The Your Future, Your Super (YFYS) reforms represent a seismic shift for superannuation funds, employers, and particularly members as they build towards a strong retirement outcome.
As part of the YFYS reforms, employers will be required to make superannuation contributions to an existing fund (‘stapled’ fund) for new employees from 1 November, unless the employee decides otherwise. Further, if new employees do not decide on a new fund, employers are no longer allowed to automatically create a new super account in the employer’s chosen default fund.
While positive in its intent – to reduce the number of Australians with multiple and unnecessary superannuation accounts – in practice the reforms mean members will assume more personal responsibility in insurance decision-making and therefore the consequences of their decisions will be greater.
While the impact of stapling on group insurance may not be seen immediately, if not managed well there could be significant short and long-term impacts.
Changing from an employer-led to member-led system of group insurance
The superannuation system has served Australians well and the funding of insurance premiums through superannuation has allowed Australians to better address the underinsurance gap. 70 per cent of all life insurance premiums, Retail and Group, flow through this system.
One of the hallmarks of group insurance has been employers, in collaboration with funds and trustees, are responsible for determining the default insurance arrangements for their employees. Generally, employers have been well-placed to know which fund provides the most appropriate insurance arrangements for their employees.
From 1 November, the decision-making will shift from employers and trustees to individual members. In a stapled world, when members change employment, they will retain their existing superfund arrangement unless they make an active choice. This means many will retain the insurance selected by an earlier employer which may not be appropriate for their changing circumstances. Changing funds, making insurance changes and in some cases changing employers or occupations may lead to gaps in insurance cover. Trustees will need to think about the insurance education and support it provides to new and existing members to avoid these consequences.
Consider this. The average employee in Australia will change jobs 12 times throughout their life, with an average tenure of 3.3 years. This means that each time they move jobs, they will need to check that the insurance cover they have in place for them at their default or ‘stapled’ fund is right for their risk as their financial burden changes. It is right to ask: how many people will do this if unprompted by their superannuation fund?
Improving member engagement with life insurance
In principle, giving members more control of their insurance makes sense when they are well informed. In practice, however, we know engagement is lacking, especially for younger members under 25 who do not receive automatic opt-out insurance cover.
Superannuation funds, supported by their insurers, need to be clear to members about the risks of insurance choices in a new ‘stapled’ superannuation system to ensure they make informed choices. Engagement strategies need to evolve so that members receive relevant communications, through their preferred channel, with appropriate supporting offers tailored to their circumstances. Insurance products will also need to support increasing personalisation of default insurance over a member’s lifetime as data and digital capabilities allow.
Members should also be well informed of the risks to insurance cover when switching funds. We want to avoid scenarios where members inadvertently cease their existing insurance, without understanding potential eligibility barriers into insurance within a new fund, particularly when we consider the interaction with other recent regulatory reform such as Protecting Your Super (PYS) and Putting Members’ Interests First (PMIF). Insurers and funds will need to work together to ensure eligibility terms are appropriately adapted where necessary.
Changes to the risk pool, pressure on sustainability and future benefit design
Given the recent changes to group insurance, there is already a challenge to make a fund’s insurance offer sustainable in the long term.
Our expectation is that stapling will require funds and insurers to focus more on sustainability, particularly on ensuring the member behaviour won’t adversely impact the claims experience.
With a member-led, opt-in model, we can expect to see a higher proportion of less healthy lives opting-in which will mean funds may consider tightening cover commencement terms, including more stringent At Work periods, lower Automatic Acceptance Levels (AALs), fuller underwriting and terms and conditions limiting accumulation of cover across funds, for example.
This is where data insights and a strong collaborative partnership with a life insurer becomes so crucial. Indeed, trying to ensure that a fund’s pricing and terms and conditions are all competitive will be more difficult, and uncompetitive insurance offerings may ultimately further accelerate the mergers we are seeing across the superannuation industry.
We believe funds will need a strategy that balances member acquisition without being overly competitive on insurance terms and conditions, which in turn may lead to uncompetitive premiums and therefore lower member acquisition volumes. Fund strategies will need to consider insurance design that allows for more personalisation for new members as opting-in allows funds to gain more information around their circumstances, and what opportunities exist for them to change their cover as they get older.
What about the product set being offered and the mix of TPD and IP cover? Funds should give deep thought to the respective claims philosophies that each benefit covers and how this is likely to optimise member outcomes at different life stages. Examples may be to reduce replacement ratios on IP or reduce TPD sums insured in line with broad needs across the membership base.
These changes make it even more difficult for trustees to comply with their obligations to ensure insurance arrangements are appropriate for certain cohorts. Insurers will need to support funds in ensuring benefit designs carefully consider how YFYS will change member demographics, and this is where understanding member behaviour will be critical.
Stapling won’t kill default cover in super, but we need to watch carefully
Default or automatic life cover inside superannuation is delivering value for members and must continue to be supported, but we need to make sure these benefits are not diluted.
The intent of stapling is right, but we must preserve the integrity of the system. It will require an increased focus and collaboration with funds and insurers around managing increased insurance risk for all parties, funds, insurers and most importantly the members. If poorly managed, these risks could accumulate, and members will be impacted.
The impacts won’t be immediately felt on 1 November, but it is essential for superfunds and insurers to continue to share ideas and information. Working together in this way is the best way to make sure we deliver for members both now and into the future.
