The revised superannuation architecture proposed in phases two and three of the Cooper review has the potential to cause the biggest upheaval in the superannuation industry in decades.
It also has the potential to dramatically accelerate the current underinsurance situation in Australia and place further strain on the social security system.
This is because it is proposed to place any members who do not express choice into a universal fund. All references to insurance within such a fund suggest a minimum default level of cover would be provided, and there would be no options for those members to increase their cover to meet their individual needs.
It is generally recognised the majority of Australians are underinsured. There are, however, millions of working Australians who would have far less insurance cover than they have now were it not for at least two significant factors.
One of these is that thousands of employers, including the many who have transferred their previous stand-alone funds to a master trust or industry fund environment, have taken steps to ensure the default super fund they have arranged for their employees provides good levels of default insurance cover.
The other is that many trustees have substantially increased the level of their fund’s default insurance cover in the past three to five years.
This has been particularly prevalent in the not-for-profit funds. Most of these funds provide both death and total and permanent disablement cover and many also provide a level of income protection as part of their default insurance offer.
There are currently millions of Australian employees in funds providing good levels of default insurance cover who have not made an active choice in respect of either the superannuation fund in which they wish to participate or their investment strategy in that fund.
However, as the intention of a default fund is that it be designed so as to be appropriate for the large majority of employees, it is not surprising most employees are comfortable remaining in their employer’s default fund.
Just because an employee hasn’t expressed choice doesn’t mean they should be forced into a position of having to do so or else be transferred into a fund with only one investment option and a minimum level of default insurance that is likely to be inappropriate to their needs.
It would be safe to say that for the majority of employees, while they may not be fully across the exact details of the cover they have within their fund, few would want the cover they currently have available to them significantly reduced.
Also, new employees to a company would be placed at a disadvantage were they not provided with similar levels of cover as their colleagues as a matter of course.
Superannuation funds in Australia arguably have access to the cheapest life insurance available anywhere in the world through the group insurance arrangements they have established.
For employees in many occupations, default cover provided under a group insurance arrangement is the only way they can obtain disability cover in particular.
Informed trustees, a competitive superannuation market and a competitive group insurance market all combine to provide a highly appropriate environment for addressing the insurance needs of many Australians.
Little, if any, information is available to trustees to allow them to tailor a default level of cover to an individual family situation and financial circumstances.
However, the trustees are best positioned to determine the default levels of cover considering the broad range of members within their own funds.
They can then negotiate, with their fund’s insurer, appropriate access to allow an individual to apply for additional cover above the default level to cover their individual needs.
The system of employer default funds, offering default insurance cover generally much higher than the proposed minimum default cover of the universal fund, should be allowed to continue in its current form.
Trustees need to be free to set the level for their fund’s default cover that they consider most appropriately aligned to its membership.
