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Has the Government opened a Pandora’s Box?
A roundtable of key superannuation industry participants has pointed to the downsides the Government and the PC may have missed.
The roundtable panelists:
Mike Taylor (MT) – Managing Editor, Super Review
Bill Butler (BB) - SuperRatings
Stephen Pratt (SP) – GM, Operations, Prime Super
Anthony Clough (AC) – Head of Corporate Trusts, AIA Australia
Paul Watson (PW) – Principal, Watson Berrill Lawyers
Adam Gee (AG) – Superannuation partner, KPMG
Jenni Baxter (JB) – Rice Warner
Franco Crapis (FC) – Head of Life Product Pricing & Strategy, CommInsure
MT: I thought we would kick off with the thing that is probably most on everybody’s mind at the moment, and that is the implications of the Productivity Commission draft report and, I guess, where it has gone with insurance, and the opt-in, opt-out. There is some pretty significant likely fallout from that. And so, I thought we would start off with someone who is at the coalface in that sense, so Frank - kick off. What is CommInsure’s view on the Productivity Commission report?
FC: One of the key call-outs from an insurance point of view from the Productivity Commission was mandating the Insurance in Super Code. We support the Insurance in Super Code and a lot of the changes to the Insurance in Super Code. Some of those have been adopted by the Federal Budget, so in terms of the Insurance in Super code, it is something that we have been aligned to and [we are] working with clients to understand the implications of some of those components of the Insurance in Super Code.
The other element of the Productivity Commission report that touch on insurance is probably the default cover. It would be another area, so with default cover - only being eligible for default cover once in a lifetime. That is something that will definitely have an impact on the insurance arrangements going forward in terms of the design and look.
BB Frank, in terms of implementing the code, presumably what they have in mind is making that into a prudential standard, because that is the only real way you can actually mandate trustees to do something, otherwise if they are adopting the code they always have to look back at the prudential standards that cover insurance already and see whether the code conflicts with that or not. Do you think that is what the PC has got in mind?
FC: I am not sure about making it a prudential standard. I am not sure if anyone else would know that. I am not sure about that.
AG: And, the other way is to legislate something for compliance, but I don’t know if you can do it through ...
FC: Potentially.
BB: It is worth it, actually, if you legislate, I think, because the code has got a lot of detail in it, so once you start putting that down in the legislation and you start finding some that doesn’t work properly, so then the Charter will change.
MT: Stephen, I mean, you are looking at it from the super fund’s point of view. What was your take on the report?
SP: I suppose, taking a step back and just looking at what came out with the Code of Practice, I mean, we certainly saw some positives in the code, but we also saw some negatives.
We certainly in no way are in favour of returning to where the industry was 15 years’ ago with contribution-based cover. We think that is a backward step and it is going to cause all sorts of issues and problems within the industry. It is going to cause all sorts of issues and problems with members. They are not going to know if they are insured or they are not insured. There is a whole heap of reasons for that, and I think the Productivity Commission is, in trying to address a problem which is duplicate accounts, is dealing with a lot of symptoms and not actually dealing with the problem which is duplicate accounts, and that is our view.
MT: Okay, Paul?
PW: Well, the Productivity Commission report – I suppose the thing that jumped out at me a little bit from the Productivity Commission report was the fact that it didn’t seem to go as far as the proposed government Budget changes in terms of some of the insurance stuff.
We think that the Productivity Commission’s recommendations in terms of insurance cover for under 25’s - we can, sort of, see that default death cover for under 25s as a default product is poorly targeted, but we do have some concerns around the idea of under 25s still being exposed to things like disability and those sorts of things because we have seen too many examples of really young people suffering either terrible sicknesses or terrible injuries.
I mean, I know a bloke just the other day who got a really substantial sum of money just from default cover in a corporate fund. He has got MS, and that is life-changing stuff for him, and under the proposed new rules he would have no cover at all.
So, we have some concerns around that, and I am sure that the actuaries of the world – I am certainly not an actuary, but as I understand it, there are pricing issues about removing certain people from the risk pool, and what that might do to the premiums for the remainder of the pool.
Obviously, the most important thing if you are going to have group insurance is making sure that it is ultimately a sustainable product that continues to be deliverable for a reasonable price without unnecessarily eroding people’s retirement savings, and those sorts of things. There has to be changes. I think everyone accepts that. I think duplicate accounts has been a big problem, both from the perspective of administration fees and multiple lots of insurance fees and all those things. I think that the recommendations, both from the government and from the Productivity Commission in terms of greater account consolidation measures and those sorts of things, is a really good step. But, I think there is still some issues to work through on the insurance side in terms of those issues about the under $6,000 thing. It seems to be a little bit arbitrary.
