Views on the bill

2.1        This chapter summarises the views held by stakeholders on the provisions of the bill and its effects. The chapter first considers views with regard to the implementation timeframe of the measures proposed and the definition of an 'inactive' account. It then considers matters raised in relation to each schedule of the bill in turn. The chapter is intended to provide an indicative, though not exhaustive, account of issues examined during the committee's inquiry.

General support for the bill

2.2        Submitters and witnesses were broadly supportive of the policy objective of the bill; that is, to improve Australians' retirement savings by protecting low-balance accounts from undue erosion due to excessive fees and inappropriate insurance arrangements. However, inquiry participants differed in terms of the extent to which they believed the measures proposed by the bill effectively meet this policy objective.[1]

2.3        ClearView expressed its full support for the bill and noted that the legislation is in keeping with the Productivity Commission's recent draft report, Superannuation: Assessing Efficiency and Competitiveness:

ClearView fully supports the Bill and believes it will be effective in reducing the erosion of Australians' superannuation savings stemming from fees on low balance accounts, inappropriate group insurance in superannuation and certain barriers to account consolidation.[2]

2.4        COTA Australia welcomed the Protecting Your Superannuation package and its 'intention to strengthen the retirement balances of Australians by ensuring low-balance superannuation accounts are not eroded with fees and insurance premiums'.[3]

2.5        Anglicare Australia commended the government for the changes proposed in the bill, highlighting the benefits of the measures for low-income earners and individuals with sporadic work histories:

The proposed measures will help unite people with their superannuation and prevent any low-balance accounts from being eroded; something of great assistance to people on low incomes and with work histories that have seen them earn small amounts over their working life. This is particularly important to women who have taken years out of the workforce to care for children and those who have worked part time for several years to fit in with caring duties.[4]

2.6        Dixon Advisory expressed overarching support for the bill, and argued that 'the legislation will improve practices within the superannuation system' and ensure that 'regulatory arrangements are focused on the fundamental objective of superannuation to provide for retirement incomes for all Australians'.[5]

2.7        The Financial Rights Legal Centre (Financial Rights) and Consumer Action Law Centre (Consumer Action) also expressed their strong support for the bill in their joint submission to the inquiry, characterising the changes proposed by the bill as a 'significant improvement on the status quo':

The Financial Rights Legal Centre (Financial Rights) and the Consumer Action Law Centre (Consumer Action) strongly support the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 (the Bill). For too long, the design of the superannuation regime has led to a proliferation of accounts and serious erosion of people's retirement savings. The Bill takes important steps to address the issues and represents a significant improvement on the status quo.[6]

2.8        Similarly, Financial Counselling Australia (FCA) noted that it supports the Protecting Your Superannuation package in principle, and 'considers that these reforms should be a first step of a continuing process to ensure that superannuation grows for all people'.[7]

2.9        The Grattan Institute (Grattan) expressed its support for the bill in both principle and detail. Grattan submitted that the bill 'will substantially reduce the costs of superannuation', further contending that:

It will constrain inappropriate income protection, life and total and permanent disability insurance (TPD), resulting in higher superannuation balances at retirement for many Australians. And it may increase competition between superannuation providers a little, lowering superannuation fees.[8]

2.10      CHOICE argued that '[f]or too long poor system design and industry inaction has led to a proliferation of accounts and serious erosion of people's retirement savings'. CHOICE summarised how the measures in the bill benefit Australians in saving for their retirement:

Reuniting people with their inactive superannuation accounts will help to fix one of the costliest problems facing Australians in saving for their retirement. The $6 billion in superannuation expected to go back to the accounts of three million members will have tangible benefits later in life. For some this will mean the difference between worrying about how they will afford the next energy bill or weekly shop and being able to retire in comfort.

The proposed improvements to life insurance targeting will deliver big benefits to younger people and people on low incomes. From inception the policy of default opt-out life insurance in superannuation has lacked a well-developed purpose. As a result, we have seen many people paying for insurance they do not know they have and in some cases do not require.[9]

2.11      In its submission, AIA Australia (AIAA) recognised the need for reforms 'to improve the system and deliver the right balance of appropriate protections to suit all members needs'. However, AIAA expressed concern that there will be unintended consequences of the reforms:

It is AIAA's view that the Government has not appropriately assessed the serious and unintended consequences of these reforms, which will significantly disadvantage vulnerable individuals in society, in particular young Australians under 25 and those with low balance active superannuation accounts.[10]

2.12      The Association of Financial Advisers (AFA) expressed similar concerns, submitting:

The AFA supports the overall objective of avoiding unnecessary erosion of superannuation balances, including through the avoidance of paying fees and insurance premiums on duplicate accounts, however we believe that there are many potential unintended negative consequences that could flow from this package and we caution against it being pushed through without adequate consultation and consideration of the objectives and the likely consequences.[11]

2.13      A number of industry representatives urged caution to avoid unintended consequences of the proposed changes implemented by the bill. For example, Cbus Super argued that 'it is imperative that achieving this policy objective does not create unintended adverse impacts on members', highlighting that:

Cbus has strong reservations about the extent to which the Bill will remove and restrict access to default group insurance for those workers in more hazardous industries who require cover or would not otherwise be able to access it.[12]

Implementation timeframe

2.14      The measures proposed in the bill come into effect from 1 July 2019. Several inquiry participants, particularly industry representatives, expressed strong concerns in relation to the proposed timeframe to implement the measures in the bill, arguing that the application date of 1 July 2019 will be challenging to achieve.[13] A number of submitters and witnesses argued that transition to the new regime should either be deferred or that a staged approach be adopted.

2.15      Concerns regarding the implementation timeframe largely centred around the ability of industry to action the life insurance measures contained under Schedule 2 of the bill.

Repricing of insurance contracts

2.16      In particular, submitters and witnesses raised the need for superannuation funds to redesign and renegotiate group insurance contracts with insurers; a process which several inquiry participants contended takes significant time and resources from both the fund and the insurer.[14]

2.17      For example, as outlined by Rice Warner:

Given the significance of these changes, funds will likely need to renegotiate the terms of their contracts with insurers. This is a process which requires significant time and resources from both the fund and the insurer. This exercise would generally commence at least one year before implementation and for most funds occurs every three years. This means that insurers will require considerably more resources to be able to deal with pricing requirements. Funds that have recently renegotiated premium rates with premium guarantees of three years will be forced to pay to go through the exercise again and the outcome for members may be a large premium increase. Where the incumbent insurer increases premiums to an extent that the trustee does not feel is justified, funds will have insufficient time to tender for insurance services.[15]

2.18      Mercer also pointed to the need to re-price insurance contracts that will arise as a consequence of the bill and questioned the ability of insurers to conduct a 'thorough reassessment of risk' within the necessary timeframe:

A start date of 1 July 2019 would require the group insurance terms and conditions to be reviewed for every large super fund by early 2019 at the latest. A one-size-fits-all approach is not possible as individual fund characteristics such as the proportion of new members under age 25 and the number of inactive accounts will vary significantly from fund to fund, as will their current terms and conditions. Doubts have already been raised about the capacity of the group insurers to conduct a thorough reassessment of risk for every fund within the necessary timeframe, as well as whether there is sufficient data available to allow accurate assessment of the impact of the changes on claim rates.[16]

2.19      Also commenting on the ability of industry to execute the changes proposed by the bill, TAL Life Limited (TAL) reflected on the complexity of the superannuation system and outlined the changes the bill will require in addition to the redesign and negotiation of insurance contracts:

The changes the Bill will require include:

• Redesign, repricing and negotiation of all life insurance policies and possibly, administration agreements and reinsurance contracts;
• Extraction and collation of appropriate member data;
• Drafting and finalising member communications to engage members on the implications of 1 July 2019 (being the current proposed implementation date);
• Reflecting the new arrangements within PDSs, insurance guides and other member facing documents and websites; and
• Creation and testing of new business rules/IT and system builds to implement the changes.[17]

Concern of possible detriment to members

2.20      Some submitters and witnesses argued that the proposed timeframe to implement the changes in the bill will increase the operational risk for insurers and superannuation trustees, and that this in turn may lead to unintended outcomes for members such as increased premium rates and risks of miscommunication.[18]

