Under the current arrangements, most super funds typically offer life insurance, total and permanent disability (TPD) insurance, and income protection to their members, ASIC notes on their MoneySmart website.
ASIC explains that while individual members can choose to increase, decrease, or even cancel this insurance (known as group insurance), default super funds have a minimum level of insurance they must offer, and as with other kinds of insurance, individuals are required to pay premiums on these products.
Currently, the Productivity Commission (a government research and advisory body designed to assess the economic and social welfare of Australians) is reviewing the super system in a bid to assess competitiveness and efficiency.
As part of this review, the Commission is considering the appropriateness of current insurance arrangements within the super system, exploring the potential impact insurance premiums are having on retirement savings and whether policy changes could result in better outcomes for fund members and the government.
“The Commission is to assess the efficiency and competitiveness of Australia’s superannuation system and make recommendations to improve outcomes for members and system stability,” the Commission explained in a consultation paper.
The primary goal of this is to establish whether the current insurance arrangements offer value for money and don’t unnecessarily erode individuals’ retirement savings.
“The cost of insurance held through superannuation detracts from retirement balances and ultimately retirement incomes, however policy dictates that life and total and permanent disability insurance are bundled with superannuation on an opt-out basis in default products,” the Commission explained in a draft report from August 2016.
“Given this constraint, the Commission plans to assess whether trustees are offering the most appropriate insurance for their members, and whether the costs of insurance are minimised for the type and level of cover provided.”
In July of this year, Minister for Revenue and Financial Services Kelly O’Dwyer said the government hoped the Commission’s research will ultimately make insurance in superannuation more appropriate and cost effective, but also that members will be able to opt out of insurance more easily if they so choose.
“This comprehensive package will help deliver all Australians a strong and modern superannuation system that is solely focused on outcomes for all Australians who rely on these funds to secure their retirement,” Ms O’Dwyer said.
“This is why we tasked the Productivity Commission to undertake a review of the system last year. The government will consider if any further changes to improve the superannuation system are required in light of any recommendations made by the Productivity Commission.”
The Financial Services Council (or FSC, a lobby group representing wholesale and retail superannuation funds) said it supported the move to make opting out of insurance easier for fund members, but also highlighted the importance of insurance within super funds.
“Group life insurance in superannuation is an important piece of public policy and a valuable safety net that delivers benefits very efficiently and effectively for millions of Australians,” the group said.
“However, the FSC supports reforms that make it simpler for those people who don't wish to have insurance cover inside superannuation to opt out if that is their choice. Consumers do need to fully understand the ramifications of opting out – and once they understand that, we support giving them easier options to do so.”