A report on the efficiency and competitiveness of the Superannuation Industry
The Productivity Commission has published its draft report into the efficiency and competitiveness of the Superannuation Industry. The inquiry has found that multiple accounts and under-performing funds are costing the Industry $3.9 billion each year. Part of the problem is identified as being related to insurance premiums eroding account balances.
The Commission recommends that super fund members who are under 25 be removed from the current opt out coverage and be provided with opt in coverage. The Commission justifies this on the basis that younger workers are more likely to be in casual or part time work with little financial commitments and no dependants meaning that insurance coverage is of little value to them. Whilst this may be true with respect to life insurance (payable on death) it is not the case with respect to disability insurance. A younger worker who is seriously injured and cannot work will face a lifetime of reduced or no income and high medical costs making insurance an absolute necessity. Removing automatic access to cheaper disability insurance through super risks increasing the under-insurance gap which already exists in Australia.
A further recommendation is for coverage to cease on inactive accounts where no contribution to super has been made for 13 months unless the member specifically requests ongoing coverage. Just because a member is not working does not mean they do not still need coverage. There can be many reasons why contributions may cease including where a person returns to full time study or takes parental leave. The possible unintended consequences of ceasing coverage by default can include that pre-existing conditions under some policies may not be covered when coverage resumes again after further contributions are received. Any move to implement this style of stop start insurance must be clearly explained to members who should be advised of the consequences of letting insurance lapse.
Underpayment of superannuation
A further problem with this proposal is that workers do not control when employers pay contributions. This draft report also exposes the significant underpayment of superannuation contributions by employers. If an employer fails to pay superannuation contributions on time then this could have a serious effect on insurance coverage in super due to these default stop start proposals.
Finally the Commission notes that the current voluntary Code of Practice developed by the Superannuation Industry in relation to insurance in super is likely to have little effect because it is not enforceable and the consequences for breaching the Code are weak. More regulatory oversight of the Code is recommended and this is welcomed.
The report signals more change in the ever changing Superannuation Industry and while some proposals may fix the issue of erosion of member’s funds they may have unintended consequences for individual members. It is crucial that any change be accompanied by a requirement for the impact of changes to be explained to a member and how that change may impact the member individually before the change takes effect.