Money Your Super Budget measure will force superannuation insurance premiums to jump
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Budget measure will force superannuation insurance premiums to jump

Young workers could be vulnerable if insurance in super is pulled. Photo: Getty
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The insurance premiums inside superannuation funds covering workers for death and disability are about to jump 11.1 per cent.

The hike comes with the introduction of new legislation announced with this year’s federal budget. It  will exclude young workers and those with low balances.

Research group Rice Warner found in a new report there would be “significant unintended consequences” resulting from the changes.

“A large proportion of superannuation fund members are expected to lose their insurance cover” and “premium rates will increase for those that retain their cover”, Rice Warner found.

The move will add $70 a year to the cost of insurance for a 35-year-old and $100 for a 45-year-old. The rises will be driven by a shrinking in the insurance pool as members drop out of insurance cover and costs will “vary considerably from fund to fund” depending on design, demographics and changes in terms and conditions, Rice Warner said.The measures will see automatic insurance cover dropped from those under 25, those with balances below $6000 and inactive members who haven’t touched their accounts for 13 months. They are aimed at protecting low balances from unnecessary premium costs.

It is not simply a numbers game that will drive higher costs: It is also about the age of those leaving. The current system uses the premiums of young people, who are less likely to claim on life and disability insurance, to cross-subsidise the premiums of older members, as this chart shows.

The cross-subsidy is so marked for younger workers that those between 18 and 25 pay more than three times the actual costs of their insurance in premium charges. In general, industry funds have the largest degree of cross-subsidisation across ages.

Funds are concerned not only with the rise in costs, but with the fact that many young workers will lose the protection of insurance because they will be automatically excluded. To gain cover, those that want it will have to opt in.

REST Super CEO Vicki Doyle said the group “provides super to 1.9 million Australians. Around 882,000 members would lose their cover under the proposed legislation”, she said. 

This would leave vulnerable people unprotected as its members are  predominately low-income, casual, female and young.

“In the absence of insurance cover provided by REST, many of our members would be unable to access equivalent cover. For those who could, the cost would be much greater.”

A spokesman for building industry fund Cbus said one-third of its members could lose insurance with the changes, and many in dangerous occupations would not be able to replace it.

“Given the riskier nature of the Cbus insurance pool, we estimate that premiums for remaining members will rise by 20-30 per cent,” he said.

Chief economist with Industry Super Australia, Stephen Anthony, said while he agreed with the thrust of the changes they should not be applied in a “blunt fashion”.

The legislation was supposed to be implemented by July 1, 2018 but is currently being reviewed by a Senate committee.

Regulator APRA recently told the committee that the deadline was too early as further work was needed on the proposal.

“APRA encouraged the government to consider further discussions with key stakeholders about appropriately targeted transition options,” a spokesman said. 

Opposition revenue and financial services shadow Clare O’Neil said: “Labor is sympathetic to the objectives of the bill.”

However, it would examine the result of the Senate inquiry about the “likely effects or unintended consequences of these changes” and act accordingly. 

Revenue and Financial Services Minister Kelly O’Dwyer said: “The changes will reduce the total amount of insurance premiums paid from the superannuation system by up to $3 billion, boosting the retirement savings of approximately five million hard-working Australians.”

The New Daily is owned by Industry Super Holdings

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