The Treasury Laws Amendment (Putting Members’ Interests First) Bill 2019 (the Bill) introduced into the House of Representatives on 20 February 2019 would require insurance in superannuation to be offered to members on an ‘opt-in’ rather than the current ‘opt-out’ basis where the member is under the age of 25 or the member has an account balance below $6,000. The changes made by the Bill will apply from 1 October 2019 and implement the Government’s original objective under the ‘Protecting Your Super Package’ announced in the 2018–19 Budget.

Background

The Treasury Laws Amendment (Protecting Your Superannuation Package) Act 2019 (the Act), which passed both houses of Parliament on 18 February 2019, gave effect to a range of measures to reduce the erosion of members’ superannuation balances. The provisions in Schedule 2 of that Act prevent superannuation funds from providing insurance such as death, total and permanent disability (TPD) or income protection insurance on an opt-out basis where, broadly, the member’s account has not received a contribution for 16 months.

The Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 (the PYSP Bill) as originally introduced and passed by the House of Representatives contained additional measures which would have prevented superannuation funds from providing insurance on an opt-out basis to firstly, new members under the age of 25 years and secondly, to members with an account balance below $6,000. However in the Senate, the Australian Greens successfully moved amendments to Schedule 2 of the PYSP Bill to, among other things, remove those proposed limitations. At the time the PYSP Bill was passed by both Houses of the Parliament, the Australian Financial Review reported that the Government had ‘cut a rare deal with the Greens’ in order to avoid additional amendments by the Australian Labor Party (ALP) to other parts of the PYSP Bill.

The ALP also moved amendments to Schedule 2 of the PYSP Bill in the Senate. However, the ALP amendments were negatived and did not pass. The ALP amendments would have allowed the Australian Prudential Regulation Authority (APRA) to exempt superannuation funds from the limitation on providing opt-out insurance to low-balance account holders and under 25 year olds when specific criteria were met. The ALP’s proposed exemption was developed in response to stakeholder concerns that members in high-risk occupations, such as the building and construction industry, may not be able to obtain life, TPD or income protection insurance outside of their superannuation fund. The argument was, essentially, that it is not viable for insurers to offer insurance in high-risk occupations other than through group insurance where a level of cross-subsidisation can occur.

Proposed changes

Under proposed section 68AAB of the Superannuation Industry (Supervision) Act 1993 (SIS Act), unless a member has elected in writing to take out or maintain insurance, a superannuation fund must not offer or maintain insurance on an opt-out basis under a choice product or MySuper product held by a member if:

• the member’s account balance is less than $6,000 and
• on or after 1 July 2019, the member has not had an account balance with the fund that is $6,000 or more—this measure applies from 1 October 2019 (subitem 8(1) of Schedule 1 of the Bill).

Under proposed section 68AAC of the SIS Act, unless a member has elected in writing to take out or maintain insurance, a superannuation fund must not offer or maintain insurance on an opt-out basis under a choice product or MySuper product held by a member if they are under 25 years old and they begin to hold the choice or MySuper after 1 October 2019—that is, the proposed measure does not apply to those who are under 25 years and already hold such a product.

The proposed changes ensure that contributions to a person’s MySuper or choice product are not automatically used to fund life, TPD or income insurance for those under 25 or with low-balance accounts. These members will not automatically be provided with insurance and in the case of low-balance accounts holders, they will have automatic insurance removed unless they elect to remain insured. Further information on the operation and effect of the proposed changes, including the regulatory impact and stakeholder positions can be found in the PYSP Bills Digest.

The fiscal impacts of this measure can be found in Budget Paper No. 2: Budget Measures 2019-20.

Default insurance in superannuation

In its final report Superannuation: Assessing Efficiency and Competitiveness (PC Report), tabled on 21 December 2018, the Productivity Commission (PC) recommended that insurance should be made opt-in for under 25 year olds (recommendation 15). The PC’s recommendation is based on its findings that default cover can be poor value for young members because, for example, ‘[m]any young members work in casual or part-time jobs, and have relatively low financial commitments or no dependants to support, meaning life insurance is simply not of value to them’.[1] While the PC acknowledged that the changes may lead to an increase in premiums for other members, it concluded ‘much of this increase will likely reflect the removal of inefficient (and inequitable) cross-subsidies’.[2]

The PC also acknowledged that default insurance arrangements for some cohorts under 25 may be of value. Accordingly, it recommended that APRA be able to exempt funds who wish to provide insurance to a specific cohort of under 25 year olds on an opt-out basis, where the fund can demonstrate that insurance would be in the best interest of the specific cohort. This aligns with the objective (at least in relation to under 25 year olds) of the ALP’s proposed amendments to the PYSP Bill.

Both the PC Report and the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Final Report tabled in Parliament on 4 February 2019, also recommended (recommendations 1 and 4.13 respectively) that persons should only ever be defaulted into one superannuation account to avoid the proliferation of multiple accounts. If implemented, this would to a large extent reduce the erosion of superannuation where the erosion is a result of insurance and account fees being levied on multiple superannuation accounts, where a member is unaware they hold such an account.