Introduction
This bill seeks to balance the interest in providing affordable, effective life insurance cover to employees (many of whom would be uninsurable) against the public interest in ensuring that member accounts are not eroded by insurance premiums. Labor supports these objectives, but has some concerns about unintended consequences. We will be recommending amendments to protect workers in high-risk industries and address concerns regarding the start date.
Given the reach and consequences of these changes, it is unfortunate that public hearings were not scheduled to enable Senators to further interrogate the 46 submissions received, including submissions from regulated entities, APRA and the ACTU.
the implementation timeframe of the bill;
members in high-risk occupations;
no default insurance for accounts under $6,000; and
insurance premium increases and long-term impacts.
Implementation timeframe of the bill
The bill has an operative date of 1 October 2019 with a requirement for funds to inform their members by 1 August 2019. The funds have given evidence to show that this is not practicable. The bill has not passed into law and the notice date is less than two weeks away.
Concerns about the implementation timetable were raised in the submission of the Australian Prudential Regulation Authority (APRA):
The PMIF Bill measures are also proposed to commence from the day after the date of Royal Assent, with the PYSP Bill measures applying after 1 October 2019 to members with balances under $6,000 and new members under 25 years of age. Requiring superannuation funds to implement the changes in the required timeframe will pose significant challenges for industry, particularly given the extent and complexity of the changes that will need to be undertaken, and current legislative uncertainty around the product level application.
Recognising the nexus between the PMIF Bill measures and the PYSP Act, the product level application of the PMIF Bill measures must be addressed consistent with proposed amendments to the PYSP Act. Further, it is critical that the PMIF Bill provides for appropriately targeted transitional arrangements that provide superannuation funds with sufficient time to take the necessary steps to implement the reforms in a manner that minimises any unintended consequences, particularly for members. APRA considers an appropriate implementation timeframe would be, at minimum, 6 months but preferably 12 months from the finalisation of both the PMIF Bill and proposed PYSP Act amendments. Taking this approach will ensure that the policy intent of the PMIF Bill and PYSP Act are achieved.
The funds agreed with the concerns raised by APRA. Industry Super Australia provided evidence of the impact on behalf of the industry super funds:
If the Government proceeds with the proposed changes, the implementation date is unimplementable and will result in member confusion and detriment. It is proposed that the commencement date of 1 July 2020 would allow funds to renegotiate insurance contracts on reasonable terms, make relevant system changes and properly inform members, but under no circumstances should it be sooner than 6 months after royal assent.
AustralianSuper gave evidence of the impact of the previous reforms on their ability to communicate with members and administer the changes:
When cover was being removed for inactive members under Protecting Your Super, AustralianSuper made a huge effort to allow members losing cover to make an informed decision. We corresponded with all affected members; we sent text messages to those who did not contact us following the initial correspondence; we contributed financially to an industry-wide ASFA awareness campaign; and we significantly increased staffing at our contact centre. Despite all this, due to the short timeframe for removing cover for inactive members, the response from affected members was overwhelming and our expanded contact centre was unable to cope with the volume of calls and provide what we would consider an acceptable service to affected members. Our understanding from industry colleagues is that this was a common experience.
Whilst losing cover may provide significant benefits from not eroding account balances for the majority of members, a failure to make an informed decision to continue cover for members with financial commitments and dependents may have dire financial consequences for those unfortunate enough to die or become disabled.
As such we believe more implementation time is needed for Members First, to allow individual members time to make informed decisions.
Mine Super gave evidence about the difficulties of communicating with workers in regional and remote locations and FIFO workers:
Superannuation funds require adequate time to assess and determine the impact of any new requirements to be imposed on them. The funds can then communicate to their members and attempt to engage them as appropriate. Members require an adequate period to assess their individual circumstances, seek advice (if desired) and make an informed decision in their best interests.
In Mine Super’s context, many miners and those working in associated industries often commute long distances to remote locations for employment. This includes fly-in and fly-out and drive in and drive out workers (with whom it is very challenging to meaningfully engage with in short periods of time due to their limited availability at their homes). The proposed commencement date of 1 October 2019, which requires funds to communicate with their membership by 1 August 2019 is not a fair and reasonable request of funds or their members. Parliament does not resume sitting until 22 July and this Bill is yet to be debated in either the House of Representatives or the Senate.
The Financial Services Council also raised similar concerns:
Even if the Bill is enacted before the end of July 2019, there will not be sufficient time for trustees and insurers to meet the current 1 October 2019 commencement date, which requires impacted members to be notified by 1 August 2019. Further, trustees will be in breach of the obligation to identify those members who have an account with a balance of less than $6,000, which, under the PMIF Bill’s current drafting, they must complete on 1 July 2019.
