New Super Rules Could Impact Employee Insurance Cover

Employers Need to Adapt to a Changing Environment

Recent legislative, regulatory and demographic changes to Australia’s superannuation environment are causing some employers to question the long-term suitability of their existing default superannuation arrangements. However, many employers have not reviewed their default superannuation fund since they first selected a provider. In addition, 47% of HR professionals do not know or feel unsure about the implications of super stapling on their organisation.^[1]

47% of HR professionals do not know or feel unsure about the implications of super stapling on their organisation^[1]

New Reasons to Focus on Superannuation

The Australian Prudential Regulation Authority (APRA) performed its first performance test on MySuper products and released its findings on 31 August 2021.

The performance test assesses:

• Financial year administration and advice fees
• Costs and taxes charged
• 8 years (7 years only for 2021) of net investment performance

Thirteen Australian superannuation funds failed the first test. If a fund fails in two consecutive years, it cannot accept new members until it is able to pass the test. All members of the funds that failed the test were notified regarding the test result. The fact that many members have not taken any action has been a concern for APRA. In 2022, APRA will include ‘Choice’ products in their performance test with potentially more funds failing the new test.^[2]

With Your Future, Your Super legislation introducing superannuation stapling laws from 1 November 2021 and other previous legislative changes, including Putting Members’ Interests First and Protecting Your Super legislation, which removed default insurance for some members, there is also a concern that employees will not have adequate insurance cover. As the superannuation system is seen as complex, few employees take the time to consider whether the insurance that comes with their superannuation is appropriate for their needs and few take action to change providers or increase their cover.

Other Factors Impacting Employee Benefits

• Further Superannuation Guarantee (SG) rate increases
  SG rate increases from 10% per annum to 10.5% per annum on 1 July 2022 will continue increasing by 0.5% per annum to 12% on 1 July^[3].
• Market consolidation for scale
  A combination of regulatory scrutiny and race-for-scale in the superannuation industry has seen several large mergers with the biggest being Sunsuper and QSuper merging to form the Australian Retirement Trust. These major changes create different superannuation offerings in the marketplace.
• Employee trends
  Employees are becoming matters more aware of superannuation, including younger employees who may be interested in Environmental, Social and Governance (ESG).^[4] Technology is also driving higher engagement between members and superannuation providers via apps and websites that provide education and easy access to data and analytics. Fintech, through avenues such as microfinance, has also been able to provide niche offerings (such as Spaceship and Raiz) to younger employees and provide a platform geared towards engagement through social media. Engaged employees can drive employers to review the continued suitability of current superannuation arrangements.^[5]
• Superannuation in the media by way of budget and retirement sources
  Superannuation continues to be in the media spotlight, with changes that involve direct interaction of individuals, whether it is being able to withdraw funds from super during the pandemic in 2020 or first home buyers being able to withdraw their voluntary super contributions (which increases to a $50,000 limit from 1 July 2022). Therefore, more individuals may use superannuation as a tax efficient method of saving for their first home deposit.

Superannuation and Employee Experience

Employer default funds have been selected by the employer and many employees would see that as an endorsement of the fund. If an employer is currently contributing to one of the 13 funds that failed the test, they may feel responsible for reviewing the current superannuation provider to ensure it meets employees’ needs. In addition, if the fund fails the test again, the employer will be unable to enter new members into that fund.

The stapling legislation’s outcome is that only employees who do not have an existing superannuation fund are defaulted into the employer’s default arrangement, with others defaulting into their existing superannuation fund or another fund (which can be the employer’s default fund) of their choosing. Therefore, an employer who wishes for more of their employees to have a suitable superannuation arrangement needs to ensure their default arrangement is not only fit for purpose but that it is also attractive enough for employees with existing superannuation funds to want to change to the employer’s default fund.

With the possibility of employees having little or no insurance, particularly where they may not have automatic default cover or a very limited amount if not in an employer default fund, we believe employers should be concerned about the impact if one of these employees dies or becomes permanently disabled. There is also evidence that financial stress impacts employees’ productivity and presenteeism^[6].

As a result, some employers more proactive about ensuring their superannuation offering meets the needs of employees, which includes superannuation, insurance and financial wellbeing solutions.

The Impact of Poorly Performing Default Funds

It is now clear that a default superannuation offering may not be in the best interests of employees if a poorly performing fund (in terms of performance, pricing and servicing) is chosen as the default. An assessment performed every few years can help to align the employer’s default fund to the changing superannuation and employee demographics and preference landscape instead of a set-and-forget system that may not be fit for purpose longer term. In addition, making it fit for purpose can also reduce any reputational impact from the default fund providing poor retirement outcomes for employees.

An employer can choose to provide incentives to make its default fund more attractive to employees with pre-existing superannuation arrangements. For example, if an employer offers to pay super administration fees for employees, its likely to mean better retirement outcomes than if the employee paid the fees themselves. This could also result in more employees joining the employer’s default arrangement. A substantial increase in such member funds could allow the superannuation providers to offer better fees and insurance offerings in the form of rates, automatic acceptance limits and better than the MySuper default cover.

An employer can offer additional services through a suitable provider that can provide member education to allow their employees to make better decisions that will improve their retirement outcomes. This can be extended to financial wellbeing programs to give employees greater appreciation for the employer and provide greater productivity in the workplace. In addition, changing regulatory requirements mean regular audits are important to ensure employers’ processes comply.

Implications for Employee Insurance Protection

A consequence of stapling legislation from an insurance perspective is that there are broader impacts to member insurance protections that employers should review.

Prior to Your Future, Your Super legislation which became effective as at 1 July 2021 (stapling provisions were delayed to 1 November 2021) unless an employee made an active super choice, employees would automatically default into the employer’s nominated default super fund for payment of their superannuation contributions. They would also automatically receive any death and disability insurances held within that super fund subject to eligibility requirements which may depend on age or account balance.

The new super stapling element of the legislation means new employees will no longer automatically join their employer’s default super fund or receive any attached death and disability insurance cover offered through the employer default fund, unless they actively choose it for their superannuation contributions.

Employers currently funding insurances inside super as part of an employee benefits plan may need to consider how the employee experience might be impacted, and other implications that could arise when only some employees are a member of their default super fund. For example, it could leave employees uninsured when the intention is to more adequately insure them.

As well, employers will no longer know if employees outside their default fund hold insurances for these risks, or the extent to which employees’ entitlements to death and disability insurance are aligned.

Suggested Next Steps for Employers

• Compare your existing superannuation provider and default fund against the industry benchmark or similar superannuation funds
• Consider a tender, with shortlisted providers and transition to a new super fund
• Undertake a compliance audit to ensure the right amount has been paid in superannuation guarantee contributions at the right time, and review how you are communicating with employees about the superannuation guarantee increase
• Consider introducing a financial wellbeing program tailored to employees’ needs and including topics such as managing personal finances and empowering women with money matters

If you would like to discuss your superannuation or group insurance arrangements, please contact us.

References

[1] Aon’s 2021 Employee Benefits and Financial Wellbeing Survey
[2] APRA, Your Future, Your Super Performance Test, 31 August 2021
[3] ATO, Key Superannuation Rates and Thresholds
[4] CNBC, Millennials spurred growth in ESG investing, now all ages are on board, 21 May 2021
[5] University of South Australia, On The Record, 25 July 2020.
[6] The relationships between presenteeism, financial stress and medical costs