A new paper released by major accounting firm KPMG has revealed the potentially damaging impact of moving insurance from a default framework to an opt-in model for members under 25 years old, members with account balances under $6,000, and members with inactive accounts as proposed in the 2018-19 federal budget.
In the first instance, there would be a “significant reduction in the overall insurance coverage inside superannuation,” the report pointed out.
According to KPMG modelling, the overall impact of the budget measures on insurance cover would be a 50 per cent reduction in group life cover.
Furthermore, this reduction in insurance cover would vary “significantly” for different funds, “due to differences in insurance cover design, member demographic, account balance profile and proportion of inactive members,” the report said.
As a flow-on effect from that, the overall group insurance premiums collected would decrease – which would then push up premium rates.
Modelling from KPMG revealed that the overall increase in group life premiums, costs that would be carried by the customer, would be 26 per cent.
This would also bump up the level of erosion of retirement benefits across all cohorts – but those impacted the most would be “for females and low income earners”, the report said.
Source: KPMG
“On the basis that default insurance is switched on once the member reaches the age of 25, there is the potential for members to end up paying more for cover over the longer term if insurers pass on premium rate increases,” the report added.
The major accounting firm expects super funds will have to expend “significant effort and money” in various activities in order to implement the budget proposals by its deadline of 1 July 2019.
This could include renegotiating group insurance contracts, developing member communication plans, and upgrading administration systems or processes.
“Given the number of regulatory and legislative changes impacting superannuation, a 1 July 2019 implementation date for the Federal Budget measures will prove to be challenging for most superannuation funds,” the report said.
Life insurance specialist AIA Australia said in a statement that they welcomed KPMG’s report.
“We share the Federal Government’s intention to reduce the unnecessary erosion of retirement balances, but research conducted into this issue is demonstrating that the Australian public will be financially worse off under the proposed reforms,” said AIA Australia and New Zealand chief executive Damien Mu.
“The government should not remove appropriate levels of protection or coverage for active, working Australians, nor should they distinguish between active members due to age or account balances, as these individuals are at risk, and they do have insurance needs as with other member cohorts.
“Instead, they should be focused on new measures for inactive accounts, which would achieve two-thirds of their targeted cost savings for members, while addressing the important issue of duplicate accounts,” he said.
