- On October 30, 2018
- insurance, Productivity Commission
Insurance in superannuation – balancing fiscal costs with social benefits
The Productivity Commission (PC) released its draft report assessing the efficiency and competition in the Superannuation Industry in May 2018. This report included recommendations to improve the provision of insurance through superannuation and some of these were similar to changes announced by the Government at the 2018-19 Budget.
Insurance cover has long been an important feature of superannuation funds’ benefit design for their members. It ensures that the long-term financial provision represented by superannuation is not brought undone by premature death or disablement. Despite the size of the group insurance market and its value for funds and their members, insurance is not mentioned in the Objective of Superannuation, and its importance is often overlooked by those commentating on superannuation.
The PC’s analysis has prompted questions around the impact to both members and government if default insurance in superannuation were to be completely removed.
Rice Warner has completed modelling on this impact which is captured in our earlier submissions to the PC¹.
The PC has recently released a Supplementary Paper on Fiscal impacts on Insurance in Superannuation which provides greater insight into the potential impact of removing insurance on the Government’s bottom line. We concur with the PC that assessing the fiscal impacts is a non-trivial exercise, requiring many layers of assumptions.
There are a few areas in the Paper that comment on the Rice Warner modelling and it is useful to address these to further understand this complex area.
- The PC asserts that Rice Warner has estimated that removing insurance from superannuation would result in a net cost to the Australian and State and Territory governments.
- This would appear to have been mis-interpreted. Our submission (sub.46) does present our estimates on costs to Government however these should not be interpreted as net.
- We have previously estimated such benefits to the Government through higher tax due to reduced contribution tax concessions and reduced earnings tax concessions².
- The PC introduces the Age Pension cost to Government (arising from balance erosion) and has modelled this using simple cameos. We have undertaken detailed modelling and found the net impact of insurance in superannuation on Age Pension outlays is modest. Removing insurance from superannuation would only reduce Age Pension expenditures by less than 2% by 2050 in aggregate³. This is negligible, particularly against an environment where Age Pension costs are expected to fall significantly as a percentage of GDP4.
- Indeed, we note Treasury would usually exclude Age Pension effects from its own costings as they arise beyond the forward estimates and are a second order effect.
- The PC noted its cameos showed Income Protection generating a greater fiscal cost to Government than TPD in apparent contradiction to our modelling.
- We note that our analysis of the more limited fiscal impact of Income Protection is a direct result of the majority of superannuation funds choosing not to offer this as a default benefit. The PC does similarly acknowledge this in its paper. However, this is not easily captured by the cameo modelling completed by the PC.
Perhaps most importantly we note that an analysis focused completely on fiscal costs to Government omits many of the benefits of insurance in superannuation which we have highlighted in our submissions.
Any members experiencing a claim event would obviously be in a far worse financial position both potentially as an individual and/or for their family unit. Just ask the 85,000 claim beneficiaries in the 2017 Financial Year5.
Group insurance remains the number one vehicle through which Australians access affordable, value for money cover free from medical underwriting. Indeed, the PC acknowledges that insurance within superannuation dates back to the 1950s and has been cemented in legislation for over a decade6.
The structure of our tax system means that many products or services provided (either by the private sector or Government) come at a net fiscal cost. For example, accounting services for tax advice, charitable donations and self-education are all tax deductible resulting in a fiscal cost but an overall social benefit.
Despite some problems, insurance in superannuation is one of the great success stories of our industry. More focus on the social benefits rather than simply the cost to Government would go a long way to creating good policy outcomes.
² See for example the fiscal and societal impacts of the Government’s changes to Insurance in Super, performed for AIA http://www.aia.com.au/en/individual/about-aia/media-centre/press-releases/2018/consequences-for-young-active-members.html
³ Modelled using the ISA-Rice Warner Retirement Outcomes Model.
5 APRA Annual Super Bulletin, 2017, Table 14
6 Productivity Commission, Superannuation: Assessing Efficiency and Competitiveness, Draft Report, pg 20