Federal Budget 2018: Kenneth Hayne should probe super fees, insurance

Disclosures in the federal budget about excessive superannuation fund charges imposed on low income earners and younger members should be brought to the attention of commissioner Kenneth Hayne for further investigation.

Hayne should also have a look at insurance cover in super given that it is inappropriate for younger members with low balancesand multiple accounts to be paying life insurance premiums.

These two profitable areas of the retirement savings system have been in need of reform for years but vested interests have fought to keep the regulators and government at bay.

But on Tuesday night financial services minister Kelly O'Dwyer belled the cat on the fee gravy train earned from low income earners and also the unwarranted life insurance premium bonanza for the five companies that control 90 per cent of the $5.7 billion a year group life market.

The first phase of Morrison's tax cuts helps 4.4 million Australians but the two main measures introduced by O'Dwyer will help at least 5 million people and have a lasting impact on their ability to boost the compound returns on their retirement savings.

O'Dwyer's main measures are a 3 per cent cap imposed on administration and investment fees on low balance accounts, a ban on exit fees when leaving a super fund, the introduction of opt-in insurance for low balance accounts, inactive accounts and the accounts of new members under 25.

As expected the leading companies in the group life insurance industry and their paid consultants have pushed back hard against the life insurance changes.

But Chanticleer wonders if this is because O'Dwyer's crack down could have serious implications for the complex and opaque financial engineering that underpins many group life schemes.

There is very little public disclosure of how group life schemes work apart from the evidence unearthed at a parliamentary joint committee inquiry into life insurance. But the majority of super fund members would have no idea about the way these schemes work.

The group life schemes involve intricate profit smoothing arrangements and the questionable movement of money backwards and forwards between super funds and suppliers of group life cover.

Chanticleer believes the schemes actually cannot be regarded as genuine insurance cover because the contractual arrangements between the funds and the life companies virtually guaranteed a set profit margin.

It is more than slightly bizarre that if the claims experience is worse than expected a fund will pay money to the group life company to cover the cost of that worsening in claims experience. If claims experience is better than expected, the group life insurer pays money back to the fund.

This leads to the creation of somewhat opaque insurance reserves, which are used to meet payments back to the group life insurer. Of course, this system may not work too well if all the younger members paying for insurance suddenly decide they no longer want to opt-in.

It is true that life insurance fulfils an important role in society by pooling the financial strength of many to cover the cost of unexpected events including death or permanent disability.

But it is inappropriate for younger super members to have insurance when they have no dependents, no mortgage and no contingent liabilities.

Their first priority ought to be maximising the amount of money in savings which can earn compound returns for retirement.

Insurance in super became automatic for super fund members after it was mandated as part of the MySuper changes introduced in 2013 by Bill Shorten when he was financial services minister.

Life insurance is worthy of investigation because it involves people being "sold" a financial product that is not suited to their circumstances.

The clear disconnection between life insurance in super and the insured members was summed up well by Treasurer Scott Morrison in his budget night speech.

"We will stop superannuation funds from forcing young people under 25 or with low balances to pay for life insurance policies they have not asked for or do not need," he said.

Paying for something you have not asked for or do not need has parallels with the fee-for-no service issues at AMP which were exposed at the Hayne inquiry.

Automatic life cover has been a bonanza for life companies partly because there are so many duplicated super accounts in Australia. Treasury estimates there are 9.5 million low balance accounts in Australia but about 3.5 million of these are duplicates.

On Wednesday TAL, which is the second largest provider of group life cover, said the carve-out of young people from insurance and the proposed changes to insurance for members with low balances will have a significant impact, particularly on those in higher risk occupations and those with below average salaries.

CELO Brett Clark said: "TAL is concerned about the proposal to change arrangements for insurance in superannuation from opt-out to opt-in for under 25s. For blue collar and higher risk occupations it is important that Australians have the appropriate level of insurance."

It was Clark who warned the Financial Services Council in April against pushing ahead with its plan to have an enforceable code of conduct in life insurance.

The FSC, led by Sally Loane, backed off after being told by Clark that he was worried that if the FSC went ahead with an enforceable code it would "fracture" the super industry.

O'Dwyer was extremely disappointed late last year when the industry decided on a voluntary code. It used the excuse that it had legal advice that such a code would conflict with the duties of super fund trustees.

Chanticleer understands the lobby groups and bodies representing industry super funds were very much against the implementation of an enforceable code.

It was very late in the 13-month long deliberations of the Insurance in Super Working Group (ISWG) that Industry Super Australia suddenly withdrew from the process.

A report prepared for the ISWG by KPMG, which was paid about $450,000 for its various consulting work found that low income earners, females and younger members could boost their retirement savings if they stopped paying insurance premiums.

"The key finding of this report is that income level has the largest effect on the impact of default insurance on retirement compared to age or gender," KMPG said.

"For example, the impact on the retirement savings for females aged 35 to 39 earning between $18,200 and $37,000 is 14 per cent, compared to 44 per cent for females of the same age earning less than $18,200."

The failure of the industry to agree on a sensible way forward caused the minister to act. It is a good example of action when it was needed.

Not only are low balance accounts paying for insurance they must pay very high fees for administration and investment. Treasury analysis released on Tuesday shows the median annual administration and investment fees on MySuper accounts with balances of $1000 are nine per cent of the balance.

It should not take Hayne long to conclude that these charges are over the top and fall well below community standards and expectations and are worthy of investigation. Fees of this kind would eat away at member balances until they disappeared.

O'Dwyer's move to cap administration fees on low balance accounts at three per cent is smart and long overdue. Latest data shows that there were around 13 million inactive super accounts or accounts with balances below $6000, which is about half of all the accounts in the super system.