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In the October 2020 Budget, the government released its package of superannuation reforms called Your Future, Your Super (YFYS). A key component of the legislation which was ultimately passed is to ‘staple’ new members to a fund for life (or until they exercise Choice). Stapling will commence from 1 November 2021.
We have previously discussed the benefits of stapling in that existing members of superannuation funds will have stability as they change jobs in future. If they take a second job, their Superannuation Guarantee (SG) contributions will flow into the same fund and stapling will lead to larger account balances. This stability extends to insurance in that members will also maintain their insurance cover when changing jobs. Currently a member who changes jobs, and as a result default superannuation funds, may experience either overlaps in cover or gaps, depending on their timing to meet the various triggers for switching cover on and off under other recent legislative changes.
We now consider these additional impacts on insurance in superannuation in more detail.
We have highlighted previously the lack of clarity to date around how an employer may choose to redirect default contributions on behalf of default employees under YFYS. Currently the majority of transfers are undertaken using a member consent basis with the direction of the default SG contribution being up to the employer to determine. We are seeing a divergence of views amongst the industry with some providers proposing this remains the prerogative of the employer and that it can be changed at the employer’s discretion (for default contributions only) with employees retaining the ability to opt-out of this. Other providers are suggesting that they will endeavour to encourage all employees to join the new default arrangement on an opt-in basis for both the existing account balance and for future contributions.
It is not clear yet whether opt-out will be permissible and we will need to wait for the final regulations to clarify the situation. However, should employees only be able to join a new fund on an opt-in basis, this has a potential significant impact on insurance as illustrated through examples below.
For traditional group arrangements large employers have historically been able to negotiate tailored insurance benefits with reasonably generous Automatic Acceptance Limits (AALs). Pre-YFYS, an insurer could be comfortable that an employer joining its fund would translate to a high majority of the employees commencing as new default members. With only a few of these employees opting out of insurance, this meant that default insurance would automatically commence for the majority of the workforce, once the employee was over age 25 and had an account balance of $6,000. Insurers were comfortable with these AALs due to the high take up, generally being around 75% or more.
This is shown in Example 1 below, with approximate assumptions used to illustrate the flows of members becoming newly insured.
In Example 2 we then consider the alternative new potential scenario post-YFYS. Where an employer changes its default to a new superannuation fund, its employees are now stapled to the existing fund and the employer redirects default contributions to the new fund on an opt-in basis only. Employers will also need to be mindful to ensure that any promotion of the new fund is not financial advice. We have shown illustrations separately for this scenario when the employer is moving away from a “Performing Fund” and alternatively from an “Underperforming Fund”. The assumptions in these examples are for illustration purposes only, but highlight the potential for vastly different flows of new insured members.
In particular, if an employer switches its chosen default superannuation fund in this scenario, the inflow of new insured members may be so low that it impacts an insurer’s comfort with offering AALs. This may lead to much lower AALs and/or higher premiums. We would expect the inflows to be higher where the prior fund was underperforming, given the communications that Underperforming Funds must now make to members.
The recent Putting Members’ Interests First legislation removed opt-out insurance for new members under age 25 and for anyone with an account balance under $6,000. There was a high risk occupation carve out included which a number of funds elected to use, including Cbus, TWU Super, BUSSQ, Aware Super and ANZ. This was done on the rationale that young members in these funds were typically in high risk occupations, needed the cover and may struggle to source insurance elsewhere.
Under stapling, this carve out becomes less effective as Australians who do not commence in high risk occupations, and hence a fund with the necessary carve out, will remain stapled to that fund even if they subsequently move into a high risk job. If that individual is under 25, they may then find themselves in a high risk occupation without default insurance.
An additional problem comes, for members of all ages, where some funds exclude cover for high risk occupations, or apply benefits caps or a higher disablement criteria. Out of 20 leading superannuation funds, which in aggregate cover over 80% of MySuper accounts today, we found only six funds that do not have some form of default insurance restrictions for high risk occupations. Examples of such restrictions include:
In the situation where an individual is, perhaps unknowingly, ineligible to claim, this creates a potential reputation risk for both funds and insurers. The optimal member experience would be to have these restrictions entirely removed, given the challenges in ensuring the correct disclosures and communications are received and well understood by all impacted members. However, the removal will inevitably lead to a flow on pricing impact.
In response to this issue the Government has committed that Treasury will undertake a review into determining the appropriateness of occupational exclusions in default insurance in MySuper products. This review has commenced with a consultation process and suggests four options aimed at considering the necessity and appropriateness of occupational exclusions in relation to default life and TPD insurance only in MySuper products:
Submissions are due by 14 October 2021.
There is also now an even greater need, under YFYS, for having improved occupation data which could include it being a mandatory requirement in SuperStream.
If a fund fails the APRA performance test over two consecutive years, it will be required to be closed to new members until such time that it passes a subsequent performance test. This may result in an ageing portfolio of insured members for an insurer to manage. Typically, we see that claims experience deteriorates in this scenario. However, different outcomes are also possible. For example, we may see a greater exodus of the more engaged older members from the fund, leaving a younger average age demographic behind. The actual experience will unfold over time and is likely to vary from fund to fund. Whilst the majority of funds now have default insurance premiums that vary by age, there are still some significant cross-subsidies within these rates, and insurers will be exposed to a material mis-pricing risk from demographic changes.
To counter this risk, most rate guarantees issued by insurers already include a trigger clause around changes in the quantity of insured members. Hence, when a fund becomes “Underperforming”, and there are member reductions, it is likely the insurer would have the right to reprice. Whatever the actual shifts in age movements, it would seem particularly important with the YFYS changes that premium rates are progressively reviewed to reduce existing age cross-subsidies. This will help to manage volatility in premium rates as a fund’s member demographic changes.
There is much uncertainty with how the new YFYS stapling rules will impact insurance and as a result insurers and funds will need to monitor how the changes evolve and be prepared to respond appropriately. Ultimately, an increased awareness of default insurance through the uplift in engagement of fund members and targeted promotion of insurance, particularly to members within a high risk occupation, could mitigate some of these implications.
Jenni is a partner in Deloitte’s Sydney office in the Actuarial Consulting practice. Jenni has over 20 years’ experience within the insurance industry across both the UK and Australian markets. Jenni has specialised technical skills across the Group insurance industry, assisting superannuation funds with their insurance services and providing independent advice to trustee boards and insurance committees.
Caroline is a Manager in Deloitte’s Sydney office in the Actuarial Consulting practice. She has 10 years’ experience in the insurance industry, having held various roles across claims, underwriting and pricing in general and life insurance. Leveraging her knowledge and diversity of thought, Caroline’s most recent work includes: Providing strategic advice to superannuation funds on all aspects of Trustee decision making and implementation of new and proposed regulatory requirements in relation to life insurance. Management of superannuation fund insurance tenders, including the evaluation of provider submissions across product, pricing, services, and technology. Assisting superannuation funds with insurance benefit design, premium affordability and insurance management framework reviews. Assisting insurers with research and positioning of various White Papers around both group and retail market developments. Caroline has a Bachelor of Science degree in Actuarial Science from Curtin University and is currently pursuing the CFA Charter.