued that members in high-risk occupations should be exempted from the opt-in arrangements.
In its submission, Mine Super stated:
Death, illness and injury does not discriminate based on age and superannuation balance among our membership. Our members genuinely require the group insurance coverage that we provide on a default basis. It is our strong view that it is in the best interests of our members employed in high-risk occupations to maintain their opt-out insurance coverage.
More than half of all members are employed as miners. We therefore believe that it is imperative that a carve out to the Bill be legislated to provide superannuation funds that have a significant cohort of members working in high-risk occupations with categories of relief from its implementation.
The Queensland Council of Unions also raised this issue with the committee, stating in its submission that it was concerned about the impact of denying default insurance to young workers employed as police officers, paramedics, firefighters, and nurses.
Similarly, given its concern that the bill may leave some of its members without insurance cover, First State Super requested a general exception for emergency service workers. It proposed such an exception to be similar to that provided to Australian Defence Force members.
To reinforce the importance of the issue, the ACTU's submission made the following observations:
From 2003 to 2016, more than 3,400 workers have lost their lives at work. Of those, 335, or almost 10 per cent, were under the age of 25. More than 27 per cent of workers under the age of 25 are in high-risk jobs.
Given these concerns, a number of submitters raised alternate options for the government to consider. For example, Maurice Blackburn Lawyers recommended the bill be amended to allow trustees with members in high-risk occupations to retain flexibility to tailor insurance arrangements for those aged under 25 years. Specifically, it recommended the government consider an approach which allows trustees to determine whether specific cohorts of members have opt-in or opt-out insurance, with APRA having powers to disapprove any such decision.
This approach was supported by the Corporate Superannuation Association in its submission, where it stated:
We believe that there is a good case for retaining "opt-out" for active members under 25 and with low balances in specific occupations and situations. For example, we support retaining "opt-out" cover for employees in maritime, mining, and construction occupations, also for employees working overseas and in remote locations in Australia on assignments where access to communications may be difficult. We would support the listing of specific occupations and situations in regulations, or exemption by APRA approval.
In contrast, in its submission to the current inquiry, SCA did not recommend any exceptions and stated:
…if the senate is contemplating carve outs for young people aged under 25 or those with low balances working in specific industries, we recommend that fund trustees be required to provide robust evidence of need for these specific cohorts; including data on dependents, and the availability of existing public workers compensation and disability schemes.
Insurance premium increases and long-term impacts
The matter of premium increases resulting from the proposed changes to default group insurance arrangements was raised again as a common concern during the current inquiry.
Cbus noted that, given the riskier nature of its membership base, it estimates insurance premiums to rise by 20 to 30 per cent for remaining members. This concern was also raised by Industry Super Australia which stated in its submission:
…the removal of insurance from active members who have balances of less than $6,000 will result in a re-pricing of insurance premiums which will impact all members and in time the increased pricing will be applied to those members it seeks to protect.
Early indications from some funds are that the premium price increases flowing from the removal of insurance from active members with low‑balance accounts alone could be as high as 7-10 per cent.
The bill's Explanatory Memorandum recognised the expected increase of insurance premiums; however, it stated any increase due to a change in the risk profile would reflect an unwinding of cross-subsidisation across member cohorts. Although cross-subsidisation is an essential feature of group insurance, the PC noted in its 2018 superannuation inquiry that inappropriate cross-subsidisation between members is a primary value-reducing driver of insurance in superannuation.
No default insurance for accounts under $6,000
Similar to the prior inquiry, a number of submitters expressed concern regarding the proposed changes to opt-out default insurance cover for active accounts with balances less than $6,000. Inquiry participants argued that this measure will disadvantage new members, particularly those who work part‑time or are on lower incomes, in that they will be excluded from default insurance and the benefits it provides until their balance reaches $6,000, despite receiving contributions.
AustralianSuper opposed insurance cover being removed for active accounts with balances under $6,000. In its submission it stated:
We support the principles of Members First but believe the proposed legislation has gone too far in relation to removing insurance for active account balances under $6,000. The Productivity Commission recommended insurance not be provided for under 25s and inactive accounts but it made no such recommendation in relation to active accounts under $6,000.
Corporate Super Association echoed this concern and stated that the opt‑in arrangements for employees with balances under $6,000 are 'fraught with practical difficulties'. It stated that the proposal would result in employees commencing work without life and disability cover until their balance builds up.
A few inquiry participants raised the concern that the bill would inadvertently impact members who held superannuation products with the sole intent to access insurance benefits through them. These 'risk-only' superannuation products are frequently held by self-managed super funds and commonly do not allow members to accumulate balances in excess of that required to fund premium payments and, hence, would likely have balances below $6,000.
