Most Australians wouldn’t know it, but they are sending about 1 per cent of their annual salary to an insurance company which they probably couldn’t name.
Most wouldn’t even know they had consented to doing so.
In a compulsory superannuation system that charges savers for life insurance on an automatic opt-out basis, it was a situation more or less bound to happen.
But with Scott Morrison firmly back in the prime ministership, one legacy from the 45th parliament that will be carried over into the new government is tackling the fee-gouging rife in the $2.7 trillion super system.
In February, an 11th-hour deal between the government and the Greens saw the shelving of plans to end the automatic charging of life insurance fees to super members under the age of 25 and for savers with super balances under $6000. It was a policy first announced in the 2018 budget.
Since February, these super members have been charged close to $1bn in largely unnecessary fees for life insurance policies they may not need or know about.
Insurance in super, where 70 per cent of Australians receive cover, costs between $300 and $2000 a year, and is deducted automatically from savings. Insurance premiums collected by the industry have jumped by roughly 35 per cent over the three years to 2017, and now total more than $9bn a year.
When workers send 9.5 per cent of their wages to a super fund, few realise that the money quickly disappears into the hands of the funds management industry. About 1.5 per cent gets carved off for investment management and administration fees. Then a further 1 per cent will be siphoned out by a life insurer — the fee is steeper for those in blue-collar jobs or dangerous manual-labour employment such as construction.
Adding in the 15 per cent tax on super contributions, and your 9.5 per cent is quickly whittled down to about 7.4 per cent, on average. In too many cases, it is money for nothing.
Because of the magic of compound interest, a 1 per cent fee can reduce a nest egg balance by about 20 per cent over a lifetime, leaving workers well short of their retirement needs, and more likely to rely on the Age Pension.
Paul Keating, the architect of the super system, last year called again for the creation of a “national insurance scheme” to ensure the government could continue to support people well into old age.
Keating’s plan would see another 2 or 3 per cent of worker wages quarantined by the government — on top of the scheduled increase in the super rate to 12 per cent — and earmarked for a “longevity levy” to help pay for old age.
As the Morrison ministry begins negotiating with the Senate over insurance measures, which are expected to save younger savers and those with low balances about $3bn a year in unnecessary premiums, the MPs should consider a more thorough overhaul.
The evidence is that the arrangements do not benefit workers, savers, claimants or the public purse. The life insurance industry, on the other hand, has become bloated thanks to the streams of government-mandated money.
Just as the Future Fund has been suggested as a competent administrator for a public superannuation option, a government-backed insurance scheme could solve many issues. Ending automatic insurance for under-25s makes sense. Few workers at that age have dependent children or spouses. Most benefits upon a death are received by a mother.
But because insurers will be forced to stop cross-subsiding older members with younger members, premiums for the remaining cohort of savers are expected to rise by about 40 per cent. Pooling risk across diverse groups of people helps reduce costs for everyone.
The bigger the group of customers, the cheaper premiums will be. As it stands, there are just a handful of insurers competing for contracts with super funds. Some, such as AMP and Commonwealth Bank, were revealed by the royal commission not to have bothered to check for decades whether their insurance offerings were cost effective (spoiler: they weren’t).
Insurers have been focused on attracting customers through a race to the bottom on gold-plated features and benefits that come with unrealistic price tags. When things went awry, companies were too often harsh in rejecting claims. With skyrocketing rates of mental health claims and a rise in workplace stress after the global financial crisis, companies have found themselves a prudential liability.
Last month APRA executive Geoff Summerhayes had to publicly shame the industry over the shoddy way it had provided income protection insurance, and gave the sector eight weeks to come up with a solution.
One solution would be to end the gravy train. Instead of workers sending 1 per cent of their wages to companies that show little interest in meeting their responsibilities, the money could be redirected to a national insurance scheme.
Claims could be capped at modest but suitable levels. Death policies would cover funeral costs and liabilities — to a degree — for those without dependants, and then increase depending on the spouse or the number of dependants. Income protection claims could be better regulated to reflect the reality of forgone wages in the event of an injury.
The Productivity Commission, which recommended a review of insurance in super, says the government is being forced to spend more on the Age Pension because life insurers are draining the savings of low and middle-income earners by up to $125,000.
Low income workers, employees with patchy job histories, and those with multiple super accounts were most affected by the fee-drain.
Retirement balances could be reduced by as much as 25 per cent over a lifetime.
The government wouldn’t even have to underwrite a national insurance scheme. It could just provide the policy parameters, the administration, and the industry could still take on the risk — and conversely, any reward.
By Michael Roddan - Michael Roddan is a business reporter covering banking, insurance, superannuation, financial services and regulation.
4 June 2019