Why you could lose your insurance on your super fund?

Ross Greenwood speaks to Assistant Minister for Superannuation Senator Jane Hume as Super fund members will lose their insurance cover on inactive superannuation funds from next month.

Ross Greenwood: I want to take you now to some of the changes that will occur in superannuation which are key from July 1. So we’re talking only a week’s time. Some of them are really important, but there are some unintended consequences of what are otherwise very good ideas to try and reduce fees for many Australians with their superannuation accounts. One of the problems in Australia is people having multiple accounts. When you have multiple accounts, you have multiple fees that come out of those super funds.

As a result, if you have less than $6,000 in an account, and you are not an active member, in other words, contributions not being made, the Tax Office will take that money and will try and find and match it up with your primary account. In other words, as a result of doing this, will stop you having to have two sets of fees or even two sets of insurance.

Here’s another thing as well. If you have an inactive account, and I’ve got one of these, so I’ve got an industry fund which is in inactive account. It’s got a few bob in it, I’m going to tell you, but the fact of the matter is I don’t contribute to that account so it would be considered to be inactive. I deliberately hold that account, in my case, because my insurances are paid by that fund, because they’re cheap. The industry funds are generally cheaper when it comes to insurance.

From July 1, because it’s inactive, if I do nothing, the insurances in that fund will be canceled. If I had an exit on July 2, I would not be covered and that’s a problem. The funds have basically been in touch with members saying, “Hey, you’ve got to get in touch with this if you want to do something.” So I’ve been in touch with my fund, but I have a separate fund, which is a do-it-yourself fund, that I make the contributions to that, if you like, is my active fund. I thought I’d bring in here to help us out. Senator Jane Hume is the Assistant Minister for Superannuation, Financial Services and Financial Technology. She’s on the line. Jane, many thanks for your time.

Interview with: Jane Hume, Senator, Assistant Minister for Superannuation

Jane Hume: Good to be with you, Ross.

Ross Greenwood: The issue, as I see it, is these are all good ideas to try and reduce the number of superannuation funds that people have, but the unintended consequences, the bureaucracy of trying to make certain that people are not inadvertently missing out on coverage that they might so desperately need from July 1.

Jane Hume: Let me take you a step back first, Ross. One of the things about the superannuation system, and it’s a terrific system, $2.8 trillion of Australian savings are in the superannuation system there to be spent for members in their retirement. The problem is the system at the moment is inefficient. It quarantines nearly $1 in $10 for potentially up to 40 years.

It’s imperative from a government perspective that we make this system as efficient as possible. Productivity Commission, as well as Commissioner Hayne, and previous reviews before that, have identified that high fees, that duplicate accounts, that underperforming funds, persistently underperforming funds, and unnecessary insurance, are part of what makes this system inefficient. So from next week if your savings are being eroded through insurance premiums in lost or forgotten accounts, that cover will end.

APRA has issued guidance to clarify the laws for those superannuation providers, and they are getting in touch with their members to find out whether members want to continue on with their insurance or not. Some members, even in inactive accounts, they will want to continue on with their insurance. It’s really important that members sit up and take notice about which of their accounts they wanted to keep their insurance in.

Ross Greenwood: The idea of this is, as the Productivity Commission in the past has noted, Australians could be paying $2.6 billion a year in fees that they otherwise should not have to pay simply by having multiple accounts or insurance. It’s not necessary all these types of things. The idea, as you say, is to try and clean the system up, to bring people down to one fund, or indeed, if they need to have two funds to make certainly conscious that they’ve got two funds and two sets of fees, but it’s to actually improve the efficiency of the overall superannuation system.

Jane Hume: That’s exactly right. We want people to consolidate, ideally consolidate into one single fund, so they only get hit with one set of fees and have one insurance contract. Often, you’ll find if you’ve got duplicate funds, even if you’ve got two insurance contracts, you might only be able to claim against one, which means that you’re paying premiums for insurance that you can’t even claim on.

Ross Greenwood: That’s a really good point. The other one also, a couple of small things for people who might have kids or something like that. Accounts under $6,000, they’re going to have fees kept at 3%, that’s to stop accounts being eroded by fees, and for many of those people also they will not have to have insurance in those particular funds.

It’s 24-25 year old with insurance when they don’t have a mortgage and don’t have kids is almost meaningless to them. They’re far better off trying to build up their superannuation, and they take at the insurance at a time when suddenly they’d got the obligations, the responsibilities, through debts or families. That does mean the people take on insurance.

Jane Hume: Yes, actually that legislation didn’t entirely pass in full, and we’re going to reintroduce that back into the Senate when parliament resumes. What we want to make sure is that people that are under the age of 25 don’t have to spend money on the premiums for insurance that they will never claim on. Although, they will very rarely claim on, because the way that insurance works is that younger people that don’t claim essentially cross-subsidize older people who do claim, and we didn’t think that that was fair, that young people were having trouble building up a critical mass in their superannuation balances before their balance is eaten away, eroded by fees and by insurance. So that’s something that we’re going to fix.

Ross Greenwood: There’s another thing also that’s been pretty important that is to improve competitiveness across the sector. The whole superannuation sector, banning exit fees, it’s been a really smart idea. It suggests that there is around $52 million a year in exit fees. By banning exit fees, it means a person, if they’re not happy with their super fund, can get up and leave and go somewhere else without feeling as though there’s a financial penalty on them.

Jane Hume: Yes. That’s exactly right. Often people will find themselves in a fund that is underperforming. It might be underperforming its competitors or it might be underperforming even its own benchmarks. Members should have the opportunity to be able to pack their bags and move to a fund that is outperforming without being slugged with unnecessary penalties for doing so. That’s a reform that has gone through.

Ross Greenwood: In your job as the assistant minister for superannuation, financial services and financial technology, I’ve got a hobbyhorse here that we have raging on behalf of many of our listeners, and this is pensioner deeming accounts. Now at the moment, the pensioner deeming rate, I’ll explain this to people is 1.75%. It’s assumed that you’ve earned it, whether you own it or not. For pension purposes, the government assumes that you were in 1.75% on the first $50,000 of a single customer’s total financial investments or the first $83,400 of a pensioner couple’s total financial investments.

Now, beyond that, the rate rises to 3.25%. What we’re hearing from large numbers of our audience, and people outside as well, is if I go and try and get a term deposit, there’s no way known on God’s earth, I can earn 3.25% interest on a deposit. If you’re struggling to get 2% these days, and yet we’re judged by the government, which reduces our age pension as earning 3.25%. Surely fairness, the fair go for Australians means that you have got to as a government consider that pensioner deeming rate.

Jane Hume: Yes. I hear the frustration in your listeners’ voices on this particular issue, particularly when returns are so low, interest rates are so low, and returns are really hard to come by. Obviously, these rules were set at a time when returns were considerably higher.

The Productivity Commission did a review of the efficiency of the superannuation system, and one of its recommendations was that we undertake a retirement incomes review that would better understand interaction of superannuation system with the age pension, and also more broadly, the impact of superannuation on national savings.

Now, the treasurer has said that he is very open to that idea, and it’s something that we’re going to get underway. I can assure your listeners that it is something that is on our radar.

Ross Greenwood: Okay, good stuff. Senator Jane Hume is the Assistant Minister for Superannuation, Financial Services and Financial Technology. The other thing I can say to you, Jane, is you’ve got to get cracking on this one because there are a lot of people out there struggling right now on pensions who are having those pensions reduced as a result of those pensioner deeming rates. We appreciate your time in the program this evening.

Jane Hume: My pleasure, Ross.


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Image source: 2GB

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