The Financial Services Council also provided evidence of their members' experience in implementing the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill:
The feedback from the FSC’s campaign demonstrated that the compressed timeframe for implementing the PYS changes caused confusion among consumers. Following soon after with similar changes may further undermine trust and confidence in the system, particularly given call centres are still receiving enquiries about PYS.
They made a recommendation that:
The PMIF Bill be amended to commence on July 1 2020.
Renegotiating Insurance Contracts
Industry Super Australia submitted that funds would also be required to renegotiate their contracts with insurers:
The proposed changes will result in significant pricing revisions, which will have implications for members. More time is required to enable industry wide re-pricing and appropriate negotiations with insurers, which does not leave trustees (and their members) vulnerable harsh commercial negotiations.
Rice Warner gave similar evidence, urging a deferral to 1 July 2020 to enable funds time to renegotiate contracts with insurers:
The insurance changes are due to take place from 1 October 2019, requiring a member stocktake to be taken at 1 July 2019 to identify members and communication to members by 1 August 2019.
Given the significance of the changes, even without the proposed $6,000 balance change, funds will need to again renegotiate the terms of their contracts with insurers. Funds and insurers are still grappling with the PYS changes, in terms of pricing investigations and negotiations, and how to implement the changes.
We recommend deferral of commencement for nine months to 1 July 2020. This will also allow time to reassess the impact of PYS on the need for the $6,000 low balance opt-in requirement.
Members in high-risk occupations
While most young workers and workers with low balance accounts would be able to access life insurance or income protection insurance other than through the group insurance product available through superannuation, this is not the case for many workers in high-risk industries.
Concerns about these workers were raised in the Productivity Commission’s (PC) recommendation which lead to this legislation. Importantly, the PC contemplated an exemption for these workers, recommending that:
Exemptions to the under-25 opt-in restriction should only be granted if the trustee can demonstrate to APRA that opt-out disability or income protection insurance would be in the best interests of a specific cohort of younger members.
The evidence before the committee shows that there is a significant risk to young workers in this cohort. Evidence provided by the ACTU in their submission points out that more than one quarter of all workers under the age of 25 are in high risk jobs with a real risk of fatality:
From 2003 to 2016 more than 3,400 workers have lost their lives on the job. Of those, 335 were under the age of 25.2 More than 27% of workers under the age of 25 are in a high-risk job…People aged under 25 make up 15.3% of the workforce and suffer injuries at work. Case studies included in this submission show that young people have suffered horrific injuries or have been killed at work.
The proposal for the Government will mean it is less likely these workers will be covered. This Bill, if passed, will cancel the insurance of police officers, paramedics, construction workers, truck drivers, agricultural workers, forestry workers, prison officers, nurses, and healthcare workers (including home care, disability and aged care workers).
Industry Super Australia provided further insight:
Nearly 30 per cent of workers under 25 years or approximately 340,000 employees, are employed in occupations and industries that are inherently hazardous. Some industries are extraordinarily hazardous. In 2016, half (50%) of worker fatalities occurred within the transport, postal and warehousing and agriculture, forestry and fishing industries.
For those who are active low balance members, Industry Super Australia provided a table that showed out of 633,159 active members, 25 per cent were in a high-risk job, 64 per cent were with a spouse and/or children, and 23 per cent with a mortgage.
Mine Super are a fund has 90 per cent of their members employed in high-risk occupations, which are categorised as dangerous by insurers. An unintended consequence of this bill is the increased cost to insurance as the insurance pool could diminish or potentially members could face increased costs in the retail environment.
In their submission Mine Super stated:
These occupations are often ineligible for retail insurance coverage and are uninsurable outside of the group insurance offering within the superannuation environment.
In working in a high-risk occupation, these members have a higher chance of being exposed to a severe workplace accident and an increased probability of being off work due to illness or injury which renders them and their dependents financially vulnerable. If our members can find insurance outside of superannuation in the retail environment, the cost of the insurance is often significantly higher than what Mine Super can provide.
Mine Super have high rates of claim due to our members being employed in high-risk occupations. On average, we receive approximately 800 claims per year (the significant majority of which are paid out). This represents approximately 1 in every 50 insured members in any given year making a claim. Over the life of an insured member, this figure is closer to 1 in every 10 members (including life, TPD and IP claims). Mine Super believes that all members should make informed decisions based on their personal circumstances. However, it is widely acknowledged that members are often disengaged with their superannuation.
This view is supported by the ACTU which states:
This will cause insurance premia to spike for those who prudently opt in, as well as for existing members within the group insurance plan.
Mr Luke Smith in his submission raised concerns that previously the Government accepted an amendment to account for those in high-risk professions, which is no longer included in this bill:
Many previous submissions on these proposed measures have raised the issue of high risk or dangerous occupations, with some recommending keeping insurance in super as opt-out for people in these occupations.
