Thursday, 14 February 2019
Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018; Second Reading
I'm pleased to contribute to the debate on the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018. The bill contains a number of measures designed to ensure members do not have their superannuation balances unnecessarily eroded. These are measures that Centre Alliance supports. The bill prevents trustees of superannuation funds charging certain fees and costs exceeding three per cent of the balance of MySuper or choice products annually, where the balance of the account is below $6,000. It also prevents trustees from providing opt-out insurance to new members aged under 25, members with balances below $6,000 and members with inactive MySuper or choice accounts unless the member has directed otherwise. Importantly, the bill also requires the transfer of all superannuation savings with a balance below $6,000 to the Commissioner of Taxation if an account related to MySuper or choice product has been inactive for a continuous period of 13 months. It enables the commissioner to consolidate accounts that have been paid as unclaimed money, inactive low-balance accounts and lost-member accounts into an active superannuation account where the reunited balance would be greater than $6,000.
The erosion of super accounts is a significant problem with long-term consequences. Multiple accounts and default measures are a structural problem and a problem that this bill intends to address. According to the Productivity Commission's report, over a third of all super accounts are unintended multiples, an unintended but problematic consequence of the current default arrangement. The Productivity Commission estimated that there are approximately 10 million unintended multiple accounts, which cost members $1.9 billion a year in excess insurance premiums and $690 million in excess administration fees. These are staggering numbers.
I note the bill has in-principle support from various stakeholders, with most criticism being levelled at the scope and application of the changes to the default insurance. The Bills Digest sets out some of the concerns raised by stakeholders, including Industry Super Australia, the ACTU, AIAA, TAL and Rice Warner. Some of these concerns include potential negative unintended consequences such as young people being underinsured, given people under the age of 25 are not likely to opt in; low-balance account holders who are still making insurance contributions and still have insurance needs being opted out; and people who work in high-risk occupations finding it difficult to obtain appropriate measures of insurance, because superannuation funds may be the only option for these people. Whilst I acknowledge these concerns, the bigger concern for me is the impact that the current default insurance arrangement has on people's retirement savings.
The erosion of members' balances through unnecessary fees, insurance premiums, delayed and unpaid superannuation, trailing commissions and suboptimal tax management was examined in detail by the Productivity Commission. As I mentioned earlier, the Productivity Commission found that unintended multiple accounts cost members $2.6 billion a year—that's what it costs the members. This is made up of $1.9 billion in excess insurance premiums and, as I said before, $690 million in excess administration fees. That's around $7 million a day being siphoned from workers' accounts to banks, super funds and insurance companies for pretty much nothing, certainly no benefit to the worker.
I would like to place on record my disappointment at the obstacles the Senate has had to overcome in order to pass this bill. It is clear that the status quo is indefensible. While the crossbench battle with amendments and intense lobbying in relation to the opt-out insurance charges—changes that are beneficial for the bulk of young workers—insurance companies are quite happily skimming millions of dollars in premiums.
Superannuation funds aren't innocent bystanders in all of this. They are raking in administration fees from unintended multiple accounts. Ironically, the funds are prohibited from charging different fees based on the account balance of the members, demonstrating why this bill needs to pass. I've seen analysis that shows that the 30 biggest superannuation funds in Australia are raking in $587 million in administration and investment fees from around 6.3 million accounts that have a balance of less than $6,000. That's a scandal. The figures are worth repeating: over six million accounts that have a balance of less than $6,000 are being charged over $587 million a year in fees. But wait—there's more! Of this, $405 million in fees is being deducted from the 4.6 million accounts that have a balance of less than $1,000 every year. That's an effective fee rate of over eight per cent across the 30 funds.
Not surprisingly, some of the worst offenders are retail funds. IOOF has around 77,000 accounts with a balance below $1,000 and collects approximately $10 million in fees from those accounts each year. With administration fees of $117 and 0.35 per cent of the account balance per annum, plus indirect costs of 0.74 per cent, you are left with an effective fee rate of over 12 per cent for an account with a balance of $1,000. Then we have AMP, which has around 1.1 million accounts with a balance below $1,000 and collects approximately $111 million in fees from those accounts each year. With administration fees of $90.84 and 0.29 per cent per annum, plus investment fees and indirect costs of 0.72 per cent, you are left with an effective rate of around 10 per cent for an account with a balance of less than $1,000.
