Today’s Super Changes Are Positive But Could Come At A Heavy Cost For Some

Opinion: Canstar Group Executive of Financial Services, Steve Mickenbecker

When I think about the overall health of our superannuation system, I invariably come back to the same statistic. There are around 8 million more super accounts in Australia than there are people old enough to have one.

That’s the equivalent of 40% of the people with super holding two or more accounts. But there are also the repeat offenders – the 1% of Australians who the ATO says have six or more accounts.

Nestled within this broader issue, of course, is the fact that with multiple accounts generally come multiple sets of fees, and potentially multiple insurance policies, which in turn bring their own premium costs – all nibbling away at your balance.

Up until now, this duplication of fees and premiums has represented a massive transfer of wealth (billions each year according to the Productivity Commission) from individuals to super funds. These issues have been well publicised of late, so it’s no surprise that we’re now seeing firm action aimed at addressing them.

The Protecting Your Super package of changes, coming into effect today, overall should be welcomed, in my view. As a suite of reforms, it is targeted yet sweeping, and will almost certainly mean fewer of us forking out for fees and insurance premiums on multiple super accounts. But precisely because these changes are sweeping, there is a risk that some people will get caught out, particularly those who could end up without insurance they may later rely on.

Here’s a summary of the changes:

  • Default insurance held within super will be cancelled for accounts that have become inactive (no contributions or rollovers for 16 months or longer)
  • Super accounts that have been inactive for 16 months with balances below $6,000 will be closed and transferred to the ATO
  • Fees on accounts with balances of $6,000 or below will be capped at 3%
  • Super funds will no longer be able to charge ‘exit’ fees to members who close an account

Generally these are straightforward, with non-controversial outcomes. The exception is the cancellation of default insurance, which detractors say will deliver detrimental outcomes.

How is default insurance in super changing?

From 1 July insurance will be cancelled on inactive accounts. An inactive account is one that has received no contributions or rollovers in over 16 months. Any life, total and permanent disability (TPD), or income protection cover that comes with that account by default could be cancelled unless you have taken action.

The case for the change

The change has been built around the premise that the super account has been forgotten and is one of those multitude of accounts being drained by fees and insurance premiums.  Drain is probably an understatement. It is probably more gushing out of these super accounts.

Canstar has crunched the numbers for a 21-year-old with a super balance of $6,100.  Without insurance premiums, they would have almost $14,200 in their account at age 67.  Were the same individual to continue paying insurance premiums, under the old rules their balance of $6,100 would be completely eroded by age 47. Both scenarios are based on no additional contributions being made, a 4% annual investment return, fees of 1.26% of balance and insurance premiums based on Canstar’s superannuation insurance premium data averaged across male and females for the white-collar category.

The suspension of insurance on inactive accounts adds a handy number to retirement savings.

But of course there can be unexpected and adverse outcomes.

The case against the change

Opponents of the change point to cases where the account holder has specifically and consciously chosen to retain the insurance because it was superior to their alternate fund and they opted out at the duplicated fund, or they specifically wished to top-up with a second policy.

To cancel the policy would leave them uninsured.

The mitigation

There is a safety net whereby account holders can opt for continuation of their insurance, whether proactively or a result of a prompt from their fund.

However, we do know that many people are quite disengaged from their super and only a minority even look at their annual statement. We’d argue that a person who has consciously made a decision about insurance in their super is more engaged than the average and more likely to act on a correspondence from their fund.

As for those who have become lost to their fund and are non-contactable, their super is probably also lost to them, as is the attached insurance. Maybe it will all be rediscovered at some point in the future, but the actuarial tables would suggest that an insurance claim is the lesser likely event that would lead to that reunion.

My view is that there is benefit in the reform and that we should resist allowing the exception to drive the rule.

Steve MickenbeckerAbout Steve Mickenbecker

Steve is the Group Executive of Financial Services at Canstar. He has decades of experience in the finance sector and is passionate about helping consumers make informed decisions with their personal finances.

Cover Image: Nutthaseth Van (Shutterstock)

Share this article