2.21      Mercer summarised this concern it its submission, commenting that 'the more rushed the implementation timetable, potentially the worse the outcome for the majority of fund members'.[19]

2.22      Rest  submitted that:

These budgetary changes will take considerable time to implement and involve administration and supporting system work, operational change management and extensive member and employer communications. Creating a new insurance policy that is in the best interests of members takes time to create and price. Rushing the pricing of a contract will lead to additional loadings due to lack of time to properly analyse claims experience.[20]

2.23      The Financial Services Council (FSC) asserted that limited time for detailed analysis in contract renegotiations will result in conservatism being built into the system as well as additional implementation costs being incurred for additional staff and outsourcing. The FSC further contended that 'these are likely to result in additional costs and premium increases to the detriment of members'.[21]

2.24      Commenting on the timeframe allowed by the bill to communicate with members the changes to their insurance arrangements, Munich Reinsurance Company of Australasia Limited (MRA) submitted:

A very significant number of members will need to be notified across the industry of the change to their insurance arrangements. Where a member is required to respond, they may be given a very short time frame to make an election before the cover is cancelled. MRA is concerned that this may result in unintended consequences, such as correspondence not being acted upon due to unforeseen circumstances.[22]

2.25      Mrs Helen Rowell, Deputy Chair, Australian Prudential Regulation Authority (APRA), also relayed concerns to the committee regarding the potential unintended consequences for members that may arise if there is insufficient time to implement the proposals in the bill:

To implement all of these proposals, funds will need to work closely with their administrators and insurers to ensure the required system changes and amendments to group insurance arrangements are in place. This will be challenging to achieve by the proposed implementation date of 1 July 2019, given both the complexity and extent of the changes that will be required to be made across the entire superannuation sector.

...

APRA is therefore concerned that unintended consequences may arise for members and that there will be significant pressure on and heightened operational risk for super funds and their insurers and administrators if sufficient time is not allowed to implement the proposals in an appropriate and orderly manner.[23]

Calls for deferred or staged implementation

2.26      A number of inquiry participants urged that consideration be given to the start date of the measures in the bill being deferred.[24]

2.27      Rice Warner recommended that 'the proposed changes be deferred until the later of the fund's next premium rate guarantee expiry and 1 July 2020'.[25] Likewise, the Australian Institute of Superannuation Trustees (AIST) supported implementation being 'deferred until the later of 1 July 2020 or from the end of insurance policies commenced prior to Budget night'.[26]

2.28      Alternatively, some submitters and witnesses argued for a staged implementation, beginning with the consolidation measures contained in Schedule 3 of the bill.

2.29      The AFA endorsed a staged approach to implementation, submitting that:

This new regime is schemed to commence from 1 July 2019 and superannuation funds are expected to start communicating with members from as soon as April 2019. All these changes are proposed to start on the same day. There is no sensible transition plan. We believe that these reforms should be pursued in stages and that the first step should be to undertake the account consolidation activity.[27]

2.30      AIST suggested a phased approach to implementation would test the capability of both superannuation funds and the Australian Taxation Office (ATO) to effectively carry out the proposed changes:

...in our submission we have suggested that there be a phased implementation of the changes, and in relation to the inactive low account balance measures we have suggested that there actually be a pilot take place during the course of the next 12 months. That's not an exceptional suggestion, because that tests fund capability and it tests ATO capability. It means that when full implementation takes place, all of the bugs have been worked out. It's an approach that was followed with SuperStream, with rollovers and then with contributions, and it's what's happening now with single touch payroll. A slow introduction of these measures we think is in the interests of the stability of the system and ultimately in the interests of members, because you don't want to be in a situation where ATO systems fall over because they were unable to cope with the volumes generated by these changes.[28]

2.31      Representatives from APRA told the committee that there is merit in a staged approach to implementation, noting that the consolidation of low-balance, inactive accounts by the ATO, provided for in Schedule 3 of the bill, would help to address the issue of duplicated accounts:

We do think, as Helen pointed out earlier, there is merit in the low account balance consolidation as a first measure, because that in fact tidies up a lot of the duplication, and then then you would come back and, as a second stage approach to the insurance, you would be effectively doing it with a smaller cohort than you would if you did it at the same time that you were doing the account consolidation.[29]

2.32      In contrast to those views above, Professor John Daley, CEO of the Grattan Institute, argued that the timeframe for implementation, while not a long time, 'is perfectly doable'. Illustrating this point, Professor Daley drew the committee's attention to previous significant legislative changes implemented by the superannuation industry:

A number of the submissions have pointed out that 11 months seems quite tight for these changes, but can I suggest that in terms of a corporate making arrangements of this kind, where the big question is essentially going to be getting all of the underwriting correct and getting the processes in place, 11 months is not a long time but is perfectly doable. To illustrate how doable that is, back in 2012 parliament passed the Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Act...That bill provided that it was a requirement going forward that anyone offering default super must provide default insurance, which up until then had not been a compulsory feature of the superannuation scheme. That act was required to come into force a mere seven months later, on 1 July 2013. The industry it appears had no trouble in complying with an act that increased its revenue over a seven-month period.[30]

Definition of 'inactive'

2.33      The bill inserts a definition of 'inactive' into the Superannuation Industry (Supervision) Act 1993 (SIS Act). A choice or MySuper product will be considered inactive if no contributions or rollovers have been received in the previous continuous period of 13 months.  The period of inactivity is reset when a contribution or rollover is received; that is, the contribution or rollover resets the clock on inactivity for another 13 months.[31]

2.34      The definition of inactive is relevant to the application of measures in both Schedule 2 and Schedule 3 of the bill, specifically:

• Schedule 2 to the bill prevents trustees from providing opt out insurance to members with inactive MySuper or choice accounts, unless a member has directed otherwise.
• Schedule 3 to the bill requires the transfer of all superannuation accounts with balances below $6,000 to the Commissioner of Taxation (Commissioner), if the account has been inactive for a continuous period of 13 months.^[32]

2.35      Inquiry participants had differing views with regard to the appropriateness of what constitutes an 'inactive' account as defined by the bill. Some submitters and witnesses disagreed with the 13-month period of inactivity, and argued that this should be extended. The committee also heard evidence from a number of inquiry participants that the definition of inactive should be amended to include additional circumstances that demonstrate a member's engagement with their account.

Period of inactivity

2.36      In relation to the consolidation measures in Schedule 3 of the bill, the Association of Superannuation Funds of Australia (ASFA) took the view that 13 months without any contributions 'is a relatively short timeframe for the determination of inactivity'. ASFA reasoned that 'a member may have perfectly straightforward reasons for such inactivity including maternity leave, carers' leave and extended leave for travel or study'. ASFA further contended that the 13-month timeframe of inactivity for account consolidation should be extended to two years as this 'would provide greater assurance that the member is genuinely lost or disengaged'.[33]

2.37      Link Group expressed a similar view, submitting that 'a 13-month period of inactivity does not necessarily equate to members' disinterest or lack of awareness of accounts' and that such inactivity 'may be caused by a number of reasons'.[34]

2.38      Although its current internal policy definition of account inactivity is 13 months without a contribution, AustralianSuper also supported an extended timeframe of inactivity, suggesting that a period of 16 months would be more appropriate. AustralianSuper submitted that:

...the period of inactivity should cover 16 months instead of 13 months to more appropriately cover workers who have undertaken parental leave. Parents will typically recommence work after their paternal leave and wait up to three months for their superannuation contributions to reach their superannuation account, as the obligation to contribute Superannuation Guarantee contributions is quarterly. The period of inactivity needs to factor in this additional three month period because otherwise their superannuation will be transferred to the ATO when they have recommenced employment and superannuation contribution activity.[35]

2.39      Similarly, Mr Geoff Burgess, Deputy Chairman of the Corporate Superannuation Association, suggested that a 13-month period may not adequately capture women on maternity leave:

I think we'd support extending that 13 months, preferably to something like two years. Women on maternity leave are the classic example. They might take 12 months unpaid maternity leave, their employer has three months to pay the next lot of contributions—suddenly, you're up to 15 months. And it doesn't take much to get beyond the 15 months: they may take not 12 months but 12½ months—all sorts of things. So I think somewhere around 18 months, preferably two years, would be a better measure for that purpose.[36]