On 14 November 2018, then Assistant Treasurer Stuart Robert said in a speech:
While the Senate Committee recommended the Bill be passed without amendment, the Government has heard from stakeholders that workers in dangerous occupations are likely to benefit from default insurance in superannuation, as they may face barriers to accessing insurance elsewhere.
Therefore, the Government has decided to make available an exception to the opt-in changes for new members in prescribed dangerous occupations, such as police officers, truck drivers, farmers or concreters, who are under 25 years old or have an active low balance account, where trustees elect to apply it.
The Government then proposed amendments to the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 including a 'dangerous occupation exception to insurance rules'. Though, as the underlying measures were removed from the bill, this amendment was moot.
However, such an exemption does not appear in the new bill. Given the Government has accepted the benefit of retaining opt-out insurance for some members, these amendments should be incorporated into the bill, or an explanation made for this change in policy.
In the submission from CBUS, they also state the need for exemptions for high-risk occupations:
Cbus supports an exemption for those employed in higher risk occupations to retain access to the current opt-out framework in the same way as those employed in the Defence Force are exempted from the Putting Members Interests First Bill and the Protecting Your Super (PYS) measures. Cbus is comfortable with such a safeguard exempting only those products covering those working in hazardous conditions and requiring Cbus to:
Obtain independent actuarial certification to support the trustee’s assessment of the additional occupational risks faced by members in the relevant product which compromises their capacity to obtain individual insurance cover;
Undertake a regular assessment of the relative value of our group insurance arrangements including the cover we provide and claims history; and
Annually provide members with disclosure about the nature and cost of their insurance cover and reminder that they can opt out.
Cbus members work in hazardous and physically demanding environments. Safework Australia’s statistics demonstrate that the construction industry was the third most hazardous industry in Australia in terms of fatalities and serious injury, coming in closely behind transport and agriculture.
No default insurance for active accounts under $6,000
According to a significant amount of submissions, a number of Australians with active accounts of balances under $6,000, could be adversely impacted by this change through no coverage, higher premiums or underwriting being necessary for those who opt-in.
The removal of default insurance for active accounts with a balance under $6,000 was not recommended specifically by the PC in its report, which only recommended the removal of default insurance for under-25s and inactive accounts.
Rice Warner indicated this will likely impact those who are returning from maternity leave, work part-time, new migrants (who have no existing super balances), those with existing balances but not active in retaining existing cover, or are rolling existing balances over and due to a time delay have no cover:
A significant portion will be under 25s. These members are typically making lower contributions at this stage, due to lower salaries and intermittent working patterns, and due to their young age will have not yet had time to accumulate a material account balance. Hence the account balances often fall below $6,000. This segment will be addressed by the proposed legislation to remove default opt out insurance for under 25s.
A further significant proportion will be members over 25 years who are simply new to the Super Fund. On average a member may take approximately a year to reach an account balance of $6,000, but for many on lower salaries, or working part-time, they will take longer than two years.
The SDA believes this bill will unfairly impact on low-income earners, women and young people who are the majority of their membership:
The SDA opposes the Treasury Laws Amendment (Putting Members’ Interests First) Bill 2019 (the Bill) because it will unfairly impact on low-income earners, women and young people. The changes impose arbitrary limits, such as periods of activity and minimum balance. This has a disproportionate impact on these cohorts. They will be less likely to opt-in when they first start work and may take many more years to reach a $6,000 balance than others.
…
Many of them are casual and part-time workers and do not have large sums of cash on hand for when things go wrong. By denying these workers default group insurance, when things go wrong, they will be likely to have to rely on the health and social welfare system.
Industry Super Australia is not aware of any Government modelling to support the need for this inclusion:
No compelling reason has been provided as to why an active members’ account which is receiving contributions needs to reach $6,000 before a trustee can offer insurance on an opt-out basis. Whilst assertions have been made that the change will benefit the retirement incomes of members, ISA is not aware of any modelling that the Government has undertaken to support these assertions.
Industry Super Australia also highlighted the impact on all members if active low balance accounts of less than $6,000 were no longer provided opt-out default insurance:
The removal of insurance from active members who have balances of less than $6,000 will result in a re-pricing of insurance premiums which will impact all members and in time the increased pricing will be applied to those members it seeks to protect.
If the dual price impacts of adverse selection (the risk to insurers of members at higher risk opting in) and a reduction in the insured group are combined there will be a long term insurance premium increase. Until insurance contracts are renegotiated with insurers these cost impacts cannot be accurately estimated.
However, early indications from some funds are that the premium price increases flowing from the removal of insurance from active members with low-balance accounts alone could be as high as 7–10 per cent.
Insurance premium increases and long-term impacts
The broader impact on group insurance has been a reoccurring issue raised throughout the Labor Senators’ report. Stakeholders have indicated that the changes in the bill will result in increased premiums and reduced availability of insurance.