I think, from my perspective as someone who looks after consumers, and everyone in the industry is often saying, that one of the great challenges is getting everyday people to engage in superannuation, and it is too complex. So, having a system where you, sort of, go, “If it is under $6,000 then you don’t have cover, but when you do get to $6,000, then you get cover. If your account balance drops below $6,000 then you will still have cover, it still continues under these rules. And, if you are under 25 and you don’t have cover, but when you turn 25 you do,” and what mechanisms are going to be in place in terms of underwriting for people getting it, and those sorts of things. It is all a bit complicated.
If you make the rule that if you have an active superannuation account, and it retains insurance cover, then that is nice and easy for people to understand. “I am in employment. I am contributing to super. I have an insurance cover.” That is just a nice easy thing for people to have, you know.
AC: That is key. You are right, it has got to be an active superannuation account. The duplicate account issue can be dealt with separately. You don’t need to lock out people under $6,000. If they are contributing, they know there is insurance cover there. They have got another account somewhere else, you don’t want to turn that off. If you are turning off cover under $6,000 you then put an individual in a situation where they used to have cover, they haven’t contributed, and suddenly they have got no cover.
JB: It is going to be very problematic. The administration is going to be horrible, and people will fall through the gaps. I think what we said in our submission on that is that; given the move to move the under $6,000 amounts to the ATO and deal with it, you don’t really need that insurance, if it is going to be largely dealt with anyway. So, remove the insurance thing about under $6,000 you don’t get it, because it is just going to stuff up new people coming into funds. So, hopefully that one will disappear.
SP: But, if you do the maths, taking people with inactive accounts with $6,000 and no contributions for 13 months, taking them to the ATO makes people worse off. If you do the maths. At an average rate of return of 5 per cent, the ATO is not going to pay 5 per cent. People are actually going to be worse off.
JB: And, how long it sits, doesn’t it, with the ATO?
SP: Well, yes.
AG: It is going to be magically consolidated now, so however that works.
MT: Adam, do you want to speak to that point?
AG: I can talk to the insurance, we have done the numbers. We have done the numbers. We have had the actuaries in the background looking at what is the impact of under 25s, of moving the under $6,000s. It is a significant impact.
Our view is premiums will go up by approximately 26 per cent for the rest of the pool. So, on the basis of if you remove the younger lives out of the system, the risk of the pool increases as you also have a lower number of members insured, and obviously that creates greater issues.
We did some work for the ISWG [Insurance in Superannuation Working Group], which we continue to be very supportive of, on premium erosion. When we did the numbers prior to the Budget changes and announcements in the Productivity Commission numbers, the average erosion was around 6.2 per cent of a member’s account. Obviously, it differed depending on salary levels, account balance, et cetera. If we now overlay removing cover for under 25s, plus the 26 per cent increase, the average erosion goes up to about 7.4 per cent. The rest of the industry will be far worse off as a result.
BB: Playing the devil’s advocate, wouldn’t the minister or someone supporting the minister say, “There, that is exactly what we were saying. Premiums for everyone else have got to go up by 26 per cent because these young people, and small account balances, are paying for cover they didn’t need.”
AG: Paying for cover? We agree. We don’t think removing cover entirely. I agree with you. I think a small level of – whether it is TPD – is a better way to do it, and if you look at a – I went on to Sunsuper’s website for some unknown reason and looked at their PDS, and I can get $50,000 worth of death and TPD for $30 a year. In our view, we would far rather see a small amount of cover for younger individuals than removing the whole lot out of the system.
SP: I think, if you look at the statistics, the average birth rate – sorry, the age of mothers who are giving birth under 25, there is about 40,000 women a year under 25 giving birth, which implies that every year you have got 40,000 people being added to a pool who need some sort of risk cover because there are family commitments there. If you cut off at 25 – our view is 25 is too old. We think 20 is reasonable, but 25 is too old.
JB: The main insurers have told us that 10 per cent of under 25s have dependents, and if you go out to the rural areas it is more like 20 per cent. Being devil’s advocate again, I think Kelly O’Dwyer would look at that and go, “Well, that validates what I have done. Ninety per cent don’t have dependents, so we are only talking about the death cover.” Disability is different. Whereas, in the insurance industry, we worry about those vulnerable people. We worry about the 10 per cent, or the 20 per cent. A lot of us have seen cases where that has happened, and they are very vulnerable, and something needs to be done for them.
SP: Thirty to 40 per cent of their death claims are for in active accounts, 30-40 per cent are inactive, so they are people that won’t get cover.
