As the not-for-profit super sector has grown, the linking of low-cost insurance with super has significantly boosted insurance levels, particularly among low-income earners and blue collar workers who previously faced exorbitant premiums or difficulties obtaining cover.
So it is perhaps no surprise that of the Cooper review’s final 177 recommendations, those concerning insurance have been among the less controversial.
Jeremy Cooper and his seven-member panel seem to agree that existing arrangements in regards to default death and total and permanent disability (TPD) cover – at least in the not-for-profit super space – are working reasonably well.
But that doesn’t mean they have ignored the insurance side of the super equation. If the panel has its way, unnecessary insurance costs will be lowered, disclosure will improve and it will be much easier to compare insurance cover among super funds.
The panel believes insurance cover comes at the cost of foregone retirement savings.
As such, it has recommended that members of low-cost MySuper funds – which some predict will involve the majority of the Australian workforce – should be able to opt out of life or TPD insurance at any time.
Taken at face value, this recommendation seems at odds with Australia’s well-documented underinsurance problem.
But few are predicting a mass exodus of insurance products, particularly given the low level of member engagement.
And it does need to be recognised that members who have insurance through another fund or outside their superannuation should have the right to opt out.
At the same time, it is disappointing the Cooper panel did not recognise the need for mandatory cover for members of funds that service high-risk industries, such as emergency services.
It seems sensible that workers such as police and firefighters be required to have basic death and TPD cover through their super.
On the important issue of disclosure, the panel has recommended new obligations for trustees, including the development of an insurance strategy with fund-specific demographics in mind.
While many not-for-profit funds already operate in line with this suggestion, those that don’t will have to think harder about tailoring their insurance offerings to their overall membership needs.
Importantly, the panel stopped short of setting minimum and maximum levels of default insurance, recognising that this decision is best left to trustees.
While there is broad recognition of the need for improved uptake of income protection insurance among Australian workers, Cooper’s decision to leave it up to funds to decide whether or not to offer this type of insurance is also welcome.
Another positive suggestion from Cooper is the introduction of a ‘life event’ consideration for binding death nominations.
Many super fund trustees have raised concerns that decisions about binding death nominations can be difficult to administer.
Should this recommendation get the green light, trustees will be able to take into account changes in member life circumstances – such as those resulting from divorce – that might occur between the time a binding nomination is made and a person’s death.
But it is Cooper’s recommendation to ban commission on insurance sold through super that has the potential to bring about the biggest change.
Generally speaking, members of not-for-profit funds do not pay commissions on insurance sold through their fund.
However, banning commission would deliver significant benefits to members of retail funds and do-it-yourself superannuants who routinely pay more than twice the price for their insurance than their not-for-profit counterparts.
The cold hard facts speak for themselves. Last year, life insurers paid a total of $2.09 billion in commissions and trails, compared with $3.8 billion in death and disability claims.
Whether they apply to super or insurance, hidden or trailing commissions have no role to play in a compulsory retirement income system and Cooper and his panel should be applauded for recognising this.
