Pressure is building on the the federal government to reconsider its controversial plans to overhaul life insurance linked to superannuation to ensure that members who are working are automatically signed up to a policy even if their balance is low.
Brett Clark, the boss of the country’s largest life insurer TAL said 900,000 retirement savers would be better off under under a proposal it has made to a senate economics committee currently reviewing the budget proposals known as the “protecting your superannuation package”.
As part of its May budget, the federal government introduced a measure that would make life insurance opt-in for all accounts with balances under $6000. The measures were designed to stop super members from having their balances whittled to nothing due to payment of fees for unnecessary life insurance.
But this means that all new super fund members would have no cover at all, and does not take into account members who are working, but have low balances, said Mr Clark.
What TAL has proposed is activity test to determine if a member is eligible for life insurance cover within super, so members who are active, or working, continued to get cover even if they’re balance is under $6000.
“Active membership in a simplistic sense is defined by contributions being made by an employer to a super account. That’s generally accepted as a key element of being an ‘active’ member,” he told The Australian FInancial Review.
“The changes we are proposing to the legislation are in our mind very modest … we’d still need a material change and reduction of insurance provided through super. That by its very nature would change the underlying insurance pool and.. perhaps prices in time too,” he said.
Some industry experts say premiums could rise by as much as 30 per cent under the government’s plans.
Interestingly, while a landmark draft report by the Productivity Commission on the $2.6 trillion super sector supported the government’s plan to make insurance opt-in for fund members aged under 25, and agreed that accounts which had been inactive for 13 months should be subject to cessation of cover, it did not agree with the low-balance measures.
Mr Clark said that it would be “easy” for super funds to track their active members, adding that “there is broad agreement across funds insurers, consumer groups and regulators, that active members should retain their insurance”.
Superannuation specialist law firm Berrill & Watson’s submission to the committee, which is due to hand down its report on August 13, said the bill should be amended to allow insurance to be offered on an “opt in” basis only for those accounts which are classed as inactive, having no super contributions going in.
“The main peril of insurance premiums on small accounts is that identified in many media stories, namely that the accounts will whittle away to nothing. This is only a problem for inactive accounts and not for accounts with super contributions being paid in,” said Berrill & Watson director John Berrill.
“Our submission was echoed by just about all the submissions to the Senate Inquiry-including Consumer Action Legal Centre, Financial Rights Legal Centre and all the peak bodies for super funds and insurers.”
Life insurance company AIA Australia’s CEO Damien Mu told the Financial Review that flagged budget savings expected to flow from changes to group insurance in superannuation will not materialise and have the potential to create an insurance underclass.
Mr Mu said the $700 million saving the federal government has forecast was unlikely to materialise saying corresponding price rises have not been taken into account.
“Both Rice Warner and KPMG have identified the savings the government is talking about are false” he said.
While the federal government has forecast a $697 million saving over four years, Rice Warner says this does not take into account the corresponding price rises the changes will ensure leading to less than $30 million in savings each year. It also says the impact on low member balances at preservation age will be less than 1 per cent.
The life insurance industry is rattled by the impending July 1, 2019 deadline. Mr Clark said that such a short window was “reckless”.
“There is broad alignment across different parts of the industry, and of course not everyone agrees on everything, but there is alignment around implementation.”
The Minister for Financial Services Kelly O’Dwyer told the Financial Review last month that the government remained “concerned” that there were not adequate protections for super fund members with low-balance accounts.