- On September 27, 2017
Last week, the Insurance in Superannuation Working Group (ISWG) released a Draft Code of Practice for Insurance in Superannuation which is intended to be binding on all APRA Approved Superannuation Funds. This Code is a positive step for the industry which has suffered much condemnation over recent years. It addresses a wide range of concerns, including the erosion of members’ retirement balances and the lack of adequate communication with members.
An important message for Trustees, insurers and administrators is not to delay reviewing the Code, because there is an opportunity to influence it now, while it is in the Consultation phase. There is considerable variability and complexity in the design and administration of insurance arrangements from fund to fund and whilst the Code permits flexibility, there may be difficulties in compliance for some funds.
Areas which are likely to cause issues for some funds and their service providers include:
- Redesigning benefits to fit in with premium limits (1% of salary for those who have attained age 25 and 0.5% for younger members).
- The ability to administer the Code requirements.
- Ensuring that premium adjustment arrangements will comply.
Rice Warner’s 2016 Affordability Study covering Insurance Premiums in superannuation identified key risk areas for members’ retirement balances being eroded. The following graph demonstrates how members’ retirement balances can be impacted due to insurance premiums being deducted from their superannuation account, with the impact most notable at young ages.
It is pleasing to see that these risks of erosion have been addressed by the code, most notably younger members and members who aren’t receiving superannuation contributions. The special circumstances of members who may find it difficult to obtain insurance outside the superannuation environment are also covered.
The Code has done this whilst still affording Trustees the ability to tailor benefits to suit the specific needs of their fund’s membership. There will however be a need for Trustees to review their Insurance Strategy and redesign benefits to ensure the premium limits for Automatic Insurance Members will not be breached. In considering whether the fund’s benefit complies with these limits, Trustees will need to decide how best to segment their membership and measure the appropriate salary level and period of membership for the different cohorts of members.
Of course, many funds don’t know the salaries of members, though they can get a good estimate from the level of SG contributions being made. Benefits for many members are based on a dollar premium based on age and gender and not related to salaries. So, will there be a conservative default level chosen to avoid most members breaching this limit or will the test be done at individual member level (at some cost to the funds).
These new rules will mean that cover levels will drop significantly for some members. As a result, Trustees will also need to review the approach to voluntary cover, in particular to ensure that members don’t inadvertently lose cover they thought they had.
Trustees will have up to two years from adopting the Code to review the Fund’s benefit design, depending on when the policy is due for renewal. Trustees need to carefully consider the timing of adopting the Code in the light of this, as a review of insurance strategy and implementation of all the changes is likely to take months to complete.
The new Code introduces the need for more frequent and detailed member communication on insurance related matters. In order to comply, funds will first need to be able to regularly identify which members need to be contacted at such times as non-receipt of contributions, changing fund divisions and when cover is about to cease. Cover must be reinstated at certain times and premium refunds given in some circumstances. These requirements will force funds to collect and store more information about their members and have multiple methods of communicating with members. Funds will need to ensure that opting out of cover can be done on-line as well as by phone, email or post.
Several funds have implemented premium adjustment mechanisms with their insurers. This has enabled Trustees to provide their members with cover on more affordable premium rates and with better terms and conditions than might otherwise have been available. The Code does not cater for all arrangements currently in place and the requirements, in particular for all adjustments to be paid into a fund’s reserve, may cause considerable expense which will ultimately need to be met by members.
Overall, we see the Insurance in Superannuation Code as an important step forward in ensuring the best experience for members, whether it be directly in relation to their insurance benefits or in improved retirement benefits. The key step is to ensure that the detail is workable for all funds and that Trustees have the necessary support to navigate the changes.
For assistance in understanding the Insurance Code and its impact on your organisation, providing feedback to the ISWG by 20 October and taking action to comply, please contact Andrea McDonnell – Senior Consultant.