Opt-in members may be individually risk-rated
A number of submitters were concerned that, even if a member chooses to
opt-in to an insurance policy, they may be denied or not provided with the same terms as those with default insurance. For example, the ACTU stated:
Default insurance works because everyone is covered despite their circumstances in the same way. Insurers will look at those who decide to opt-in differently if insurance becomes a choice. If a young person opts-in insurers call that ‘self-selecting’ which prompts the insurer to either deny coverage or require underwriting.
Workers may be subject to health checks before they are able to commence their insurance coverage. Those in high-risk jobs may not be eligible to receive insurance.
The Explanatory Memorandum acknowledges that there is likely to be a transaction cost imposed on individuals who would have been automatically covered under the current arrangements and who choose to opt-in to insurance coverage under the new arrangements, especially if that insurance coverage is individually underwritten.
As stated previously by the committee, there is no question that Australian society has changed since superannuation was first introduced. It is no longer the norm for people to work in the same occupation in the same industry for the entirety of their career. The average job tenure of Australians has considerably reduced, and there is a greater number of people employed on a part-time and casual basis.
The superannuation system has also changed. The majority of funds are now public offer funds with a demographically broader member base. As such, and particularly with regards to the provision of default insurance, the committee is of the view that these need to be mindfully designed to suit a majority of the population's needs; not simply a small minority. For instance, an overwhelming majority of people under the age of 25 do not have dependants, and should be given the opportunity to make an active decision as to whether insurance is something they want financially. Getting Australians actively involved with their superannuation earlier is something that should be encouraged. Additionally, a one-size-fits-all approach, as is the status quo, is also no longer appropriate.
The superannuation system needs to adapt to all these changes in order to effectively meet the needs of its members. Ensuring that Australians' superannuation balances are preserved for retirement is essential to the success of Australia's retirement income system. Effective regulations that promote product safety and suitably are, therefore, critical to guarantee that the best interests of members are upheld. However, the current design of Australia's superannuation framework has led to inappropriate insurance arrangements.
In conjunction with the prior bill, the committee considers that the measures in the bill are an important additional step in addressing this issue and will have tangible benefits for Australians' retirement savings.
The committee also notes that several submitters drew attention to the Productivity Commission's recommendation that called for the government to commission an independent public inquiry into insurance in superannuation to, among other things: evaluate the effectiveness of initiatives to date; evaluate the role of insurance in superannuation more broadly; and determine whether further policy changes are needed. The committee broadly supports the intent of this recommendation and encourages the government to undertake such a review as soon as practicable.
The committee heard strong concerns during the inquiry in relation to the implementation timeframe in the bill. In particular, industry stakeholders expressed concern that the proposed commencement date of 1 October 2019 will be challenging due to a need to renegotiate the terms of contracts with insurers and communicate with members. While mindful of this concern, the committee considers that renegotiating insurance contracts is not an unfamiliar process to superannuation funds. Further, the policy implemented by the bill forms part of the Protecting Your Super Package that was announced over a year ago in the 2018‑19 Budget and originally included for consideration in the prior bill. Notwithstanding this, the committee encourages the government to consider changing the date of commencement to 1 December 2019 to allow for trustees to effectively engage with their members.
The committee understands stakeholder concerns regarding the removal of default insurance coverage for some cohorts, specifically those employed in high-risk occupations. The committee reminds stakeholders that the bill does not bar members impacted by the measures in the bill from electing to opt-in to insurance, particularly in cases where employment is more casual. Furthermore, the committee reiterates that there are other support mechanisms available to assist people affected by illness or injury and who are unable to work. These include: sick leave; social security payments; workers' compensation schemes; the National Disability Insurance Scheme; and various other arrangements, including compulsory third party motor vehicle accident insurance.
The committee notes that the impact of the bill on insurance premiums was a common matter of concern raised by stakeholders. The committee recognises that there may be changes in the overall risk profile of insured members due to these changes; however, as stated previously, the committee stresses that any increases in insurance premiums that result from the proposed measures only demonstrate the substantial cross-subsidies that are inherent in the current system. As reported in recent research by Rice Warner, members aged 18 to 25 years are, on average, paying three times their true premium. The committee is strongly of the view that the current settings in this area, including the impact of cross-subsidisation, is counter-productive to engaged decision making and the eventual retirement balances of young Australians.
The committee thanks all inquiry participants who took the time to prepare and lodge a written submission. It has reviewed each and every submission, and taken into account the issues, concerns, and suggestions raised. Notwithstanding the implementation date, the committee believes that, based on the extensive consultation on the issues raised in the bill during the current and prior inquiries, the bill strikes the right balance for all concerned.
The committee recommends that the government changes the date of commencement to 1 December 2019.
Subject to the consideration of the previous recommendation, the committee recommends that the bill be passed.
Senator Slade Brockman