2.40      Industry Super Australia (ISA) proposed that the period of inactivity, as defined by the bill, be extended from 13 to 16 months. In giving evidence to the committee, Mr Matthew Linden, Director of Public Affairs at ISA, explained that:

Based on feedback from some of our funds, in many respects this reflects some of the issues with the current quarterly regime with the superannuation guarantee, where there might be a lag of three to four months between when a person is returning to work, when they are eligible for a superannuation guarantee contribution, and when it must be paid to that employee under the Superannuation Guarantee (Administration) Act. There can be a lag of up to three months and 28 days.[37]

2.41      Mr Linden also commented on the potential benefits of a longer inactivity timeframe for individuals who are self-employed and whose superannuation contributions are often more episodic:

We think increasing the time period where eligible contribution would define someone as inactive or not is an important change which would need to be made to reduce the risk for someone who indeed may well be working. For someone who's self-employed and working, they might during that portion of time be responsible for their own super contributions. They might not make them. It will give them a bit more leeway in terms of making that contribution and not being in a situation where they might lose important default cover.[38]

2.42      The AFA recommended that the timeframe of inactivity for the transfer of an account to the ATO should be extended to 18 or 24 months as this would 'reduce the number of people who have their funds move to the ATO against their wishes'. The AFA also commented that:

Some consideration needs to be given to the cost and disruption involved in the transfer to the ATO and the recovery. The benefits of moving it sooner do not seem to justify the potential inconvenience and wasted administration.[39]

2.43      In contrast, Maurice Blackburn Lawyers agreed that 13 months is an appropriate threshold for determining inactivity. Maurice Blackburn submitted that '[i]n our experience, lessor periods of inactivity are often due to parental leave considerations or other life circumstances'.[40]

2.44      Mr Xavier O'Halloran, Campaigns and Policy Team Lead at CHOICE, was supportive of the 13-month period of inactivity in the bill. Mr O'Halloran was of the view that a 13-month period of inactivity would appropriately 'pick out the vast majority of people', and informed the committee that:

This is one of the bigger debates that happened in the life insurance code process and the 13-month figure was something that was a compromise after the evidence that we presented showed that average maternity leave times were closer to seven months or even lower in some circumstances. Taking into account all the different factors such as delays in super guarantee payments, a period of inactivity 13 months would pick out the vast majority of people. On top of that, there is contemplated a disclosure regime so that people will be informed that they may lose insurance and have the opportunity to keep it going. There were so many protections and extended timeframes built into that 13-month figure already that it's interesting that industry is now coming back and saying that to protect that demographic they need even longer.[41]

2.45      Grattan noted the arguments for an extended timeframe for which an account is to be considered inactive in its submission, and contended that the cut-off 'is ultimately a question of degree':

On the one hand, if accounts are consolidated later, there will be fewer instances of a person returning to the workforce. On the other hand, if accounts are consolidated earlier, many people who have in fact changed jobs will benefit.[42]

2.46      Mr Nick Kirwan, Senior Policy Manager (Life Insurance) at the FSC, shared a similar view:

The difficulty here is it's actually balancing two evils. If someone has changed jobs and has got their insurance in a different superannuation scheme, then 13 months is perhaps too long, when 13 minutes would probably be about right in those circumstances. But equally there are people for whom 13 months is clearly too short...So 13 months is a trade-off. It's probably wrong for everyone. For some people it should be longer and for some people it should be shorter. But in setting a rule, of course, you have to draw that trade-off. It's probably about right.[43]

Additional circumstances demonstrating account engagement

2.47      In addition to extending the 13-month inactivity timeframe, ISA advocated for a broader definition of what constitutes member engagement with an account. ISA submitted that '[a]n account ought to be considered active in circumstances where it can be clearly demonstrated that the account holder has intentionally engaged with the account'.[44] Elaborating on this point, ISA argued:

Circumstances where an account should be considered active include actions taken by the member such as investment option switching; nominating or changing binding nominations for account beneficiaries; increasing or decreasing insurance cover; where an income stream is being deducted from the account or where the member has expressly opted to remain with the fund.[45]

2.48      Similarly, Cbus Super recommended that:

...the definition of inactive should be clearly defined, practical and contemplate different workforce patterns/scenarios such as seasonal workers and parental leave. For example, inactivity could be where there is no contribution or other prescribed form of member engagement (some positive act indicating the member wishes to remain a member of the fund).[46]

2.49      The Australian Council of Trade Unions (ACTU) also contended that 13 months without a contribution by itself does not adequately reflect a member's engagement with their account. Mr Joseph Mitchell, Workers' Capital Organising Officer, ACTU, called for 'a more nuanced definition of an inactive account':

If someone takes an extended time off and they have done the due diligence of changing their beneficiaries or changing their investment portfolios or having meaningful interactions with the fund—and I stress 'meaningful'—then that person is an active holder of that account. They know that that account is there, regardless of whether it's receiving contributions.[47]

2.50      When questioned by the committee about whether the inclusion of additional circumstances of member engagement with an account had been considered in developing the definition of inactivity in the bill, representatives from The Treasury advised the committee:

We are aware of these proposals, because they've been brought up with us. We've taken the view that there should be a rigorous definition of activity...In some ways, if people aren't receiving contributions, there's a good chance they're not working, in which case they might not be covered anyway, or they've got another job and their contributions are going elsewhere, and so there's a risk of duplicate accounts. That's the problem we're trying to solve.[48]

Views on Schedule 1—Fees charged to superannuation members

2.51      Schedule 1 to the bill prevents superannuation trustees from charging certain fees or costs—administration fees, investment fees and prescribed costs—that exceed three per cent of the balance of an account annually if the balance is less than $6000 at the end of a fund's income year or at the time of account closure.[49] The fee cap percentage can be no more than three per cent and will be set in regulations.[50]

2.52      Prescribed costs refer to an amount prescribed in regulations that are incurred by a trustee for the administration of the fund or investment in the fund's assets which are not charged to the member as a fee. It is expected that the regulations will capture amounts which directly or indirectly reduce the return on a member's investment.[51]

2.53      Schedule 1 to the bill also prevents trustees from charging exit fees, other than a buy-sell spread, that relate to the disposal of all or part of a member's interest in a fund, regardless of a member's account balance.[52]

General comments on Schedule 1

2.54      Most inquiry participants were broadly supportive of the fee cap and exit fee measures in Schedule 1 of the bill.[53]

2.55      In expressing its support for the proposed fee cap, FCA submitted that '[t]he legislative intent of the superannuation system is for people to grow their retirement savings over time. Superannuation that is eroded by fees defeats that legislative intent'. FCA was supportive of the proposed ban on exit fees, submitting that:

Exit fees stop people from rolling over their superannuation to a better performing superannuation fund and therefore reduce competition. Exit fees stop people from effectively managing their superannuation and improving financial literacy by being able to shop around without penalty.[54]

2.56      Mr O'Halloran from CHOICE agreed that a ban on exit fees will empower Australians to shop around and switch if they are unhappy with their superannuation arrangements:

Yes, I think it will. When we've done surveys on consumers around superannuation we've found that exit fees are a barrier. When we've reviewed them we've found not all of them [exit fees] are exceptionally high, but it can be a mental barrier to a lot of people switching, even if the benefits of switching may eventually outweigh those fees. So I think it's a good practical measure that actually pays regard to how people think about switching and acts on the kinds of behavioural biases that they might display in considering to switch.[55]

2.57      COTA Australia welcomed the fee cap measure in the bill 'given that low-balance accounts currently pay disproportionally high fees leading to significant erosion of account balances'. COTA Australia further submitted that, combined with the proposed ATO powers, 'the measures will ensure that overall retirement balances are increased within consolidated superannuation accounts'.[56]

2.58      Grattan described the fee cap and exit fee measures as being 'sensible reforms', further contending that:

The current arrangements create incentives for funds to encourage a multiplicity of small accounts, each paying a minimum fee. Inevitably this increases the total costs of the industry.

