KPMG believes its report into the costs and benefits of default group insurance in superannuation will inform debate on this important public policy issue. The report was prepared at the request of Industry Super Australia and the Insurance in Superannuation Working Group (ISWG).
The conclusions of KPMG’s analysis were that overall, the default group insurance in super 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 to a significant degree by retirement benefits erosion and specific measures are needed to help those people.
Hoa Bui, KPMG Partner, said: “The current system facilitates greater insurance coverage for a larger part of the population, which helps to reduce Australia’s long-standing underinsurance issue. Many more people are covered, and to a much greater degree, than if they relied on government support. Death benefits also allow the surviving spouse, often female, to carry on working rather than having to leave the workforce and look after children – an important societal and economic benefit.”
The KPMG report finds that income level is the key factor to 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.
Hoa Bui said: “Options often discussed such as the removal of default cover for young people may not have the intended effect when examined over a person’s working lifetime. Further, any removal of cover can be expected to cause premiums to rise for the rest of a fund’s members.
We are also not convinced that an opt-in regime would necessarily solve the key problems, and could well remove or detract from the main benefits of the current system.
“The overall reduction to retirement benefits for members is moderate – on average, 6.2 percent of the superannuation guarantee contribution and less than 1 percent of salary. But the data confirms that a relatively small proportion of members are disproportionately affected.”
To address these issues, KPMG proposes alternatives for policymakers to consider:
But, importantly, the KPMG report finds that there are many additional benefits of the current system:
Hoa Bui said: “Our analysis suggests that making targeted rather than wholesale changes may be more effective in solving the issues that concern the community. The government might also consider, on the grounds of rationale and costs, whether the components of disablement cover are all essential. Is it cost-effective to provide both a lump sum and income replacement on disablement – and are Death, TPD and IP (income protection) cover all necessary for default group insurance cover or could TPD and IP be interchangeable?".
She added: "It is important to bear in mind that for the majority of Australians, government benefits are not an adequate substitute for insurance. The amount available to members who become disabled or for the families of those who die, are not sufficient to sustain their existing lifestyles. The evidence suggests that without default group insurance, many would simply lack any cover. Taking out insurance communally rather than individually is more cost-effective, and if the rough edges of the current system are smoothed, this may be the best outcome."
KPMG adopted an evidence-based approach to the issue, using publicly-available industry-level data from the ATO, APRA and major superannuation funds. We analysed the benefit design of default superannuation funds and a 2 percent sample tax file containing 258,744 records. The same methodology and modelling was used to assess the impact on retirement benefits of the current system continuing, compared to potential changes to the system.
Some of the possible modifications to the super system considered in the report, to combat the problem of erosion of members’ retirement benefits included:
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