Minister Kelly O’Dwyer is concerned that default super fund members may be paying too much for excessive insurance cover, and warned the superannuation industry that the Government is prepared to take action.
Insurance in superannuation has been a focus of the Minister recently, in particular the potential erosion of super balances with default insurance.
More funds have been signing up to the the superannuation industry’s Insurance in Superannuation Voluntary Code of Practice. However the Code has been criticised, including by Minister O’Dwyer who said the industry had “walked away” from a robust and compulsory code.
“I can only reiterate that where industry cannot or will not act, the Government will step in and take action,” Minister for Revenue and Financial Services Kelly O’Dwyer told the Financial Services Council Life Insurance Conference.
“There is no doubt that default superannuation has been an important contributor to increased levels of life insurance cover in Australia – with over 70 per cent of total life insurance policies being held through superannuation.”
“However, it is important to ensure that members receive appropriate cover, value for money and good outcomes in relation to that insurance.”
Minister O’Dwyer noted that insurance premiums in APRA regulated funds accounted for almost 15% of total super contributions in 2015/16. Though O’Dwyer acknowledged that “life insurance can be a valuable thing” and default life insurance in superannuation can provide efficiency benefits compared to separate individual policies.
“However, in determining the appropriate settings for the superannuation system now and into the future, we must ensure that the benefits of default cover are not outweighed or reversed by an undesirable erosion of peoples’ hard earned retirement savings.”
“I am concerned that some, possibly many, default members are paying too much for cover that goes beyond what they need. In other words, they are not receiving value for money.”
“Now, this might be a situation that some people are happy with, but for others such as low-income members, younger members and disengaged members, this is not a good outcome.”
Minister O’Dwyer said she was concerned that young super fund members are being defaulted into cover that doesn’t suit their needs and disengaged members are defaulted into cover they might not be able to claim – such as multiple income protection policies. But the Minister’s biggest concern is the erosion of low balance, dormant, accounts by insurance premiums.
“Trustees have a duty to act in the best interests of members and to ensure that insurance arrangements do not unduly erode retirement balances.”
“I am not convinced these obligations are currently being taken as seriously as they should be, across the industry.”
“If premiums are being taken from people’s retirement savings, trustees must be certain that the cover provided is appropriate and not excessive.”
“It is incumbent on trustees to ensure their members are not sacrificing contributions and earnings for insurance cover they do not need or cannot claim on.”
O’Dwyer said it was up to both Government and industry to work “proactively” to fix this issue.
“The industry has recognised that there is a pressing need to address the problems with life insurance in superannuation, but unfortunately, the results have not matched the ambition of those leading the work.”