The proposed fee caps will align the incentives for funds more closely with the interests of their members. The caps will encourage funds to seek out small accounts and ensure they either grow quickly, or are consolidated.[57]

2.59      ISA was welcoming of the proposed introduction of fee caps for low-balance accounts on direct and indirect fees, however cautioned against capping indirect fees 'without appropriate measures in place to ensure they apply consistently and transparently'.[58] ISA also submitted that 'without the opportunity to review the supporting regulation, the reforms may be subject to gaming and may not result in an equitable outcome for members'.[59]

2.60      The AFA commented on the implications that capping fees for low-balance accounts and banning exit fees will have for superannuation funds. The AFA noted that '[t]his will have a much greater impact on superannuation funds with members who are on low incomes, have low balances and change jobs more often', and that such funds 'will be at a substantial disadvantage to other funds'.[60]

Higher fees for other members

2.61      Some inquiry participants expressed concern that, given superannuation funds' fixed costs, members who are not impacted by the proposed fee changes in the bill will have to pay more.[61]

2.62      For example, Rest submitted that:

The $26-million cost of the fee relief provided to Rest members with balances of $6,000 or less will be unfairly borne by the remainder of our 1.9 million members, many of whom have account balances only marginally above the $6,000 limit.

In addition, these members will be charged higher fees and receive no additional benefit for services others receive at a discount, leading to potential confusion and resentment.[62]

2.63      With regard to the proposed ban on exit fees, the AFA argued that members who choose to leave a fund 'should be required to pay, as a minimum, the direct costs of processing that exit'.[63] The AFA reasoned that:

The removal of any ability to charge an exit fee will mean that those members who remain loyal to the fund will need to subsidise the costs that result from the administration activity involved in processing withdrawals for those members who choose to leave the fund. On any measure, this is unreasonable for those who remain in the fund. For anyone who is a member of a high turnover fund, then this would be completely unreasonable.[64]

2.64      Chartered Accountants Australia and New Zealand (CAANZ) contended that implementation of the fee measures proposed in the bill would in fact promote superannuation trustees breaching their fiduciary duties, legislated under the SIS Act, to act in the best interests of and fairly between all beneficiaries.[65]

2.65      CAANZ further submitted that:

...to effectively implement the government's proposed policy, trustees will need to charge higher fees to those with account balances of at least $6,000.

In effect, this would mean that a super fund trustee would not be acting fairly between all beneficiaries and this issue would exist despite the protections proposed in sub-section 99G(7) of the SIS Act as contained in the bill.[66]

2.66      Mrs Rowell, Deputy Chair of APRA, acknowledged in her opening statement to the committee that the fee changes proposed in the bill are likely to require a review of fee structures by superannuation funds and, consequently, may lead to higher fees for members with account balances over $6000.[67]

2.67      Mr Burgess from the Corporate Superannuation Association, suggested that, where a member removes the entirety of their balance from a fund for consolidation purposes, the small exit fee cross-subsidy borne by other members is balanced with the member benefit obtained through account consolidation. However, Mr Burgess argued that this exit fee cross-subsidy is not appropriate for partial account withdrawals, only full withdrawals.[68]

Concern that measures could be gamed

2.68      A number of submitters and witnesses highlighted the potential for the proposed fee cap and ban on exit fees to be gamed as a matter of concern. In particular, inquiry participants pointed to inconsistencies between what is classified as 'fees' and 'indirect costs'; the exclusion of buy-sell spreads; and the possibility of members moving funds from their account prior to balance test day as avenues for funds to game the fee cap and exit fee measures.

Transfer to indirect fees and costs

2.69      AIST expressed concern in its submission that inconsistencies in how fees and indirect costs are classified 'provides an avenue for entities to game the fee capping requirements'. Accordingly, AIST indicated it was pleased that the explanatory materials for the bill refer to indirect costs being included in the fee cap calculation.[69]

2.70      Mr David Haynes, Senior Policy Manager at AIST, elaborated on this point in giving evidence to the committee:

...we believe that there are a significant number of ways in which people can manipulate the operation of a fee so that things that are fees are redefined as not being a fee. We think the most significant example of that is in relation to indirect costs. So, while that's not the whole universe of issues, our argument is that indirect costs should be clearly and consistently identified and included within the definition for the fees and the fee cap for the purposes of this legislation...^[70]

2.71      While supportive of the proposed fee cap and the inclusion of indirect fees and costs in the calculation of the fee cap, Mr Alan Kirkland, CEO of CHOICE, pointed to the need for closer oversight of attempts to game the cap:

...regulation of fees is a very complex thing. It can be a noble but complex objective to execute. So we need to be careful of things like hidden fees and costs that might get around the fee cap. We need to make sure there's appropriate monitoring to try and pick up on any of those consequences.[71]

2.72      Similarly, Mr Linden from ISA commented on the issue of clarity around indirect costs:

You have a situation where some funds may charge fees directly. In the case of others, there might be indirect costs which are incurred which equally reduce balances but that may not be explicitly levied as a fee by the RSE. So our view is that it should be consistent and comprehensive.[72]

2.73      Mr Linden acknowledged that the bill contains a regulation-making power to define indirect costs that will be captured by the proposed fee cap.[73]

Exclusion of buy-sell spreads

2.74      As noted above, the bill excludes buy-sell spreads—the transaction cost incurred by a trustee of a superannuation entity when they buy or sell the assets of the entity—from the proposed ban on exit fees.

2.75      Cbus Super queried the exclusion of buy-sell spreads from exit fee measure in the bill, and strongly submitted that the ban on exit fees must 'also extend to buy-sell spreads if it is to be effective'. Cbus Super contended that:

...failing to tackle buy-sell spreads will result in the exit fee ban being able to be gamed by funds imposing buy-sell spreads as a disincentive for members to exit. Buy-sell spreads are less transparent than exit fees and are often more detrimental to members transacting in or out of funds.[74]

2.76      Ms Louise du Pre-Alba, Strategic Policy Advocate at AustralianSuper, expressed a similar view:

...our concern is that exit fees are subject to certain requirements around being limited to cost recovery. Buy-sell spreads currently are not limited by cost recovery. So, while we can give you information on what buy-sell spreads typically look like now, if they're not limited by things like cost recovery requirements then they could proliferate. They could also proliferate because they're less prominent in a member's decision-making process when looking at fees and fee comparisons.[75]

2.77      CHOICE also expressed concern that some providers may seek to game the prohibition of exit fees by increasing other fees charged on exit, such as buy-sell spreads. CHOICE characterised buy-sell spreads as being 'extremely opaque', submitting that:

Often the exact buy-sell spread is not known and therefore not disclosed in a product disclosure statement; a person is instead left with a percentage-based range they may be charged on exit. It is unlikely most consumers have any understanding of what the term buy-sell spread means, let alone the circumstances in which it will be charged.[76]

Withdrawing funds prior to balance day

2.78      The proposed fee cap for low-balance accounts is calculated based on a member's account balance on the last day of a fund's income year or at the time of account closure.[77]

2.79      ASFA submitted that the annual balance test for the purpose of calculating the fee cap could have unintended consequences or be used to minimise fees. ASFA further observed that the balance day test 'does not appear to allow for the possibility of the account having had a higher balance in the previous 12 months'.[78]

2.80      ASFA recommended that:

[T]he fee cap be limited to accounts which have remained below $6,000 for all of the previous 12 months. Any account which has at any time in the 12 months prior to the balance day test been above $6,000 should be given an exemption.[79]

2.81      The Law Council of Australia also expressed concern that the fee cap measure as proposed in the bill could be 'open to abuse', whereby a member temporarily rolls out most of their account balance immediately prior to the balance test day, and suggested that some modification be made to address the potential for arbitrage.[80]

2.82      QSuper also highlighted this as a concern and provided the following example:

...a member with a $1 million balance could reduce their balance to $100 the day before the calculation is performed. A member's balance in a product could reduce because they have withdrawn funds, rolled funds over to another fund, or moved funds to another product, such as a pension product.

