Treasury will also examine the arguments for lifting the required level of life and disability insurance coverage for MySuper products.
Thursday’s paper is the third consultation paper to come out of the royal commission, the other two dealing with insurance claims handling and the enforcement of industry codes of conduct. The government says it has taken 14 separate measurers in response to Mr Hayne’s recommendations, and has committed to implementing 75 of the 76 recommendations.
Under the 2013 “stronger super” changes, superannuation funds are required to provide members with default life and total and permanent disability insurance. The automatic nature of the system means consumer awareness and understanding of these policies is low.
In his final report, Mr Hayne found insurance contracts were often “difficult for the average consumer to navigate and understand” and that “subtle differences in definitions, terms and exclusions from one policy to another can make the task of comparing policies particularly challenging”.
The government’s announcement comes a month after it failed to pass in full a package of reforms aimed at preventing members’ superannuation balances being eaten away by unnecessary life policies, a problem springing from the huge levels of disengagement with the system and high job mobility.
When workers switch employers but fail to nominate their existing super funds, they are defaulted into a newĀ fund. This means disengaged workersĀ automatically take out new life insurance policies each time they switch funds. Premiums come out of the super balance, and can seriously erode members’ retirement savings.
The blunt, one-size-fits-all approach of group cover means that insurance is poor value and does not meet their needs and preferences.
ā Productivity Commission report
The government tried to address this by making life insurance an opt-in rather than opt-out feature for people younger than 25, balances less than $6000 and accounts that had been inactive for 16 months. The Senate blocked the first two changesĀ following heavy lobbying by the life insurance and superannuation industries, but passed the third. The government has introduced a billĀ containing the rejected changes but it is unlikely to be votedĀ on before the federal election expected in May.
In January the Productivity Commission released a report on the superannuation industry that was scathing of group life insurance, and called for an independent inquiry.
While the report acknowledged insurance through super was “undeniably good value” for some members, it warned: “For other members, the blunt, one-size-fits-all approach of group cover means that insurance is poor value and does not meet their needs and preferences, but because they are uninformed and disengaged they do not elect to opt out.”
It found premiums had increased 35 per cent between 2014 and 2017, and the cost of these premiums, which come out of members’ superannuation balances, were often “excessive and highly regressive”, hitting hardest younger members, intermittent workers and members with multiple accounts the hardest.
Of the $9 billion in premiums paid in 2016-17, it found that about $1.9 billion went on unnecessary duplicate accounts.