Big Super’s insurance gravy train must be ground to a halt

The Australian Financial Review 11 July 2019 

Compulsory life insurance inside superannuation is not working for all Australians. That is the view of the Productivity Commission, Choice and the Consumer Action Law Centre. 

This statement will now be tested by a new Senate inquiry into our plan to improve insurance in superannuation.

As someone who spent almost 10 years inside the financial services industry, I’ve heard all sorts of arguments to justify public policy preferences.

Yet the arguments being used to keep costly, unfair and poorly targeted insurance inside super would have to take the cake.

These arguments against changing insurance – that vulnerable people will be uninsured and workers in high-risk jobs won’t have coverage in the event of a permanent disability – are being run by the unions, Labor and parts of the finance industry. Indeed, multiple reports have found compulsory life insurance is actually working for the insurance industry, not ordinary Australians.

If you listen to those who stand to benefit most from current arrangements, you could be forgiven for thinking the world will come to an end if changes are made.

Take super fund REST, which proclaims: “The burden will fall on government to provide financial support and services for those members who suffered a disability and did not receive any insurance.”

Translation: Australians are effectively too ignorant to acquire insurance on an “opt in” basis.

Here’s how it now works: if you are working, you have a super fund and you have life insurance unless you “opt out” of the system. It doesn’t matter how young you are or how much money you have in your account. This means that a 20-year-old without dependents or debts has life insurance that eats away at their accumulated savings. The Productivity Commission says these excess insurance premiums cost savers $1.9 billion per annum. The government’s plan to fix this was stymied in the Senate at the end of the last Parliament. But we are still seeking to enact precisely what the PC recommended: “Insurance should be made opt in for members aged under 25 (rather than opt out, as is currently the case).” 

There are two reasons why this policy should be adopted.

First, the current system is unfair.

If you are young, you probably don’t need insurance. Consumer group Choice (not exactly a bastion of right-wing ideologues) says that “for most under 25s life insurance, particularly death cover, will offer little to no value”.

 If you’re a lower income worker, you will pay for this system. The PC found that ‘‘balance erosion for low-income members due to insurance could reach a projected 14 per cent of retirement balances in many cases, and in extreme cases (for low-income members with intermittent work patterns and with multiple income protection policies) could be well over a quarter of a member’s retirement balance’’.

The “balance erosion” refers to an industry practice of taking out premiums whether or not people are working, often for insurance which is poorly targeted.

There are cases where people have seen $50,000 of their super disappear due to zombie insurance policies. 

It is also unfair because it encourages a “she’ll be right” mentality, which is most likely to hurt people with lower levels of financial literacy.

Government and insurers cannot foresee people’s insurance needs. Most insurance in super policies will pay out between $100,000 and $200,000 in death benefits. But in reality, full-time workers with young children should have around $600,000 in insurance coverage according to Rice Warner Actuaries.

That is a big gap.

This “one size fits all” approach discourages Australians from seeking proper advice about the insurance coverage they actually need for their own circumstances. This analysis would take into account a person’s family situation, income, objectives and risks.

Second, it undermines the purpose of super. Superannuation is supposed to achieve two principal outcomes: reduce the public sector costs of an ageing population and improve quality of life in retirement. 

Both objectives depend on a superannuation system which is efficient and fit for purpose: not one with unnecessary fees and costs.

Insurance is one of many factors undermining this system of national savings. Again to the PC report:

 ‘‘The effect on age pension outlays of the erosion of superannuation balances by insurance premiums is not trivial, and could materially offset any savings to government in social security outlays (that would otherwise have been paid to members that become insurance payout recipients).’’

In other words, poorly targeted insurance is working against the objectives of super. 

The most recent Intergenerational Report estimated that at the current rate, most Australians are still on track to require some form of pension by mid-century.

To get more people off the age pension, we need higher super balances, not poorly targeted insurance policies draining

$1.9 billion from Australia’s savings each year. The government’s plan to end this gravy train presents an early opportunity to do the right thing by workers and savers. The new Senate inquiry will surely provide more weighty evidence for this change.

Andrew Bragg is a Liberal Senator for New South Wales