In this situation, the fund would be required to refund the fees in excess of fees calculated on a $100 balance and not the member's balance throughout the year. This could potentially be used annually by members to rollover funds in the last week of the year to avoid paying fees.[81]

2.83      Professor Daley from the Grattan Institute advised the committee that he does not share the concerns raised by some stakeholders regarding the potential for the fee cap and exit fee measures in the bill to be gamed. Professor Daley explained that:

The reason I don't share those concerns is that I'm guessing the number of actual individuals who will try and game the system in that way is going to be small in the overall scheme of things. It might well be that we can come up with these examples, but my guess is that, in practice, most people are simply going to toll their money from one account to another rather than mucking around.[82]

Views on Schedule 2—Insurance for superannuation members

2.84        Schedule 2 to the bill will prevent trustees from providing insurance cover on an opt out basis to a member of a MySuper or choice superannuation account when:

• the member is under the age of 25 and begins to hold the superannuation account on or after 1 July 2019;
• the balance of the account is less than $6000 and has not been $6000 or more on or after 1 April 2019; or
• the account has been inactive for a continuous period of 13 months or more.[83]

2.85      A superannuation trustee may only provide insurance to a member who meets one of the criteria above where the member has elected to obtain or maintain the insurance cover.[84]

General support for the intent of insurance measures

2.86      Most submitters and witnesses noted their support for the intent of the measures proposed in Schedule 2 of the bill; that is, the protection of Australians' retirement savings from undue erosion resulting from inappropriate and, in some cases, duplicate insurance premiums.

2.87      For example, CHOICE submitted that it supports the overall intent of the insurance measures in the bill, commenting that:

There are clear and strong reasons for making insurance opt in for people under 25 years of age, low income people and those with inactive accounts. The estimated $3 billion savings to these people of the reform will help people save for retirement with dignity.[85]

2.88        Similarly, ClearView Wealth expressed the view that:

Requiring young Australians and those with low account balances to consciously opt-in for life insurance inside super is sensible public policy that will go some way to protecting members and ensuring savings are not eroded by premiums on life insurance they often do not need and commonly cannot even claim on.^[86]

2.89        ClearView Wealth further submitted that:

...a system which requires members to consciously opt in for group insurance in super will result in a substantial improvement in understanding what they are, and aren't, covered for and how much cover they have. This will significantly reduce the number of workers who think they, and their loved ones, are adequately protected when they're not. Importantly it will lead to more workers seeking advice, either via their super fund or a third party, about the type, and level, of cover they need.

...

An opt in model will also force many of the current inherent cross-subsidies to be addressed and help make transparent what the real costs of the current system are.^[87]

2.90      FCA acknowledged that insurance in superannuation can be a low-cost way for people to get access to life insurance, but contended that 'there is no doubt that insurance premiums erode low balances in superannuation accounts'. FCA also commented that:

FCA is concerned that many people may be paying insurance premiums for insurance that they can never claim on, or is of little, or no value. It is also possible because of lost super and external insurance sales that many people are double insured.

...

We appreciate that superannuation funds provide insurance as a safety net for their members but it should not be at the cost of people having suitable insurance or significantly impacting their retirement savings.[88]

2.91        However, while generally supportive of the intent behind the insurance measures in the bill, other inquiry participants were less supportive of the legislative approach proposed in the bill. The main concerns raised by stakeholders are summarised below.

Insurance premium increases and long term impacts

2.92      The matter of premium increases resulting from the proposed changes to default group insurance arrangements was raised as a common concern during the inquiry.

2.93      Submitters and witnesses highlighted that premiums for members not impacted by the insurance measures will increase due to the fixed costs associated with default group insurance and changes to the demographics of the collective risk pool of insured members. Inquiry participants also emphasised the likely premium increases and changes to automatic acceptance terms for members who choose to opt in to insurance coverage following implementation of the proposed changes, attributing such increases to a need for individual underwriting and the risk of anti-selection associated with providing cover on an opt in basis.[89]

2.94      Mercer summarised this concern, submitting that:

Increases in premium rates and changes to automatic acceptance terms are highly likely as a result of greater expected anti-selection (e.g. opt-in is more likely for members in poorer health), more underwriting costs and the spreading of fixed costs over a smaller premium base.[90]

2.95      Similarly, CAANZ observed that the group insurance model that currently applies to most superannuation fund members means that insurers cannot be 'selected against'. CAANZ continued that '[a]ny ability to allow a super fund member to self-select their participation in the arrangement alters the contract dynamics and therefore pricing that insurers are willing to offer'.[91]

2.96      In response to questions taken on notice, The Treasury have indicated that the increase in premiums that remaining members in the pool might face will be reflective of the risk those members (older, sicker and higher balance members) bring into the pool.[92]

2.97      AIAA also contended that a reduction in insurance for young Australians would increase premiums for remaining members, reasoning that 'removing under 25s would change the demographics of the risk pool and the underlying principle of group insurance through the distribution of risk'.[93]

2.98      The AFA argued that the insurance changes in the bill fail 'to take into consideration that if you take a large number of people out of the insurance pool then it increases the cost for everyone left in the pool'. The AFA continued that:

This is due to the fact that the fixed costs of the insurance business need to be apportioned over a lesser number of members and also those removed from the pool might represent lower risks. In fact, the impact is compounded by the reality that those who choose to opt-in are more likely to be the people who are at increased risk of making a claim.[94]

2.99      ISA also considered the principle of collective risk-pooling in group insurance in its submission:

Insurance in superannuation is a highly cost-effective mechanism that provides an additional safety net to millions of Australians and their families, and it plays a significant role in reducing Australia's estimated level of underinsurance. This is principally achieved through the effects of collective risk-pooling. Trustees can negotiate rates that are lower at a group level than if each member was individually underwritten. Through default enrolment, members benefit from group underwriting and the risk is more evenly shared amongst the insured. However, if new members are not automatically enrolled upon joining a fund and must opt-in, they will be subject to individual underwriting and higher premiums putting these members at an unnecessary disadvantage.[95]

2.100         The Explanatory Memorandum for the bill acknowledges that members that continue to hold default insurance in superannuation may also face increased premiums, however also notes that any increase due to a change in risk profile would reflect an unwinding of cross-subsidisation across cohorts.[96]

2.101         Mr Allan Hansell, Director of Policy and Global Markets at the FSC, acknowledged that cross-subsidisation occurs between younger and older members of a fund, but suggested that this is an inherent part of the risk-pooling that takes place under group insurance arrangements:

People talk a lot about cross-subsidisation between the various age cohorts. But if you look at a person, they will commence in an insurance scheme as a younger member, and, yes, there will be a level of cross-subsidisation that occurs between them and older people, and the sick; but then, as they move through the life cycle, they end up getting the same level of support from younger members at a future date, because they remain as a member of the scheme. The whole concept of pooling is cross-subsidisation. Members put money into the insurance pool to cover off their risks, and when their health is compromised or they suffer from an illness, they draw down on the risk pool. If someone's healthy, then that's great, but they've got that insurance cover in place and they pay the premium for it.[97]

2.102         Analysis was undertaken for The Treasury by the Australian Government Actuary regarding the impact of the proposed changes in the bill on insurance premiums. The Government Actuary estimated that—following the cessation of default insurance cover for impacted members and opt in for those with balances below $6000 or inactive accounts—it is expected that insurance premiums will rise by seven to ten percent for accounts held by members over 25 years of age.[98]

2.103         In giving evidence to the committee, Mrs Rowell, Deputy Chair of APRA, recognised that the removal of certain cohorts from the insurance pool, in addition to the removal of inactive accounts, will likely create upward pressure on premiums for remaining insured members. However, Mrs Rowell also noted that '[t]he precise impact of the insurance proposals is difficult to assess at this time'.[99]

Rice Warner and KPMG Analyses

2.104         Throughout the inquiry, a number of inquiry participants pointed to research analyses carried out by KPMG and Rice Warner into the impact of the Protecting Your Superannuation package.[100]

2.105         The research by KPMG—Insurance in superannuation: The impacts and unintended consequences of the proposed Federal Budget changes—estimated that group life insurance premiums would increase by 26 per cent overall as a result of the insurance measures proposed in the bill.[101]

