Loss of Default Insurances – how are your employees impacted?

Superannuation and employee insurances – the real situation?

Changes to legislation are further reducing the number of Australians who automatically get death and disability insurance cover as part of their employer’s default superannuation arrangements.

In short, the percentage of the Australian workforce without death and disability insurance cover is set to grow significantly from 1 April 2020 [1].

What Insurance do my employees currently receive through super?

The ‘Choice of Fund’ legislation [2], introduced 1 July 2005, allows many employees the option to choose a superannuation fund rather than join their employer’s default fund. If an employee does not choose a super fund, an employer must pay the employee’s superannuation contributions into a ‘MySuper’ superannuation account (within the default fund). By law, MySuper superannuation accounts must provide both Death as well as Total and Permanent Disablement (‘TPD’) insurance on an ‘opt out’ basis. Superannuation trustees are free to choose the level of default cover they deem appropriate for their members (subject to prescribed guidelines). As such, there is a significant variance between funds in terms of the default cover they provide. Superannuation trustees are not required to provide income protection insurance as part of their ‘MySuper’ default insurance arrangement (and indeed, a great many do not) [3].

What are the changes to legislation?

The Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 (‘PYS Bill’) sought to cancel insurance cover in superannuation for members who met one or more of the criteria below:

1. any person under 25; or
2. any person with a superannuation account balance below $6,000; or
3. any person whose superannuation account had become ‘inactive’ as determined by a test of whether the account had received a contribution in the last 16 months.

Only item ‘3’ became law in early 2019 and came into effect from 1 July 2019. Insurance cover can be maintained if the member makes an election to the superannuation fund or makes regular contributions to their account.

Items ‘1’ and ‘2’ were postponed to later in 2019 and became law in October 2019 as part of the Treasury Laws Amendment (Putting Members’ Interests First) Bill 2019 (‘PMIF Bill’), in what was effectively an extension of the PYS Bill. The requirements of ‘1’ and ‘2’ take effect from 1 April 2020. Note: Default cover provided to these cohorts of members must be provided on an ‘opt-in’ basis only. That is, automatic cover is still available, but the member must actively make an election to the superannuation fund to provide cover. If the employer pays for the cost of their employee’s insurance in superannuation (in addition to their legal superannuation guarantee contribution obligations), then the legislation does not apply.

Can I rely on superannuation to protect my employees?

The short answer to this question is ‘no’ as these examples show:

• John is a 21 year old who is about to finish is apprenticeship. He is playing rugby on the weekend when he is seriously injured in a tackle resulting in quadriplegia. He will need considerable on-going medical care, major alterations to his place of living, and is unlikely to ever work again. Although John had joined his employer’s default superannuation fund, under the changes taking effect from 1 April 2020 he would not have automatically been provided with insurance cover as he was under 25. John was not familiar with superannuation and the need for insurance. As such he had not elected to take out cover with his super fund. John will most likely be reliant on the State and family for financial support for the remainder of his life.
• Jane, has recently been recruited by FakeNews Media, and is achieving superb sales results for the organisation. Sadly, 7 months into the role, Jane is diagnosed with breast cancer and will need a considerable period off work. Although she was in the company’s default superannuation fund which has income protection, her superannuation account balance had not yet reached $6,000. She had not understood that automatic insurance cover did not commence until her account balance reached this amount. Her employer is now faced with the dilemma of continuing to pay her (while also looking for a replacement) or to cease paying her once her holiday and sick pay runs out.
• Lucy, aged 29, has been with her company for 7 years and has taken 24 months of maternity leave to care for her newborn. Lucy is a member of the company default superannuation fund. Tragically, 22 months into her maternity leave Lucy passes away from a brain aneurysm. Consistent with her company’s maternity leave policy, Lucy has been paid for the first 3 months of maternity leave and thus superannuation contributions were paid for this period. Unfortunately, her account has been inactive for longer than 16 months at the time of her death and, while the superannuation fund had written to her, Lucy had not responded and so her death and TPD insurance was switched off. Lucy passed away with no death insurance cover leaving her partner with a 22 month old child to raise whilst trying to earn a living.

What can I do to protect my employees?

There are essentially two options available to protect an employee:

• Rely on the superannuation fund to educate superannuation fund members (your employees) on the importance of insurance.

To be effective this requires the member to be sufficiently engaged with their superannuation (and related insurance needs) to take the necessary action to gain the insurance they need (or at least a basic safety net). Sadly Australians, particularly the younger cohorts, are generally disengaged with their superannuation and may be unlikely to take the action they need to.

• Implement an employer funded arrangement via a ‘group insurance’ arrangement.

This allows you, as the employer, to take out a policy to provide coverage for all your employees (or a subset if you wish to reduce your costs and limit those to whom cover is provided). There are multiple ways to configure the cover – from a low cost, basic ‘safety net’ through to comprehensive death, permanent disability and temporary disability.

These changes take effect 1 April 2020. Please reach out to Aon to discuss your circumstances and how you can best protect your valued employees.

[1] https://www.ricewarner.com/putting-members-interests-first-bill-will-it-work/
[2] Superannuation Legislation Amendment (Choice of Superannuation Funds) Act 2005 (Cth)
[3] KPMG Report: Review of default group insurance in superannuation