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.
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.