2.106         The research by Rice Warner (commissioned by AIAA)—Economic Impact of 2018 Federal Budget Proposed Insurance Changes—considered the longer term impacts on retirement balances as a result of default insurance being removed for members under 25 years of age. That research concluded that, if there is no change to insurance premiums as a result of the reforms, there would be a 0.76 per cent improvement in individuals' retirement balance. The research also modelled the impact of a premium increase of 15 per cent. In this case, the Rice Warner estimated that there would be an average improvement in individuals' retirement balance of 0.27 per cent.[102]

2.107         AIAA contended that the research by Rice Warner 'demonstrates that the benefits of removing default life insurance for under 25s would be minimal'.[103]

2.108         However, other inquiry participants questioned the validity of the above analyses. For example, COTA Australia noted that most of the premium increase estimated by KPMG is attributed to the removal of default group insurance for members with balances below $6000 or inactive accounts. COTA Australia submitted that:

In other words, low balance account holders and inactive account holders are subsidising the overall premium pool, in most cases unwittingly.[104]

2.109         Grattan also pointed to the apparent cross-subsidy inherent in default group insurance, submitting that the KPMG and Rice Warner analyses strongly suggest that those cohorts impacted by the bill are cross-subsidising everyone else:

The current system appears to have very substantial cross-subsidies. Analysis by both Rice Warner and KPMG in submissions to this Committee claim that the proposed changes to default insurance would lead to large increases in insurance premiums.  This strongly suggests that those who are young, have inactive accounts, or small balances, are cross-subsidising everyone else. It is not obvious why it is desirable for there to be an insurance cross-subsidy for those who are old or have large balances.[105]

2.110         Mr Beckett from The Treasury also commented on the KPMG and Rice Warner research on the proposed Protecting Your Superannuation package reforms, noting that these analyses appear to use certain unrealistic assumptions:

We're aware of some submissions to the committee which contend that there will be minimal improvements in people's ultimate retirement balances as a result of these changes. On this we would observe simply that the modelling in these analyses appears to use certain assumptions, including that individuals only ever have one job, one super account and one set of insurance. This is unrealistic, but it's important to note that reforms intended to address more realistic scenarios still result in an improvement in retirement balances for these idealised scenarios. We know that people don't stay in one job for their working lives. Multiple super accounts resulting in duplicate insurance policies are very common and something that the PC is currently grappling with. Where a person has more than one account, which we know is the case for approximately 40 per cent of all superannuation members, the impact on their ultimate retirement balance is more pronounced as the changes will mean that these members will no longer pay for unnecessary duplicate insurance.[106]

Members in high-risk occupations

2.111         Several submitters and witnesses contended that the characteristics of certain cohorts of people warrant the exclusion from the insurance measures proposed in the bill; in particular, individuals who are employed in high-risk occupations. Inquiry participants argued that where such individuals choose to opt in for insurance coverage, insurers are likely to refuse cover or require individual underwriting. Where cover is offered, inquiry participants considered that cover is likely to be limited or expensive.[107]

2.112         For instance, ISA submitted that workers employed in high-risk occupations 'need the default insurance offered in superannuation from the day they start work'. ISA elaborated that:

The risk of death or disability in high-risk work does not wait to materialise until a worker's super balance reaches the $6000 or they turn 25. Safe Work Australia data clearly demonstrates that some industries are more hazardous than others. A worker is 38 times more likely to die at work in the agriculture, forestry and fishing industries than the national average across all workplaces.[108]

2.113         AIAA argued that the insurance changes proposed in the bill could remove 'an important and necessary safety net' for young Australians:

The Government's proposed changes could lead to many young Australians working in casual employment or high-risk jobs such as the mining and construction industries being unable to attain life insurance, particularly for disability, removing an important and necessary safety net.

This is because group insurance schemes were designed to accommodate a broad spectrum of risk across the nation's policy holders, and a change to the default model would leave these members exposed where there is some form of underwriting.[109]

2.114         Cbus Super submitted that the hazardous nature of work in high-risk industries will be problematic for impacted members who choose to opt in to insurance through superannuation:

The policy assumptions which underpin the insurance measures in the Bill are that members excluded from default cover who wish to retain their cover will be able to opt in. However, given the hazardous nature of the industry in which our members work and the demographic of our membership, the impact of the reforms is far more problematic. There will be a proportion of members who will be refused cover or only provided limited cover, the conditions of acceptance of cover will be likely to be more restrictive for all members particularly in relation to pre-existing conditions, and the cost of coverage will increase for all members.[110]  

2.115         A number of submitters and witnesses argued that an exemption to the proposed insurance measures be provided for members in high-risk occupations. Some suggested that this could be done via application to APRA.[111]

2.116         For example, ISA recommended that:

Trustees ought to be able to apply to APRA to exempt certain cohorts of members from the prescribed insurance rules, where the trustee can demonstrate reasonable need to do so in order to protect the interests of its members.[112]

2.117         Cbus Super shared a similar view, submitting that:

Should the Bill be supported for passage, we would strongly submit that a mechanism should be created to grant relief to funds like Cbus which offer default insurance coverage to higher risk member profiles who need, rely and claim against their cover. Such relief could be premised on the trustee obtaining independent actuarial certification of the hazardous nature of the industry and tailoring of product to reflect members' needs. These amendments would minimise unintended impacts on special categories of members who rely on default death and TPD and would be unable to obtain affordable opt-in insurance cover.[113]

2.118         APRA was cautious about suggestions for a mechanism whereby trustees could apply for exemptions for certain cohorts of members. Mrs Rowell, Deputy Chair of APRA, commented that:

Exemptions can be fraught with difficulties and can be abused, and so I think you'd want to think very carefully about how any exemptions would be framed and the criteria on which any exemptions would be based.[114]

2.119         Mr Kirkland from CHOICE expressed a similar view, stating that an exemption regime 'would need to be very tightly constrained, subject to strict criteria and quite robust evidence requirements'.[115] CHOICE also considered this point in its submission, commenting that:

There is a risk that allowing carve outs may open the floodgates and undermine the intent of the legislation. If carve outs are contemplated a robust framework, including specific criteria and regulatory approval, should be in place to prevent misuse.[116]

2.120         Grattan took a different perspective from most submitters with regard to the issue of insurance for members in high-risk occupations. Grattan noted that workplace injuries will typically be covered by both workers' compensation schemes as well as insurance through superannuation. Grattan suggested that the problems faced by members in high-risk occupations in obtaining insurance:

...could easily be remedied by writing insurance that did not cover incapacity covered by workers compensation. Those in high-risk industries are unlikely to have more illnesses or accidents outside of work. It is unlikely that the problems of adverse selection in this situation would be any greater than for workers in low risk industries.[117]

No default insurance for accounts under $6000

2.121         A number of inquiry participants expressed concern regarding the proposed changes to opt out default insurance cover for active accounts with balances less than $6000. Inquiry participants argued that this measure will disadvantage new members, particularly those who work part-time or are on lower incomes, in that they will be excluded from default insurance and the benefits it provides until their balance reaches $6000, despite receiving contributions.[118]

2.122         The FSC summarised this concern in its submission:

By definition, new accounts start with a balance of zero, meaning that trustees would not be able to provide these members with default insurance until their balance reaches $6,000. However, as soon as regular Superannuation Guarantee payments start, the account is clearly active.

We do not understand the policy rationale for providing default insurance cover to people who are actively contributing to their accounts only when their balance reaches $6,000. Creating a lag in insurance cover for new members with active accounts appears to be an unintended consequence of the proposals.[119]

2.123      TAL expressed the view that removing opt out insurance coverage for balances under $6000 is not in the best interest of working Australians. TAL reasoned that:

Under the proposed changes, an average working Australian will not be entitled to receive automatic default life insurance cover until they accumulate $6,000 as a superannuation balance, which could take up to 2–3 years depending on salary levels and superannuation contributions.

