AustralianSuper has made a good call with its decision to change the life cover arrangements for members under 25. Let’s hope other super funds respond to this move with their own initiatives to stop the erosion of account balances of young and low-income members.
Last week, AustralianSuper announced that members under 25 would no longer be given insurance automatically when they join. Under normal arrangements, life cover is provided on an opt-out basis; all members will be covered automatically and premiums deducted unless they specify that they do not want the cover.
AustralianSuper says members under 25 can choose to have life insurance if they want it but will only be provided on an opt-out basis for members who are 25 or older.
The super fund, which is Australia’s biggest with more than two million members, says it made the change to stop the erosion of the account balances of young members. It has 150,000 members under 25.
“People under 25 starting out in the workforce need to begin building a base for their retirement savings. Given that they are often on relatively low incomes, the fund does not want to see undue erosion because of insurance that may actually be of very limited value to them,” AustralianSuper said in a media statement.
“With people getting married or having kids later in life we need to adjust our assumptions of what people need at various stages in their life.”
The fund’s experience is that for life insurance claims paid to members under 25, only 10 per cent are paid to financially dependent spouses or partners and children.
AustralianSuper estimates that for a member joining at age 15, the savings over 10 years is $637 (based on current premium rates). This amount will increase the member’s balance by $9,000 at retirement (age 65).
The super fund says premiums will not rise for other members.
Consulting firm KPMG, which prepared a report on the costs and benefits of default group insurance for the Insurance in Superannuation Working Group, says the opt-out system produces substantial benefits for members and Australia as a whole by closing the underinsurance gap.
“The current system facilitates insurance coverage for a large part of the population, which helps reduce Australia’s long-standing underinsurance issue,” it says.
However, there are some groups, including low-income earners, female workers and young people, who are adversely impacted to a significant degree by retirement benefits erosion. Income level is the key factor in benefit erosion, more than gender or age.
KPMG says the average reduction in retirement benefits is moderate, at around 6.2 per cent of the superannuation guarantee contributions and less than 1 per cent of salary.
However, a relatively small proportion of members are disproportionately affected and KPMG says measures are needed to help these people.
Its suggested policy options include: introducing lifecycle or needs-based default cover to vary insurance according to individual needs, depending on age, income, dependents and so on; imposing a premium cap based on the SG contribution, which is linked to salary; and applying cessation rules for casual workers and women with broken work patterns.
There is a fair chance that AustralianSuper’s move will not be the last such change by a super fund. The Insurance in Superannuation Working Group, which has been developing a code of practice for the sector, says it is working on maximum premium limits for different segments of a fund’s membership that will protect account balances from inappropriate erosion.