Industry and not-for-profit funds aren't immune to collecting exorbitant administration fees from low-balance accounts either. Rest holds around 400,000 accounts with a balance below $1,000 and collects approximately $30 million in fees from those accounts each year. That's $30 million that could be in workers' superannuation funds. With administration fees of $67.60 and 0.1 per cent per annum, plus investment fees and indirect costs of 0.76 per cent, you are left with an effective rate of around 7.5 per cent for an account balance of $1,000. Hostplus holds around 278,000 workers' accounts with a balance below $1,000 and collects approximately $24 million in fees from those accounts each year—for some pleasure, I guess. With administration fees of $78 per annum, plus investment fees and indirect costs of 0.1 per cent, you are left with an effective rate of around 8.8 per cent for an account with a balance of $1,000.
I note the schedule relating to fee caps has the broad support of the industry, but I think it's most important to highlight just how much has been gouged from members' accounts that have low balances, and how much will continue to be gouged if this bill does not pass. Delaying this bill sends a message that it's okay for members to have their accounts raided with exorbitant fees and unnecessary insurance premiums. The reason for the delay is a change to the default opt-out insurance arrangements, arrangements that insurance companies and superannuation companies have been benefitting from quite comfortably since 2013. Schedule 2 is the most contentious part of the bill, but in my view it is not so contentious that it should be holding up the passage of the bill.
Insurance and superannuation dates back to the 1950s and has gradually changed to the arrangements we now have. The current default arrangements were introduced by the Labor government in 2013 following the Cooper review in 2010. The end result was a mandatory requirement for funds to provide life and TPD insurance on an opt-out basis in all MySuper products. The Productivity Commissioner found that these arrangements have led to 'a litany of problems, which is in part evidenced by insurance matters accounting for over a third of member complaints against superannuation funds'. Issues include a lack of awareness that insurance is included in superannuation—the kind of stealth operation I used to conduct on submarines; you do things and no-one knows what you're doing, except, unfortunately, the worker loses. Issues also include complexity and lack of comparability of insurance products, excessive balance erosion, and account proliferation resulting in many members holding multiple insurance policies, some of which they would be ineligible to claim against
I want to put on the record that I recognise the benefit of having insurance inside of superannuation, including on a default opt-out basis. However, default opt-out insurance must provide value for money for all members; not just a particular cohort. Inappropriate cross-subsidisation, not enough funds tailoring their insurance and multiple accounts are some of the factors that contribute to workers, especially young and low-income workers, not getting value for money from their insurance. Claims that the proposed changes to default insurance would lead to large increases in insurance premiums strongly suggest that young workers and those who have inactive accounts or small balances are cross-subsidising everyone else. I'm not convinced that a healthy, non-smoking 23-year-old female worker should be cross-subsidising a 53-year-old overweight male who smokes a pack of cigarettes a day, but apparently that's how insurance is meant to work.
As the Productivity Commissioner correctly pointed out, automatic life insurance cover for young members without dependants is difficult to justify. The Productivity Commissioner also made a draft finding that the younger members and those with intermittent labour force attachment—groups which commonly have lower incomes—are more likely to have policies of low or no value to them. I acknowledge that the Insurance in Superannuation Working Group has been proactive in developing a code of practice, and I welcome this as a first step, but it falls short of what is needed to effectively deal with deficiencies in the current arrangements for insurance in superannuation. The draft that was released for consultation in 2017 was substantially watered down and is no longer intended to be binding and enforceable. The code does not go far enough, and I'm sceptical that it ever will.
This is why legislative intervention is necessary. While the funds and insurance companies point to case studies where a worker aged under the age of 25 was injured and would not have been covered were it not for their insurance, it is important to remember that this is not a common occurrence. Default opt-out insurance should be designed with the majority, not the minority, in mind. This is exactly what AustralianSuper have done. And I think they sum it up best on their website:
We're changing the starting age that basic cover is automatically provided because we believe members under the age of 25 are at greater risk of super balance erosion—and generally have lesser insurance needs.
That's because younger members are less likely to have children or other dependants or significant debt. They generally have lower super balances and working patterns may be casual or part time. There is also the likelihood that younger members will earn significantly lower salaries than older members.
We believe that younger members may be better served by devoting all of their super savings to their retirement and having the option to apply for cover if they need it.
I think that sums it up well.