Similarly, a member who is working but does not have $6,000 in their superannuation account will have their life insurance cover cancelled under the proposed changes.[120]

2.124         This view was supported by AIAA:

For an average full-time working Australian with total earnings of $81,500, it would take 11 months to accumulate sufficient contributions in a new account to meet the $6,000 threshold. For the average working Australian with total earnings of just under $62,000, it would take almost 15 months to accumulate this amount. This is a significant period where the majority of new members will be exposed without adequate protection.[121]

2.125         Several submitters argued that the removal of default life insurance cover for members with balances less than $6000 should only apply to inactive accounts.[122]

2.126         For example, Financial Rights and Consumer Action commented that:

While we acknowledge the significant impact of balance erosion on low-balance accounts, we only support the move away from default insurance on accounts with balances under $6,000 for accounts which are inactive.

...

There are many reasons that a person may have a balance below $6,000. It may be because they have multiple accounts, recently returned after an extended period away from work, recently arrived in Australia, or their employer has not paid employer contributions. These could all occur with active accounts. While insurance premiums will significantly erode low balances, it does not follow that people with low balances do not need insurance.[123]

2.127         Berrill & Watson shared this view, reasoning that 'whilst we agree that small accounts could be unnecessarily eroded by insurance premiums, this is really only true of inactive accounts'.[124] Elaborating on this point, Berrill & Watson submitted that:

...active superannuation accounts fed by ongoing Superannuation Guarantee contributions will in all likelihood grow and not be eroded by insurance premiums to nil. If there are significant periods of inactivity, that would be protected by the triggering of the 13-month inactive account provision under section 68AAAA or perhaps by some lesser measure of inactivity on small accounts.

Accordingly, we strongly endorse the recommendation of CALC and FRLC that section 68AAB should be amended to exempt active accounts under $6,000 from the removal of default insurance.[125]

Views on Schedule 3—Consolidation of inactive low-balance accounts

2.128         Schedule 3 to the bill amends the Superannuation (Unclaimed Money and Lost Members) Act 1999 (SUMLM Act) to include additional circumstances, namely when an account is inactive and has a balance of less than $6000, where the balance of an account must be transferred to the Commissioner.[126]

2.129         Schedule 3 to the bill also gives the Commissioner greater powers to consolidate amounts held for a person who has an active account, without needing to be directed to do so by the person and where the consolidated account balance will be $6000 or greater.[127]

General comments on Schedule 3

2.130         Most inquiry participants were broadly supportive of the consolidation measures in Schedule 3 of the bill.[128]

2.131         Maurice Blackburn Lawyers applauded the initiative, asserting that the expansion of the current provisions in the SUMLM Act for referring funds to the Commissioner 'seems like an appropriate way to enact this sensible move'.[129]

2.132         The SMSF Association (SMSFA) submitted that:

The SMSFA supports the reunification of superannuation balances for individuals with inactive accounts below $6,000.[130]

2.133         CHOICE also noted its support for the consolidation provisions in the bill, observing that 'it will see billions of dollars flowing into the accounts of people'.[131]

2.134         Grattan described the proposed consolidation of inactive, low-balance accounts as 'a sensible reform that will substantially reduce the costs of administering and managing superannuation'.[132]

2.135         COTA Australia also expressed its full support, commenting that:

These two initiatives will, hopefully, consolidated the 40% of superannuation accounts with balances below $6,000 and will increase the future balances members will have upon retirement age...The additional powers of the ATO Commissioner to consolidate low-balance superannuation savings held by the ATO into active superannuation accounts, without requiring consent of members, will improve consolidation of multiple funds held across the superannuation system.

Given the increase in part-time jobs held by Australians, and the potential for numerous superannuation funds to be held in a member's name COTA Australia believes these measures should be supported to maximise the accumulation potential for members within the superannuation system.[133]

2.136         RGA Reinsurance Company of Australia (RGA) argued that account consolidation should be the focus of the Protecting Your Superannuation package as 'this will have the largest beneficial impact on future retirement savings'. RGA further noted that while consolidation will lead to a reduction in overall insurance cover, this 'will reflect the removal of multiple default insurance covers held by individuals, which in some cases are not wanted'.[134]

2.137         In contrast, Rest opposed the consolidation measures in the bill on the basis that:

These members would lose valuable insurance cover.

Members would receive investment returns based on the Consumer Price Index, rather than benefiting from the higher investment returns they would receive by remaining with their fund.

Importantly we believe it is not necessary for the ATO to retain member's investments in order to reunite them with inactive accounts at a later date.[135]

Direct fund-to-fund transfer

2.138         A number of submitters and witnesses opposed the mechanism proposed in the bill by which inactive, low-balance accounts are transferred to a member's active account via the ATO, and argued that the ATO should not act as an intermediary in the account consolidation process. Some inquiry participants contended that it would be in members' best interests for account consolidation to instead occur by means of direct fund-to-fund transfer, reasoning that members would benefit from higher investment returns.[136]

2.139         For example, ISA argued that an approach whereby members' retirement savings are directed to an account where the net returns are greater than CPI would put members' interests first. ISA proposed an alternative direct fund-to-fund approach:

The power to consolidate inactive accounts would remain in the hands of the Commission of Taxation and trustees would be required to report inactive accounts to the ATO. The proposed change would see no interference in the process of automatically consolidating a member's inactive account with an active account held by them - other than the inactive account funds would, in normal circumstances, continue to receive significantly higher net rates of return until they can be matched with an active account.

When the ATO matches an inactive account with an active account, an order could be made for the immediate transfer of the monies held in the inactive account directly to the active account. This proposal would involve no delay in the transmission of funds. It would however, involve the accrual of significant funds into members' accounts. This simple proposal will directly benefit the retirement incomes of members and is in the public interest.[137]

2.140         Mr Haynes from AIST also advocated for a direct fund-to-fund approach, describing the method of account consolidation as proposed in the bill as 'double-handling'. Mr Haynes contended that by implementing direct fund-to-fund approach:

...[y]ou would remove one step from that process, and it would be much less confusing for the consumer. It would mean that the member's superannuation interest would remain within the superannuation system the whole time. That would result in people's active accounts becoming significantly bigger, and, again, as the committee knows, I think 40 per cent of people have more than one account. So it would actually result in a very significant uplift in people's active accounts about which they are more aware.[138]

2.141         Grattan expressed the view that stakeholder concerns regarding lower investment returns on accounts held by the ATO should be kept in perspective. Grattan submitted that, notwithstanding the fee cap measures for low-balance accounts proposed by the bill, the difference in returns between funds held by the ATO and those held in an inactive account 'is unlikely to be more than about $100 per year'. Grattan continued that:

This may not be trivial to a person on a lower income, but a more complex administrative solution is unlikely to be worth pursuing given that the ATO will probably consolidate most accounts fairly quickly.[139]

2.142         While mindful of that leaving retirement savings in funds gives greater opportunity to earn higher investment returns, CHOICE noted its preference for an approach with greater ATO control. CHOICE also observed that 'given the ATO expects to be able to reunite most funds within a month these lost returns are likely to be small in quantum'.[140]

2.143         Professor Daley from the Grattan Institute shared the view that responsibility for administering account consolidation should remain with the ATO. Professor Daley reasoned that:

I think the advantage of clearing money through the ATO is that it saves a lot of argy-bargy. If I can talk about a personal experience briefly, at one stage I tried to consolidate some money from an old super account into my current super account. I did that by writing to the existing super fund. First, there were a lot of forms to fill out. Second, it started to get quite complicated pretty quickly.

...

I think one of the problems with asking the super funds to talk to each other is that inevitably the donating super fund, if I can call it that, will rapidly try to contact the member and try to get them to change their mind. They will find reasons why the paperwork is not in order or that things haven't been spelt correctly, whereas if it's a message that's been passed to the ATO—and the ATO, of course, has automatically generated this because it can see the super balances and so on—then there's going to be a lot less argy-bargy.[141]

Exclusion where no active account

2.144         In addition to views presented regarding direct fund-to-fund transfers, some inquiry participants argued that it would be in members' best interests to exclude members with no alternative active account from the requirements to transfer low-balance, inactive accounts to the Commissioner. Submitters again cited higher investment returns as primary reason for this view.[142]

2.145         For instance, ASFA submitted that:

We consider that there needs to be careful consideration over whether it is in a member's best interest to transfer low balance accounts when the member only has one account and no alternative active account to which the inactive account could be transferred.

