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Australia: New law modifies risk benefit provision for certain retirement superannuation fund members

Retirement|Future of Work

November 18, 2019

Certain DC superannuation fund members will lose risk benefit coverage unless they actively opt in, which could have major implications for employers.

Employer action code: Act

It is typical practice for the superannuation fund used for accumulating retirement savings also to provide risk benefits on death and disability, with members able to opt out of risk benefit coverage. The risk benefits are insured, and premiums are funded through retirement account deductions. The Treasury Laws Amendment (Putting Members’ Interests First, or PMIF) Act 2019 moves such risk benefit coverage within defined contribution (DC) superannuation funds from an opt-out basis to an opt-in basis for members who are under age 25 or whose account value is small. The government’s intention is to avoid the inappropriate erosion of members’ retirement income. Arguably, insurance is less important for younger employees with no debt or dependents. Further, for those on low incomes with slowly growing account balances, an insurance premium deduction slows the rate of savings accumulation. Under the current opt-out approach, inertia or poor engagement is common, and so many fund members take no action.

Key details

  • The PMIF Act will force DC superannuation funds to change insurance benefit provision for fund members who are under age 25 or whose accumulated retirement account balance is under 6,000 Australian dollars. Insurance will become opt-in rather than opt-out. This new requirement will apply to all existing fund members with balances less than 6,000 Australian dollars on April 1, 2020, and to new members under age 25 from April 1, 2020. Current members under age 25 are not affected (provided they have a balance of at least 6,000 Australian dollars).
  • There are some exemptions to the new requirement. It will not apply to defined benefit arrangements. There is an exemption for employees in dangerous occupations, although the details of what this means and how it will work are not yet clear. Finally, where the employer pays for the premium, rather than it being deducted from the employee’s balance, the changes do not apply.

Employer implications

The ramifications for funds and insurers are significant. Product design, risk management against selection risk, pricing, reserving and communication documentation must all be reviewed. We expect that even fund members who are older than 25 and have more than 6,000 Australian dollars accumulated will see premium increases applying.

For the bulk of employers, who neither provide defined benefits nor pay for the insurance costs, the main ramification will be that insurance for newly hired employees from the day they join the default fund can no longer be assumed. Obtaining insurance will require either specific opt-in action by the employee or the passage of time until they attain age 25 and have more than 6,000 Australian dollars accumulated. The risk of uninsured deaths or disabilities in the workplace will depend on the characteristics of the employees and the work environment. Further, the risk controls imposed by the default fund product provider may also mean that risk cover is not necessarily automatic on attaining age 25 and a 6,000 Australian dollar balance. Cover could easily be subject to more stringent underwriting given the newly introduced anti-selection moral hazard.

Employers should take the following actions:

  1. 01

    Review internal policies (and new hire material) about the provision of risk benefits. If necessary, consider what the employer believes its obligations are in relation to risk benefits for employees.

  2. 02

    Find out the default fund's anticipated risk benefit design changes.

  3. 03

    Establish the necessary changes to procedures and communications to employees, particularly through the new hire process.

  4. 04

    Consider the risk ramifications of uninsured deaths or disablements in the workplace. In the event of material risks — legal, financial or reputational — of uninsured deaths or disabilities, alternative insurance programs may be warranted for the workforce.


Senior Director, Retirement

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