Move to change insurance in super
The shakeup of insurance within superannuation, first signalled in last year’s Federal Budget, has kicked off with the passing of Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018. In order to do so however, the government had to make some concessions to address specific concerns raised in the months following the Budget announcement.
Opt-in for under 25’s removed from final legislation
One of the debated features of the original bill – removing default cover provisions to new members under the age of 25 – was removed from the final legislation. While there was support for the underlying intention of this policy (to protect those with lower balances from high insurance fees and inappropriate levels of insurance), some members of parliament, were concerned about whether some of the unintended consequences had been fully considered.
This was the case in relation to younger members whose occupation placed them in a vulnerable position. Removing default cover would result in these workers, especially those in higher risk industries, having to apply for cover through the underwriting process. This would require unprecedented levels of engagement by these workers and could result in many having restrictions on their cover, or having their cover declined altogether.
The rationale for removing default cover for younger members is that it does not provide value to them. Peter Whish-Wilson, the Greens’ financial services spokesperson, said recently “…it is true that most young people don’t need life insurance. But no one needs insurance until they need it”.
It’s hard to argue with the second part of that statement, the notion that most young people don’t need life insurance is debatable. In AIA’s submission to the Senate Standing Committee on Economics in 2018, it revealed it had paid $84 million in benefits to around 1,200 members aged under 25 since 2015. Furthermore, AIA also noted that the rate of Income Protection (IP) and Total and Permanent Disability (TPD) claims for people aged 20 was about the same as it was for those aged 30.
This data, as well as submissions from other interested parties, created enough concern for parliament to proceed with caution when passing the final legislation. So, for the time being, younger members will continue to benefit from the default insurance in their super.
Opt-in for low balances removed from final legislation
Members with account balances of less than $6,000 will also continue to receive default cover. This was another feature of the draft Protecting Your Super Bill which was contested due to the fact that account balance is not a reliable indicator of insurance needs. The result of this would have been that an average member earning $60,000 per annum would have not received cover until well into their second year of accumulation.
Opt-in for no contribution in 16 months (inactive) retained in final legislation
What does remain in the Protecting Your Super Bill is the requirement for funds to cease cover on inactive accounts, although the 13 month inactive period has been extended to 16 months. This will come into effect from 1 July 2019 but will require trustees to identify at-risk members by 1 April 2019 and provide them with an opportunity to maintain cover should they wish.
With the inclusion of this provision within the legislation, two main changes to the policy will need to be implemented by 1 July 2019. Firstly, the ‘end of cover’ clause will need to be amended to reflect the automatic cessation of cover on inactive accounts at 1 July 2019 as well as on an ongoing basis following implementation.
Consideration will also need to be given to the ‘reinstatement’ or ‘recommencement’ of cover that ceases as a result of an account being ‘inactive’ in terms of the Bill but which once again becomes ‘active’ (because, for example, a contribution is subsequently made to the account). What rules are put in place will depend on how the trustee wishes to accommodate these members and may impact premium rates.
Despite these amendments to the Protecting Your Super Bill, the Government was clear that it remains committed to the original draft legislation. The Treasury Laws Amendment (Putting Members’ Interests First) Bill 2019 includes the low account balance and under 25 restrictions on opt-out cover in its provisions.
Clearly this is a topic which will continue to be discussed over the coming months and we will await to see the outcome of the Putting Members’ Interests First amendment. In the meantime our focus remains on working with and supporting our existing trustee members to ensure that immediate requirements are met while preparing, where we can, for the possibility of further changes in late 2019.