Review of default group insurance in superannuation | KPMG | AU
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Review of default group insurance in superannuation

Review of default group insurance in superannuation

KPMG's analysis into the costs and benefits of default group insurance in superannuation highlights that default group insurance in the superannuation system produces substantial benefits both for members and Australia as a whole, but there are some groups – low income earners, female workers and young people – who are adversely impacted by erosion of retirement benefits and specific measures are needed to help those people.

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The objective of the report, which was prepared at the request of the Insurance in Superannuation Working Group (ISWG), is to evaluate the impact of potential changes to the current system to address current concerns that default group insurance may be unduly eroding retirement benefits.

Some of the possible modifications to the current system considered in the report include:

  • lowering or removing the levels of default group insurance for younger members who may have less need for insurance
  • reducing or removing duplicate insurance accounts
  • changing from the current opt-out system to an opt-in regime.

Benefits of the current system

The report finds that there are many benefits to having default group insurance in superannuation including:

  • Greater insurance coverage for a larger proportion of the Australian population, thus helping to reduce Australia’s well documented underinsurance issue.
  • In some instances default insurance in super improves access to insurance for people in high-risk occupations.
  • Higher levels of insurance benefits are paid through group insurance compared to government safety net social security benefits, thus allowing people to take better care of their family and dependants in the event of death or disability.
  • 80 percent of group insurance premiums are paid back to members in claims, with 12 percent spent on expenses and commissions. By comparison, 50 perent of individual insurance premiums are paid back as benefits and 40 percent are spent on expenses and commissions.
  • There is lower cost and minimal need for underwriting in comparison to individual insurance held outside superannuation.
  • The income protection benefits offered under default insurance disqualify recipients from claiming a full Disability Support Pension, representing a significant saving to the public purse.
  • Income Protection benefits save the government between $3 - $4.2 billion over 10 years in terms of claims on the Disability Support Pension.
  • Tax on insurance payments benefit the public purse by $2.9 billion over 10 years, outweighing the costs of tax concessions provided to group insurance in superannuation.

Retirement benefits erosion due to insurance

Our analysis indicates that the overall reduction to retirement benefits due to default insurance premiums is moderate - 6.2 percent on average. But the analysis also confirms that a relatively small proportion of members are disproportionately affected.

The report finds that income level is the key factor to retirement benefit erosion, more so than age or gender. For example, the impact on the retirement benefits for females aged 35-39 earning between $18,000 - $37,000 is 14 percent and may be higher for those earning less than $18,000.

Possible alternatives

The report outlines a range of possible alternatives in relation to how default group insurance within superannuation could be re-designed. These include:

  • Insurance should vary according to the individual’s needs for protection, depending on age, income, dependents etc. The use of lifecycle or needs-based default cover can significantly mitigate the impact on retirement benefits.
  • As salary is an important driver of benefit erosion, consideration should be given to a premium cap based on the Superannuation Guarantee Contribution, which is in turn linked to salary.
  • Introducing appropriate cessation rules can make a significant difference to segments of the population like casual workers and people, largely women, who have broken work patterns.

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