ASFA has conducted analysis into the relative performance of low balance accounts compared with those held by the ATO and we have found that for members with balances below $6,000 they are likely to be better off if their account remains with a fund due to the higher investment returns.[143]

2.146         Link Group recommended that members with a single account should be excluded from any consolidation process. Link Group considered that such members 'will likely be disadvantaged by the proposed ATO consolidation, as their retirement savings will accrue only at CPI, rather than at super fund investment rate returns'.[144]

2.147         Cbus Super shared a similar view, submitting that:

...small inactive accounts under $6000 (based on the broader activity test proposed above) be transferred directly to a member's active account. This would mean that auto-consolidation would not apply where the member does not have an active account in another fund.[145]

ATO deadline for consolidation

2.148         The ATO has estimated that, for an average account, it would take less than a month from the time funds are transferred to the ATO to when the funds are transferred to an active account.[146]

2.149         However, some submitters and witnesses expressed concern that there is no defined period of time set out in the bill in which the Commissioner must transfer funds to a member's active account.[147]

2.150         For example, ASFA considered that:

...should the money be required to go to the ATO or for the money that is already there, we consider that the ATO needs to be accountable for reuniting the super benefit with people's active accounts as quickly as possible to ensure people benefit from higher fund returns.

We recommend that strict deadlines should apply to the Commissioner for the return of members' money to their active accounts.[148]

2.151         Likewise, AustralianSuper submitted that 'the ATO should be subject to either a legislative timeframe or business benchmarking to determine their timeliness in reuniting members' unclaimed monies with their active superannuation accounts'.[149]

2.152         Mr Kirkland from CHOICE suggested to the committee that 'there should be a benchmark or a time frame set for trying to reunite 90 per cent of inactive funds with an active account within a month' and, additionally, 'there should be public reporting on how the ATO is performing against that'.[150]

2.153         In support of this view, Mrs Julia Davis, Policy and Communications Officer at Financial Rights, commented that 'I think transparent reporting [by the ATO] of how the process is going [to] be critical to making sure that it's an accountable process'.[151]

2.154         Mr James O'Halloran, Deputy Commissioner of Superannuation at the ATO, assured the committee that 'a month is certainly doable' with regard to how quickly funds can be transferred to an active account. Mr O'Halloran explained that, in allowing for consolidation without the explicit direction from the member, the bill will enable the transfer of funds as quickly as the ATO can identify a match with an active account:

I've seen reference to this a few times in some of the submissions, but, at least as the administrator or the tax office, there is no interest in us holding the money. In fact, our track record, as I've discussed in other places, has been that we do it as quickly as we can identify a match. Up until now the hold-up has actually been getting the authorisation, if you like, from the person concerned and their conscious wishes of which fund or funds the money needs to be allocated to. So we would be seeing to run it as, really, a straight through process.[152]

Committee view

2.155         There is no question that Australian society has changed since superannuation was first introduced. It is no longer the norm for people to work in the same occupation in the same industry for the entirety of their career. The average job tenure of Australians has considerably reduced, and there are a greater number of people employed on a part-time and casual basis. The superannuation system has also changed. The majority of funds are now public offer funds with a demographically broader member base. A one-size-fits-all approach, particularly with regard to fees and the provision of default insurance, is no longer appropriate. The superannuation system must to adapt to these changes in order to effectively meet the needs of its members.

2.156         Ensuring that Australians' superannuation balances are preserved for retirement is essential to the success of Australia's retirement income system. Effective regulations that promote product safety and suitably are therefore critical to guarantee the best interests of members are upheld. However, the current design of Australia's superannuation framework has led to extensive proliferation of accounts and serious erosion of members' balances through excessive fees and inappropriate insurance arrangements. The committee considers that the measures in this bill are an important first step in addressing these issues and will have tangible benefits for Australians' retirement savings.

2.157         The committee heard strong concerns during the inquiry in relation to the implementation timeframe in the bill. In particular, industry stakeholders expressed concern that the proposed commencement date of 1 July 2019 will be challenging due to a need to renegotiate the terms of contracts with insurers. While mindful of this concern, the committee considers that renegotiating insurance contracts is not an unfamiliar process to superannuation funds, and believes this process should be achievable within the proposed timeframe.

2.158         Stakeholders held differing views regarding the definition of an 'inactive' account as proposed by the bill; that is, an account will be considered to be inactive if no contributions or rollovers have been received in the previous continuous period of 13 months. Some argued for a longer and/or less narrow definition. The committee notes that the fundamental purpose of this reform is the consolidation of low-balance accounts that are unlikely to grow and are at risk of undue erosion. Consequently, the committee supports the more rigorous definition of inactivity adopted by the bill.

2.159         Retirement savings that are eroded by fees defeats the legislative intent of the superannuation system. The committee therefore welcomes the introduction of a fee cap on low-balance accounts and prohibition on exit fees proposed by the bill. The committee notes the government's estimates, based on the most recent data available, that these measures, combined with the rest of the package, will see members save around $570 million in fees in their first year of operation.[153]

2.160         The committee notes concerns raised by some stakeholders that members with accounts above the $6000 threshold may face increased fees. That said, the committee argues that this increase would only be a result of removing the cross-subsidy previously provided by low-balance account holders. Additionally, the committee considers that any small increase in fees borne by other members from prohibiting exit fees is appropriately balanced with the considerable member benefits that result from increased account consolidation.

2.161         The committee heard concerns that the proposed fee measures could be gamed. The committee is of the view that some of these concerns—in particular, those regarding possible member manipulation of the balance day test—are overstated and unlikely to be borne out in practice. The committee notes that, per section 99C of the SIS Act, buy-sell spreads are only to be charged on a cost recovery basis. Notwithstanding this existing protection, the committee suggests that consideration be given to ensuring close regulatory scrutiny around changes to the imposition of buy-sell spreads as a result of the fee measures in the bill.

2.162         The committee appreciates that insurance in superannuation provides a safety net for members and their dependents should their ability to earn an income and therefore save for retirement be impacted as a result of illness, injury or death. While the insurance covenants of the SIS Act require that the type and level of insurance in superannuation be appropriately balanced against the risk of erosion of members' retirement savings, it is apparent that the current balance between the protection provided and erosion of members' benefits is not aligned for some cohorts.

2.163         The committee recognises recent industry efforts to reduce inappropriate and duplicate insurance in superannuation, including the development of the Insurance in Superannuation Voluntary Code of Practice and movements by some funds toward age-based pricing for coverage. Notwithstanding this, the committee contends that industry action has been slow and does not go far enough to protect members' interests.

2.164         The impact of the insurance measures in the bill on insurance premiums was a common matter of concern raised during the inquiry. The committee recognises that members who continue to hold default insurance in superannuation may face increased premiums as a result of changes in the number of accounts as well as the overall risk profile of insured members. However, the committee stresses that any increases in insurance premiums that result from the proposed measures only demonstrate the substantial cross-subsidies that are inherent in the current system. As reported in recent research by Rice Warner, members aged 18 to 25 years are, on average, paying three times their true premium.[154]

2.165         The committee understands stakeholder concerns regarding the removal of default insurance coverage for some cohorts, specifically those employed in high-risk occupations. That said, the committee agrees with the principle highlighted in the Grattan Institute's submission that defaults should be set so that they are appropriate for the most people. The committee also reminds stakeholders that the bill does not bar members impacted by the measures in the bill from electing to opt in to insurance. In addition, the committee notes that there are other support mechanisms, such as workers' compensation schemes and the Disability Support Pension, available to individuals affected by illness or injury.

2.166         Finally, with regard to the consolidation measures in the bill, the committee notes concerns expressed by some stakeholders regarding the proposed mechanism for the transfer of inactive account funds via the ATO. Given that the ATO has no pecuniary or reputational interest in retaining the funds and existing data matching techniques will be utilised, the committee is confident that the ATO will be able to proactively consolidate member funds with an active account within the estimated one-month timeframe and with limited impact on investment returns. The committee notes the government's estimates that these consolidation measures will see around $6 billion in retirement savings reunited with approximately three million individuals in 2019–20 alone.[155]

Recommendation 1

2.167      The committee recommends that the bill be passed.

Senator Jane Hume
Chair

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