BB: Some of these reports implying that trustees have been sitting on their hands and doing nothing about the account erosion requirement, persist. In fact, our experience, and I am sure yours will be the same, is that when we talk to trustees they are concerned that before they chop off cover at younger ages, that they have a look at the claims, and a lot of them are more comfortable with ceasing cover, or not applying cover up to, say, age 20, but 20-25 there are significant numbers of risk and claims in cases where it would be quite difficult if the cover wasn’t there. So, it is not a case of the trustees doing nothing, it is the trustees taking their jobs seriously.
AC: When we look at our claims for that sort of age bracket, the number one TPD claim is mental health. The third highest for [income protection] IP is mental health, after counts for muscular/skeletal. If you remove cover for these individuals, disability cover, you are limiting their ability to get access to programs where they can get back to wellbeing again.
I mean, as an insurer, one of the things that we through the occupational rehab is we work with these individuals. We work with their medical professional and their employer, to say, “How can we get this person back on the road to wellness, wellbeing, and ultimately back into the workforce?” You take that away, the access to the support networks is diminished straight away and it falls back onto the government. The NDIS doesn’t cover this sort of scenario, necessarily. You will ultimately provide them a worse outcome for those people who really need that support.
JB: Is there a way insurers can provide those support services to under 25s without claims and premiums being paid? Is that something that fund are asking you to do look into?
FC: Outside the super system?
PW: Yes.
FC: It is difficult. It would have to be outside the super system, rather than inside, so then therefore the onus would be back on the employer to be looking at ways to provide cover for their employees.
AC: So, that is something that goes back to the employer then. You have to get them to source that sort of thing.
The stats that we had under the age of 25 was, over the last five years, we had almost 700 claims across death, TPD and disability, which amounted to about $60 million in claims that we had paid out, so there is -
JB: Did you look at those death claims, where they are going to? Were they going to dependents or are they going to parents?
FC: No. I haven’t been looking at that analysis, but based on the statistics that you just quoted, you have got to extrapolate that further and make an assumption.
BB: But, 40 years ago, people had their own life insurance through what used to be called collector insurance where the agents would go around to workplaces and sell policies. People don’t do that so much now. My anecdotal experience with my kids is that they don’t even think about it. The only insurance a lot of people have is through their super funds, and so there is no safety net there to fill the gap.
AC: We know the general apathy in terms of superannuation in general of that age range. Now, if you make it an opt-in model, our view would be somewhere between two to ten per cent of people will actually opt-in, if that.
BB: The other thing with that under $6,000, is you have got to look - there is a few other things about it is that you have got the – who are the people who have these low account balances, the under $6,000?
You are talking about people who may be entering the workforce later in life, such as migrant workers who have come from overseas so they might have dependents, but if they are in a low-paying job, they might be in a physical job and they will be exposed to that risk, and they will have that risk themselves rather than having it with an insurer for, sometimes, two or three years even before they get to the $6,000 mark. And then, you look at other communities who have got these things. The indigenous community. You have got younger people – like, you think about the impact of premiums you were talking about by removing certain people out, and you think about the under $6,000 thing with funds like REST and Hostplus, who have younger demographics in their membership, and no doubt you are going to have certain super funds who are going to have much worse experiences from a premium rise perspective than other funds who have a more widely spread one. AustralianSuper, or something like that. So, there is going to be all sorts of things like that could have substantial impacts. That the concern that we have, though, is that you have got already seriously vulnerable communities that will be the ones who will be exposed. Migrant workers, mums returning from maternity leave, these sorts of things, so will have low account balances and have no cover.
AC: That is the other thing, as well as people who work in the riskier occupations. We know under 25, 40 per cent of the workers under 25 are full time, and out of those, 45 per cent of those work in a high-risk occupation. Mining, construction. You get to the $6,000 mark, what happens? You need some form of mechanism to avoid a selection list. So, can these people actually access cover or does the cost of cover get too high, so they can’t actually afford cover? That is another scenario, there.
JB: They need to be pooled in a big pool so that they can have affordable cover.
FC: A lot of it assumes that opt-in and opt-out – the rules, or the insurance that you will be able to get in opt-in and opt-out will be similar or the same. It will vary, and the variable will have an impact in terms of conditions and premiums.
BB: One of the other measures in the draft report was to have a discussion or a debate on whether insurance should be in super or not. I think it was right at the end, and I think that is a good one, because potentially that gives us the chance to finally – I assume they would affirm the importance of insurance, but at least we will know what the purpose is, and trustees will have some guidance. Because, up until now, trustees haven’t had any guidance as to how much cover to provide, why they are providing cover, so you get different interpretations. You get some funds that have the minimum life super cover. Others like REST, for example, that have needs-based cover, so it could be something good come out of that part of the discussion, if it happens.
AUTHOR
Industry Expert
Leading industry experts contribute to the Money Management & Super Review website and magazine, providing insight into a wide range of specialised topics within the financial services industry.
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