Low income level has largest super erosion effect

Income level is a key factor to insurance in superannuation benefit erosion more so than age or gender, according to KPMG.

KPMG’s ‘Review of default group insurance in superannuation’ found the default group insurance in super system produced substantial benefits for both members and Australia as a whole, but there were some groups – low income earners, female workers, and young people – who were adversely impacted to a significant degree by retirement benefits erosion and specific measures were needed to help those people.

KPMG said the average reduction on their retirement savings, under the current default group insurance premium deduction system, females aged 35 to 39 who earnt between $18,000 and $37,000 was 14 per cent. For a woman under 30 earning less than $18,700 the average reduction was 16 per cent.

For a male aged 45 to 65 with a salary over $87,000 the reduction was three per cent.

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KPMG partner Hoa Bui, said: “Options often discussed such as the removal of default cover for young people may not have the intended effect when examined over a person’s working lifetime. Further, any removal of cover can be expected to cause premiums to rise for the rest of a fund’s members”.

KPMG noted that they were not convinced that an opt-in regime would necessarily solve the key problems, and could well remove or detract from the main benefit of the current system.

“The overall reduction to retirement benefits for members is moderate – on average, 6.2 per cent of the superannuation guarantee contribution and less than one per cent of salary. But the data confirms that a relatively small proportion of members are disproportionately affected,” Bui said.

KPMG proposed that policy makers could consider:

• Insurance should vary according to the individual’s needs for protection, depending on age, income, dependents etc. The use of lifecycle or needs-based default cover can significantly mitigate the impact on retirement benefits;
• As salary is an important driver of benefit erosion, consideration should be given to a premium cap based on the superannuation guarantee contribution, which is in turn linked to salary; and
• Introducing appropriate cessation rules can make a significant difference to segments of the population like casual workers and people, largely women, who have broken work patterns.

“Our analysis suggests that making targeted rather than wholesale changes may be more effective in solving the issues that concern the community.  The government might also consider, on the grounds of rationale and costs, whether the components of disablement cover are all essential,” Bui said.

“Is it cost-effective to provide both a lump sum and income replacement on disablement – and are death, total and permanent disablement (TPD) and income protection (IP) cover all necessary for default group insurance cover or could TPD and IP be interchangeable?”.

Bui noted that it was important to bear in mind that for the majority of Australians, government benefits were not an adequate substitute for insurance.

“The amount available to members who become disabled or for the families of those who die, are not sufficient to sustain their existing lifestyles. The evidence suggests that without default group insurance, many would simply lack any cover,” she said.

“Taking out insurance communally rather than individually is more cost-effective, and if the rough edges of the current system are smoothed, this may be the best outcome.”