Low income earners, female employees and young workers bear the brunt of default life insurance unnecessarily eroding their superannuation savings, according to a new KPMG report.
The report found female workers on incomes under A$37,000 (US$29,300) would retire with 14% less savings due to the account erosion caused by default life insurance, which is provided on an opt-out basis in superannuation. This was more than double the average account erosion, in which fund members with insurance can expect to retire with 6.2% less superannuation than if they were not charged insurance.
The Insurance in Superannuation Working Group (ISWG) commissioned the report by KPMG on default group insurance, ahead of last week’s release of a draft Code of Practice for superannuation funds that offer insurance.
The KPMG report found that opt-out insurance has helped reduce Australia’s underinsurance problem, with many more people being covered than if they had solely relied on government support, and death benefits also provide much-needed support to surviving spouses.
However, the fees collected by the wealth management industry have been targeted by the federal government and consumer groups. The Productivity Commission is currently investigating the A$2.3 trillion super system, with a focus on fees, member outcomes, and where the savings of the least-engaged members are looked after. Earlier this year, Financial Services Minister Kelly O’Dwyer raised concerns that life insurance premiums within super are eroding retirement savings through fees and charges, and said there needs to be better options for customers to opt-out of insurance.
However, according to KPMG, if default insurance was changed from opt-out to an opt-in system, only 2-10% of super fund members would take up insurance and between four and five million Australians would be unable to obtain insurance at all or at reasonable rates. The benefits of income protection insurance also save the taxpayer between A$3 billion and $4.2 billion over 10 years, from workers who would otherwise go on the disability support pension.