Has O’Dwyer let the ‘opt-in’ genie out of the bottle?

The Government has pointed to superannuation balance erosion for young and lower paid fund members as a reason to contemplate making insurance inside superannuation ‘opt-in’, Mike Taylor writes. This is part one of a group insurance feature.

Insurance has been a critical element of default superannuation from its beginnings, but serious questions are now being asked about whether it should remain an opt-out arrangement, particularly for the very young and the low-paid.

The Productivity Commission’s (PC’s) continuing work around the competitiveness and efficiency of the superannuation system has traversed the role of insurance inside superannuation without strongly advocating for specific change, but the third and final stage of its deliberations seem destined to go much further.

While the key superannuation industry organisations such as the Association of Superannuation Funds of Australia (ASFA) and the Australian Institute of Superannuation Trustees (AIST) have argued strenuously for maintenance of the opt-out status quo, the Government’s terms of reference to the PC have put that seriously in question.

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According to the terms of reference delivered to the PC by the Treasurer, Scott Morrison and the Minister for Revenue and Financial Services, Kelly O’Dwyer, the Commission should consider the appropriateness of the insurance arrangements inside superannuation, including:

• The impact of insurance premiums on retirement incomes of both default cover and individually underwritten cover funded inside of superannuation;
• The extent to which current policy settings offset costs to government in the form of reduced social security payments;
• Whether policy changes could improve default cover through superannuation, so that default cover: – provides value-for-money; – does not inappropriately erode the retirement savings of members of all ages; and – delivers consistent outcomes across the system; and
• Whether policy changes are needed to ensure that insurance is not a barrier to account consolidation.

The PC discussion paper evolving out of those terms of reference pose the following questions to superannuation fund members:

How comfortable are you to allocate a portion of your superannuation savings to life and total and permanent disability insurance? How would you determine how much to allocate to insurance?

If you have used your superannuation insurance policy, how would you rate your experience?

How easy is it to amend or opt out of the insurance policy offered as a default by your fund?

Have you retained duplicate superannuation accounts for the purpose of retaining an insurance policy attached to a previous superannuation product?

Importantly, O’Dwyer then made clear the Government’s views on insurance inside superannuation and its concerns around the erosion of superannuation balances when she used a radio interview in early July to directly question the validity of the current “opt out” arrangements.

Discussing the degree to which existing arrangements had led to superannuation balance erosion particularly for younger people and those on lower incomes, O’Dwyer said this was “exactly the reason why the Government has asked the Productivity Commission to look at this very specific issue”.

“…the issue around the impact of insurance premiums on retirement incomes, particularly for those people, young people, and whether in fact we ought to have opt in rather than opt out arrangements”.

“As I said before, the default arrangements are that you have to opt out. And it’s very hard,” the minister said. “I mean I can give you a personal example – last year I was actually looking at my own superannuation arrangements and looking at consolidating one of my accounts, and I was looking at how I could do that, particularly in relation to insurance, and you can’t do any of this stuff online either. It’s actually quite difficult to do it.”

“So you actually have to write in and make those changes by writing an old-fashioned letter and actually getting the fund to change your arrangements. In today’s day and age, is that really acceptable? Why are we making it so difficult for people to be able to make these choices about their funds and their arrangements?”

O’Dwyer agreed with the contention that, under existing arrangements, younger fund members were effectively helping to fill the pool to fund older, wealthier fund members with respect to insurance arrangements.

“We’re asking that question and we’re asking the industry to justify some of these arrangements,” she said. “There are also arrangements where there are profit-share arrangements with a number of these funds as well, and again, the question is – are individual members actually getting the benefit of that or, in fact, is the fund itself getting the benefit and that not being passed on?”

Part two

Part three