Shifting the focus from Budget to Code

It was a tense time for the superannuation industry as the Senate approached its final sitting week of 2018.  We all waited to find out whether the Protecting Your Superannuation package (PYSP) legislation would pass and if so, with what amendments.

The announcement of the legislation at the May Federal Budget had been a surprise to many as there had been no industry-wide consultation prior to this. However, the draft report of the Productivity Commission had highlighted problems with superannuation fees and life insurance, and PYSP was designed to address these.

After a short period of consultation and a few amendments to allow for the feedback, the legislation was passed by the House of Representatives on 28 June 2018. Progression through the Senate proved much more difficult due to the range of subsequent industry input and variation in views.  This is not unexpected bearing in mind the huge impacts that PYSP will have on the insurance design of many funds, not least the removal of default life insurance cover for nearly 50% of all members (albeit many will regain cover at an older age or when their account balance reaches $6,000).

The key focus of PYSP is to reduce the erosion of members’ superannuation accounts. This will be achieved by:

• Reducing fees charged to small accounts.
• Sending small inactive accounts to the ATO.
• Not providing default cover to members under age 25, those with balances under $6,000 or an inactive account. The proposed changes would also mean that some members would lose their voluntary cover.

The first two aspects of PYSP are generally accepted by the industry and political parties.  However, the restriction on insurance cover is more problematic. The theory of not providing automatic cover for members while they are young or have a low balance or inactive account is pragmatic, but it is a blunt instrument, given most members are unengaged.  Therefore, there is a risk that many members will be left uninsured.

With the stalling of PYSP, funds are left with some uncertainty.  However, the key focus for many will be implementation of the Insurance in Superannuation Code of Practice (the ‘Code’).

Rice Warner’s recent Group Risk Product and Pricing Annual Review studies changes in group insurance across the superannuation market.  The December 2018 report indicates that a few funds have already made changes to consider the affordability requirements of the Code, with some also incorporating proposed PYSP changes.  The most notable change is removal of default cover at younger ages. 

Funds need to consider removal of default cover within MySuper requirements and the members’ needs for cover. Rice Warner’s Life Insurance Needs in Australia 2019 report shows that the average non-dependant Australian aged 15-24 has a need for death insurance cover.  The amount of cover required depends on many factors including family status, income and working status. Table 1 shows the average basic need for death cover for young full-time workers in various family situations. Where the individual has a partner, it is assumed that the partner is also working full time.

Table 1.  Basic Death cover requirement for member aged 15 to 24

Most funds published their Code transition plans in December 2018.  These plans differ widely by fund as there was no prescribed format and funds are at different stages of considering how and if they will comply with each Code requirement. 

The work required to comply will be considerable for some funds, with the Code containing over 180 clauses setting out specific commitments to members.  There are also requirements to comply with some clauses of the Financial Services Council Insurer Code which the fund’s insurers have adopted. Parts of the Code will be interpreted differently by various funds and some will require alternative approaches depending on the nature of the fund and for different divisions. For instance, where funds have tailored employer plans, the employer generally selects the design and may pay premiums. Careful consideration of the appropriateness of the design and what happens when members cease work with the employer needs to occur.  Where generous cover continues to be provided, ex-employees may end up with large premium deductions from their superannuation account without being aware.

One area that will require interpretation is the alignment of the fund’s insurers’ claims philosophy with that of the fund.  From our experience, the structure and wording of claims philosophies are often different although the intent is generally similar.  A more practical requirement may have been to ensure that the claims philosophies do not differ in their intent, or better still have considered developing a common claims philosophy across the market.  Consideration of alignment will be more complicated for funds with multiple insurers.

Funds need to publish an annual Code compliance report on their website.  Again, the format has not been prescribed. A consistent format across the industry is important if the intention is to enable members to compare funds. Trustees must consider not only which clauses the fund will comply with and how to determine compliance but also how they will monitor and improve compliance. In view of the time-consuming nature of the work and interpretation, some will seek independent support and advice to assist with these activities. We expect that most funds may report non-compliance, for example because the Code implies that prescribed timeframes will be met in 100% of cases and it is likely that they will inevitably be breached occasionally.

Funds will need to dedicate resources to implement the Code, and also remain prepared for new legislation which may impose further requirements. The next steps will vary by fund and Rice Warner has been assisting with detailed consideration on how all clauses impact various funds as well as negotiations with service providers.  Overall, 2019 is expected to be another challenging year for insurance in superannuation.