The prospects of recent insurance specific initiatives, as they stand, to address the deficiencies of insurance arrangements in superannuation, while welcome, are limited, says the Productivity Commission which is the Australian government's independent research and advisory body on a range of economic, social and environmental issues.
In its draft “Superannuation: Assessing Efficiency and Competitiveness” report issued yesterday, the Commission says that accordingly, further concerted action is required — by both industry and government. This includes efforts by industry to adopt and improve on the code of practice, complementary action by government and regulators to drive code adoption, and other actions by government to mitigate adverse outcomes from current insurance in superannuation arrangements.
What should industry do?
Proactive and preemptive actions to selfregulate can address concerns in a more efficient and less burdensome manner than through government regulation.
There is scope for superannuation funds to improve benefit design, including better tailoring of insurance products to meet the needs of different cohorts, while ensuring that full consideration is given to the effect of insurance premiums on account balance erosion. It is apparent that there is scope to use available data to do this better, with funds able to impute the likely characteristics of their own membership from generic data sources.
Complexity and lack of comparability across product offerings is an obstacle that makes switching to better superannuation products difficult for members and limits competitive forces. Development of standard definitions is a crucial step in reducing this problem, although it should be done in a way that does not inhibit better tailoring of products to members’ needs — such as the redesign of TPD products to have staged payments, rather than a single lump sum.
Engagement with members is another key area for improvement by funds, including ensuring members are aware of their insurance cover and making it easier to opt out, amend cover or make claims.
An important aspect of this is having as up to date contact details for members as possible, and all funds should work with the Australian Taxation Office (ATO) to ensure that they have the latest available contact information for their members.
It is apparent that there is currently a diverse range of approaches by funds, so there is scope for many funds to adopt approaches in line with industry best practice.
Funds should adopt industry code
It is the Commission’s view that funds should adopt and implement the provisions of the industry code of practice, as this is a transparent and consistent way for funds to make improvements to insurance arrangements that increase the value of insurance to members.
If funds do not adopt the code, they should be prepared to face additional scrutiny from regulators on their insurance arrangements, and be able to explain why adopting the code is not in the best interests of their members.
The code should be strengthened through its subsequent iterations
While future iterations of the code have been flagged, it is important that the unwarranted flexibility and carveouts of the current version are unwound, says the Commission. In particular, the code provisions should be enhanced in the following areas:
- Standard definitions. While comparability for members will always be difficult due to different mixes of insurance types and levels of cover, common eligibility and exemption definitions for insurance types (particularly in the case of TPD insurance) should be introduced to increase transparency and address the potential use of unreasonable exemptions to address cost pressures.
- Tailoring benefit design. While the code requires participants to consider member characteristics in designing benefits, further prescription in the code could increase the adoption of industryleading benefit design practices (such as imputing member needs using Australian Bureau of Statistics data).
- Communications. The code contains extensive provisions on communications, including an annual member statement. However, the risk is that without further direction, the statement will end up long, excessively detailed and unread. Similar to the key fact sheet, the annual statement needs to be a short form document that contains only key details on the level and type of cover, annual premiums, the likely projected balance erosion for the member, and links to additional information on the fund’s website (including the fund’s balance erosion tradeoff determination and a calculator for assessing balance erosion for individual members).
Ensuring communications even reach members is a necessary precondition to be effective, but this is not always the case — the code should also require all signatories to regularly access updated contact details from the ATO.
A key objective should be to strengthen the code to the standard necessary for ASIC approval. Beyond bolstering provisions of the code, a critical task for the code owners — with appropriate regulator guidance — is to make the code binding and enforceable on participants.
What should government do?
In broad terms, government should focus on measures to bolster and leverage the work of industry and to intervene in areas where industry efforts are unlikely to be effective.
Policy responses to address broader systemic issues affecting superannuation will also be important in addressing problems related to insurance. For example, addressing superannuation account duplication will also reduce unintended multiple insurance policies — thereby reducing the incidence of one of the most egregious sources of balance erosion.
The Commission is proposing initiatives to modernise the default system by having a single default fund for life, amongst other recommendations. The Commission is also recommending changes to assist in consolidating the legacy stock of unintended multiple accounts.
Ongoing efforts to improve data collection and dissemination will also be important. The need for better data is indeed a common theme across this inquiry and the Commission is recommending the creation of a crossregulator working group to identify avenues for improved data collection and access.
In addition, there are also some specific insurancerelated measures that the government should adopt.
Joint regulator taskforce to bolster code
Regulators should leverage the code by undertaking activities that require funds to adopt and comply with code provisions, and provide guidance to assist the code owners in bolstering the provisions and administrative arrangements of the code to an appropriate standard.
To coordinate efforts across regulators, the Australian government should establish a joint taskforce. It should include both ASIC and APRA to ensure that there is coordination between the regulators, given that some instances of inappropriate activity may require a response by both regulators. Further, there is a close link between many elements of the code and other requirements (or proposed requirements) imposed on funds, such as requirements around optout procedures. The taskforce should also consult with consumer organisations and insurance experts.
To ensure that the necessary enhancements to the code occur promptly, the taskforce should provide guidance on priorities for bolstering the code and what is needed to meet ASIC’s requirements for an enforceable ‘approved’ code of conduct. Industry should be given two years to make the bolstered code meet this standard.
As an additional check to ensure code development remains on track, the taskforce should monitor and publicly report on the adoption and implementation of the code by funds, and progress in implementing the necessary enhancements to the code — including implementation of standard definitions and moving to a short form annual insurance statement.
Other actions that the government can take include:
- Make the code a MySuper condition
- Require funds to publish their balance erosion tradeoff assessments
- Allow opt-in insurance for members aged under 25 years
- Effect cessation of insurance on inactive accounts
- Conduct future review of insurance in superannuation arrangements.
The government in 2016 tasked the Commission to assess the performance of the super system — to determine if it is meeting the needs of members and retirees and providing the best possible investment returns. Among various issues, the review, which commenced last July, looked at the appropriateness of the insurance arrangements inside superannuation, including:
- the impact of insurance premiums on retirement incomes of both default cover and individually underwritten cover funded inside of superannuation
- the extent to which current policy settings offset costs to government in the form of reduced social security payments
- whether policy changes could improve default cover through superannuation, so that default cover:
- provides value-for-money
- does not inappropriately erode the retirement savings of members of all ages
- delivers consistent outcomes across the system.
- whether policy changes are needed to ensure that insurance is not a barrier to account consolidation.
A final report will be provided by the Commission to the Australian government, with the timing to be advised.