Super insurance changes to lift fees

Australia’s super fund members are set to face even higher fees charged as nest-egg managers look to offset new laws.

Australia’s super fund members are set to face even higher fees as nest-egg managers look to offset new laws aimed at ending life ­insurance premiums for younger members and ­sky-high fees on low-balance ­accounts.

The prudential regulator yesterday warned the government’s initiative would lead to higher life insurance premiums for the average super member, who would also be likely to see higher overall fees as funds look to compensate for the proposed 3 per cent fee cap on low-balance ­accounts, defined as those with less than $6000 in savings.

Australians already pay some of the highest fees in the world to their super fund managers.

Local super funds charge fees more than four times higher than similar funds in Canada, Europe and the US, totalling more than $30 billion a year.

Australian Prudential Regulation Authority member Helen Rowell told a Senate committee in Sydney yesterday that it “supports the policy intent” of proposals unveiled in May’s federal budget, put forward by Financial Services Minister Kelly O’Dwyer, that would force super funds to end automatic life insurance cover for new members under the age of 25 and move to an opt-in basis for cover from July next year.

From July next year the laws will also limit fees charged on super accounts with balances under $6000 to a maximum of 3 per cent.

Ms Rowell said fee caps for members with low balances would “require funds to review their fee structures” and “may lead to higher fees” for members with larger balances, while the life insurance proposals were “a significant shift” for the market, which would put “upward pressure on premiums for the ­remaining insured members”.

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APRA’s life insurance executive Geoff Summerhayes said premiums would be volatile for some time in the wake of the policy but “will rise for the remainder of the pool”.

KPMG Australia partner Adam Gee has estimated the ­insurance changes could lead to a 26 per cent spike in premiums for the remaining pool members, while specialist superannuation consultancy Rice Warner has suggested a 15 per cent figure.

Rice Warner head of insurance Jenni Baxter said the impact on retirement balances would be negligible if premiums rose, with the average member likely to slightly benefit from the law changes. The KPMG report only looked at a fraction of the industry, Rice Warner said.

Ms O’Dwyer said the government was committed to “ending the rip-off of low-income earners, low-balance account holders and young people” and said AustralianSuper’s changes to insurance — which mirror the budget proposals — had no impact on premiums.

“Those looking to defend high fees and charges, and who are arguing to protect insurance products people don’t want or need, are profiting from people who can least afford it,” she said.

Automatic, opt-out life insurance has been a lucrative business for the insurance sector. Modelling by Treasury expects the proposed legislation to wipe $3bn off premiums collected by the life insurance industry, from a total of about $8.5bn — equal to a 35 per cent reduction in revenue collected by the sector through super. Premiums have already surged in recent years, due to rising claims and more awareness of benefits. Death and total disability cover premiums have jumped by more than 200 per cent over the past five years, while income protection rates have almost doubled.

Moreover, super funds have been raking in revenue from low- balance and idle accounts, which is then often shelled out to shareholders, or used to cross-subsidise other members.

Wealth major AMP is one of the most vulnerable to the low-balance fee cap, and faces a hit to almost $100 million in fee revenue it generates annually across hundreds of thousands of low-balance super accounts that are mostly made up of forgotten or lost super funds.

Brett Clark, chief executive of the country’s largest life insurer TAL, said the timeline for introducing the laws — July next year — was too short and asked for a year’s extension. Ms Rowell also suggested the timeline was too tight. Financial Services Council senior policy manager Jesse Krncevic said the implementation “will be extremely challenging” for the industry.

But Grattan Institute chief executive John Daley slapped down the complaints of the funds management sector and said he supported the bill “both in its broad scope and its detail”. Mr Daley pointed to the 2011 MySuper reforms making life insurance mandatory, which were passed into law with only seven months’ notice for the industry to comply. He said the industry “had no trouble” complying with an Act that increased revenues for the sector within the time period.

Mr Daley also said life insurance in superannuation was largely useless, as workers were already covered for workplace accidents by state-based workers’ compensation schemes, which were often much more generous than payouts provided by life insurance through super. “There is a very good case for saying that people in high-risk industries should only be covered for accidents that happen outside the workplace,” he said.

According to actuarial firm Rice Warner, a quarter of superannuation fund members are having their savings whittled away as trustees charge fees for life insurance on idle and forgotten super funds, where members have made no contributions over the past 12 months. In some cases insurance sold in super has been found to have short-changed some workers by as much as $600,000 by the time they reach retirement.