Let’s ensure we don’t let super funds ‘kludge’ it this time
by John Daley
Published in the Sydney Morning Herald, Tuesday 13 November
When it becomes overwhelmingly clear that policy changes are in the public interest, the next move of vested interests is to chip away at seemingly innocent details, all in the name of more perfect public policy. But invariably these “kludges” are really about undermining the principles and protecting the rent.
And so it is with the Protecting Your Super Package bill now before the Senate. As the Productivity Commission found, far too many Australians have multiple superannuation accounts. Lots of people are defaulted through super into life, disability and income protection insurance that doesn’t suit their circumstances – and in many cases they don’t even realise they’re insured. Most income protection insurance can typically be claimed against only one policy and only when members are working.
The bill fixes these problems by proposing that life, disability, and income protection insurance will be opt-in for people under 25. Most under-25s don’t have dependents, so life insurance is inappropriate for them. And the bill proposes that insurance will only start once there is $6000 in your super account (typically after a year’s full-time work), to reduce the number of people who are doubly insured. These reforms will substantially reduce the costs of superannuation, ultimately boosting super balances at retirement.
When the bill was investigated by a Senate committee, not one of the submissions argued that the current state of affairs was defensible. Instead, a forest of submissions from the financial services industry mostly argued for “refinements” that would in fact undermine the point of the bill.
Take one example: several super funds have argued that people in high-risk industries should continue to be defaulted into insurance. It sounds so reasonable. But people are pretty comprehensively insured against accidents at work through workers’ compensation legislation. If a person dies through a work-related accident in Victoria or NSW, their dependents receive compensation in the order of $750,000. This is far more than people are likely to get from insurance through super, where the average benefit is only about $100,000, and even high-end benefits are only about $400,000.
And of course, workers’ compensation premiums are paid by the employer, not the employee. While workers’ compensation doesn’t always pay out immediately, life and disability insurers don’t always pay out immediately either, as laid bare by heartbreaking evidence to the Royal Commission.
There is no reason for people to take out insurance against accidents at work. There is certainly no reason to default them into such insurance.
This state of affairs has continued because for most 40-year-olds, insurance costs about the same whether or not it covers work accidents. According to the Australian Institute of Health and Welfare, a 40-year-old is most likely to die from suicide, accidental poisoning, a car accident, or heart disease. Work accidents are well down the list.
Even for people who do work in a high-risk occupations, such as farmers or builders, it makes no sense to get expensive insurance against a risk already covered by WorkCover. Rather than defaulting people in high-risk occupations into insurance through super, the bill should be requiring life insurance through super to exclude accidents at work – unless a worker specifically opts in to such insurance.
Take another example. The bill proposes that if a person doesn’t make super contributions for 13 months, their account will be rolled into the Australian Tax Office, which will hold the money, pay interest, not charge fees, and at the earliest opportunity transfer it to an active account.
The industry proposes to allow super funds to hold onto inactive accounts for 16 months. This is supposed to protect women who have taken career breaks. They are allowed to opt out and retain their inactive account – and they are likely to get many letters from their super fund suggesting this. And the typical career break is more like eight months than 16. But what sounds like concern for a fraction of those women who take career breaks is in fact an extra three months of fees and (probably duplicate) insurance premiums paid by a much larger group of people who have inactive accounts because they have changed employer and therefore superannuation fund.
As Sir Humphrey from Yes Minister would suggest, if all other arguments fail, press for delay. And so the financial services industry is arguing that the bill should not start until July 2020. The industry appeared to have no trouble setting up default insurance within seven months of legislation passed in December 2012. But it now claims that it needs much more than seven months to implement changes to default insurance that reduce income. And, of course, another 12 months of fees and premiums will be collected in the meantime.
Kludging tends to be successful, because few people have got the time to get across the detail and the patience to keep fighting for the public interest when it all sounds unimportant. The Protecting Your Super Package bill would be a good place to start a new trend.