Federal Budget 2018: Changing Super Cover Means Less Insured For A Higher Price

Younger workers in physical jobs will be hit hard by the changed in superannuation insurance rules. Louie Douvis

My father worked on building sites all his life and I was lucky enough to work with him during summer holidays. As a 15-year-old, the hardened men I worked with had one piece of advice for me: stay in school and get an inside job with no heavy lifting. They knew the toll a life of demanding physical work took and the inherent dangers it presented.

The government's proposals in Tuesday's federal budget to carve out young people and low-balance superannuation holders from insurance in superannuation could have a substantial impact on them and their families.

The unfortunate reality is that across a large population, tragic events will affect all manner of young people, in some cases leaving them disabled and unable to earn income and adequately care for themselves for their life ahead. Insurance is important for individuals aged under 25 if they are not able to work for a period or permanently because of an accident or a medical condition.

To give but one example of many, a 19-year-old male had an accident where a branch fell on him. As a result, he is now paralysed. This was not a workplace accident so no WorkCover payments were applicable. The only insurance cover he had was $150,000 death and total and permanent disablement through superannuation.

If you're starting out work in emergency services, as a tradie, in a low-income job, or find yourself in an outside job with heavy lifting, you need to be particularly concerned. These proposals have significant consequences, namely the massive underinsurance of younger people, and it would be a mistake to dismiss this important policy debate on the assumption that the industry is self-interested.

Seventy per cent of Australians get their life insurance at a group rate as part of their superannuation. It's tax-effective and pools the risk across the population. It's a classic nudge that would garner the support of many Nobel Prize winners in economics.

Group insurance pays back a much higher ratio of premiums to policy holders than other forms of insurance, mainly because commissions are not payable to advisers and the system is extremely efficient. Australian Prudential Regulation Authority data shows that 80 per cent of group insurance premiums are paid back to members in claims, compared to about 50 per cent of premiums for retail insurance offerings.

Large numbers of young Australians have dependents. In 2015-16 there were nearly 300,000 households in Australia containing about 450,000 employed persons with the household head aged under 25. In these households there were nearly 60,000 dependent children in. What's more, in about 100,000 such households the head of the household had a spouse.

Leaving younger people worse off

For households with the head aged under 25, the total amount in the bank held by all members of the household is $13,700 on average – as they're desperately saving for their first home deposit – with the median figure below this.

Australia has a classic underinsurance problem and this was one of the key policy rationales for the inclusion of default insurance in superannuation in the first place. It provides a safety net level of cover.

Moving to an opt-in model will result in the vast majority of young people losing the protection of this safety net. Behavioural economics and all the available evidence tells us that only a very small minority of young people will opt-in, in all likelihood much less than 10 per cent. Low levels of organ and blood donation, despite long-running public campaigns, are examples of behavioural biases at work in other spheres.

Increasing engagement remains the Holy Grail, however the grim reality is that inertia is a powerful force and most young people will not turn their mind to the issue. Younger people also typically underestimate their risk – we are all 10 foot tall and bulletproof in the realm of early adulthood.

A KPMG report considered the impact of taking cover away from young people. It found that there was not a significant improvement to their superannuation outcome (especially for low income earners), as their removal led to higher premiums for those remaining in the group insurance pool, which, under the proposed reforms, these young members would experience upon rejoining the pool at age 25.

Put simply, younger people will be worse off because their retirement balance will not have improved due to higher premiums later on, but they have lost the benefit of insurance in their younger years. And in a tragic situation, such as death or disability, the consequences would be dire.

There are much better solutions to balance the retirement and insurance needs of young people, such as limiting how much can be spent on insurance premiums or ceasing cover where contributions to superannuation are not being received. The industry is in the process of implementing these measures through a Code of Practice.

Removing insurance for young people ultimately places a greater strain on the public purse when the worst occurs.

It will be the families and dependants of young Australians suffering misfortune who will be left to pick up the pieces if the measures pass.

By Martin Fahy

Financial Review

13 May 2018

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