The Productivity Commission has taken a deeper dive into insurance inside superannuation and cast doubt into the sector's ability to help the Government alleviate social security payments.
Releasing a supplementary paper to its May draft report, the Commission said it undertook its own modelling into the fiscal cost and benefits of group insurance that counters research from KPMG and Rice Warner.
The paper cited research from KPMG which stated if the current insurance in superannuation system continued to operate over the next 10 years, this would free the Government of outlays between $650 million and $1.85 billion in the absence of default group insurance.
Separately, Rice Warner analysis found that removing insurance from superannuation would result in a net cost to the Governments of about $1.66 billion per year.
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The Commission commented that KPMG's research is based on gaining fiscal benefits associated with income protection insurance and additional tax revenue on insurance payouts. Rice Warner's analysis on the other hand is focused on TPD insurance, the Commission said.
Both analyses are "partial" as neither considered the effects of super balance erosion on Age Pension eligibility, it said, adding the fiscal impact of group insurance is "not mechanistic nor straightforward," it said.
Based on its own calculations, the Commission argued claim payouts for some members may reduce eligibility for social security payments, primarily Disability Support Pension (DSP) payments. Additionally, super balances eroded by insurance premiums lead to greater Age Pension payments for some members.
Taking tax implications into account, the Commission said insurance premiums reduce super savings and thus reduce the tax collected on super earnings - this increases the fiscal costs of insurance in superannuation, it said.
In its May draft report, the Commission highlighted six major recommendations to:
- Make life insurance for young members aged under 25 years old opt in only;
- Cease insurance on accounts without contributions for 13 months unless members expressly choose otherwise;
- Require funds to publicly document rationales on the appropriateness of cover and the balance erosion trade-off;
- Make super funds adopt the industry code, particularly if MySuper is offered;
- Establish an ASIC/APRA taskforce to monitor code adoptions, compliance and development (including providing guidance); and
- Launch an independent review of insurance in superannuation that's commissioned within four years to evaluate initiatives and consider necessary policy intervention.
Of the 12 million Australians insured for life, TPD and income protection via their superannuation, the Commission estimates 17% of these members have more than one superannuation account with insurance cover.
The amount members pay for insurance premiums vary widely; some pay an average $300 per year while others pay as much as $2000 per year.