APRA stated in its submission:
APRA considers the PMIF Bill measures, together with the PYSP Act, represent a significant shift in the provision of insurance to superannuation fund members, with members with balances of under $6,000 and new members under 25 years of age only being offered insurance on an opt-in basis. While the precise impact of the measures is difficult to assess at this time, one likely impact that will result from the removal of low balance account members and new members under 25 from "default" insurance pools, will be upward pressure on premiums for remaining insured members.
Hesta provides a view of group insurance in their submission:
Insurance purchased within superannuation is significantly cheaper than comparable insurance purchased outside superannuation, for several reasons. Superannuation funds can pool risk with little to no underwriting. Bundling insurance in superannuation substantially increases the number of people insured. This spreads the risks to the insurance provider and hence decreases the costs. These savings can be passed on in the form of lower premiums.
Pooling a risk reduces the need for underwriting. Different people have different chances of having to claim on an insurance policy. Some people might be at higher risk because of the types of work they do or lifestyle choices. Pooling risk means that workers with all kinds of risk profiles are pooled together. This allows higher risk workers to get insurance at a lower price who might otherwise struggle to get insurance because of their risk profile.
There are tax advantages to purchasing insurance within superannuation. The money within the superannuation fund is taxed at a concessional rate. Insurance premiums held within superannuation can also be fully or partly tax deductible. The result is that insuring within superannuation is more tax effective than holding the same policies outside superannuation.
Default insurance works because everyone is covered despite their circumstances in the same way. Insurers will look at those who decide to opt-in differently if insurance becomes a choice. If a young person opts-in insurers call that ‘self-selecting’ which prompts the insurer to either deny coverage or require underwriting.
Workers may be subject to health checks before they are able to commence their insurance coverage.
The SDA claims that opt-in has negative impacts for it members:
Taking away group insurance has negative impacts. Currently, members can opt-out, they can increase or decrease their cover, and choose which parts of the insurance they will take up. If the Bill goes ahead, opt-in would involve a range of different restrictions and conditions. For example, there is likely to be a period during which a person can opt-in and if they miss that timeline, those who opt-in may require underwriting because they will be considered by insurers as a higher risk. It is also likely that there will be an increase in premiums across the board as numbers decline. This is likely to have an impact on affordable insurance for low paid workers.
The Association of Financial Advisors indicated that insurance premiums could increase across the board with people being taken out of the pool:
The apparent view put forward in this legislation that people under the age of 25 are less likely to need insurance and therefore they should be removed from the insurance pool, fails to take into account that a large number of people under the age of 25 experience insurance events. Secondly, it fails 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. This is due to the fact that the fixed costs of the insurance businesses 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.
Labor Senators' view and recommendations
Labor Senators believe it is unreasonable for the industry to implement the commencement date of 1 October 2019, while having to inform their members by 1 August 2019. Labor Senators are pleased to see in the chair's report a recommendation to change the commencement date to 1 December 2019. However, Labor Senators do not feel this goes far enough. There are a number of complexities involved with these proposed changes, which cannot be rushed in the best interest of members. Members need time to make properly informed decisions regarding their insurance without confusion, and funds need the time to work through the complexity of the change. Insurance renegotiations could take between 12 and 18 months.
Members in high-risk occupations could potentially be left uninsured or face higher premiums if they do opt-in to group insurance. This could affect police officers, paramedics, construction workers, truck drivers, agricultural workers, forestry workers, prison officers, nurses, and healthcare workers. Labor Senators believe this is not in the best interest of those members.
Labor Senators share the concerns of stakeholders regarding the removal of default insurance for active accounts of balances under $6,000. Unfortunately, the committee did not allow public hearings to further investigate this issue thoroughly. There are potential impacts on those who are returning from maternity leave, those who work part-time, and new migrants. These individuals could face greater difficulty in accessing coverage or higher premiums compared to their peers in the same job. Extending the commencement date will hopefully provide enough opportunity for funds to effectively communicate these changes to this affected cohort.
Labor Senators are also concerned about the impact of insurance premium increases. Submitters were clear in their view that group insurance provided an affordable benefit to all members of a superannuation fund. There is a risk that any benefit gained from those under 25 or low active accounts will be eroded when they reach the age and/or balance threshold and start paying a higher insurance premium.
Recommendation 1
The commencement date should be amended to 1 July 2020 and the date for funds to inform their members should subsequently be amended to an appropriate date.
Recommendation 2
Amend the bill to exclude high-risk occupations that would benefit from opt_out insurance.
Recommendation 3
Implement a review after 1 year of commencement to investigate whether an unintended consequence of this bill is increased premiums across the board and for those who opt-in.
Recommendation 4
The bill should be passed once Recommendations 1, 2 and 3 from the Labor Senators’ report are supported.
Senator Alex Gallacher
Deputy Chair