House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Revenue and Financial Services, Minister for Women and Minister Assisting the Prime Minister for the Public Service, the Hon Kelly O'Dwyer MP)

Chapter 3 Insurance for superannuation members

Outline of chapter

3.1 Schedule 2 to this Bill will prevent trustees from providing insurance on an opt out basis to members who are under 25 years old and begin to hold a new superannuation account on or after 1 July 2019, to members with account balances below $6,000, and to members with inactive accounts.

3.2 In all circumstances the member may opt into insurance offered by the trustee by making a direction to the trustee.

Context of amendments

3.3 Currently, many superannuation trustees automatically provide insurance cover to members upon joining the fund. This arrangement is commonly referred to as 'default insurance' and requires a member to 'opt out' of insurance if the member considers the insurance to be inappropriate for them.

3.4 Default insurance is part of the legislative framework for MySuper products. That is, the MySuper settings generally mandate the provision of death and total and permanent disability insurance on an opt out basis, and also allow income protection insurance to be provided on an opt out basis at the trustee's discretion. Some choice products also include default insurance.

3.5 Under the insurance covenant in the SIS Act, trustees must only offer insurance that does not inappropriately erode the retirement income of members. Despite the covenant, insurance premiums are a key driver to the erosion of superannuation savings for certain member cohorts.

3.6 Young members, members with multiple and/or inactive accounts or products, and members with low balances can face significant erosion due to insurance premiums.

3.7 In addition, as a result of the default nature of the insurance and of members being disengaged, many members may not be aware that insurance premiums are being deducted or that they have multiple insurance policies. This leaves the member's retirement savings at risk of being significantly eroded by those premiums.

Summary of new law

3.8 From 1 July 2019, if a person holds insurance within superannuation, and certain criteria is met, the trustee may only provide insurance on an opt in basis.

3.9 For existing members, trustees must notify the affected members on or before 1 May 2019 of the changes so as to give these members an opportunity to elect to continue with their insurance cover beyond 1 July 2019 through their fund.

3.10 The changes do not apply to existing members under the age of 25, where the person's account has a balance of $6,000 or more and the account has not been inactive for 13 months.

3.11 The changes do not replace the existing broader obligations that apply under the SIS Act, such as the insurance covenant, nor do they affect the MySuper insurance settings for those unaffected by the changes.

Comparison of key features of new law and current law

Detailed explanation of new law

3.12 Currently, under section 68AA of the SIS Act, trustees are required to provide MySuper members with death and total and permanent disability insurance cover on an opt out basis, unless a reasonable condition applies.

3.13 There are no similar requirements for members who hold a choice product but some trustees of choice products choose to provide insurance on an opt out basis.

3.14 Schedule 2 of this Bill amends the SIS Act to prevent a trustee from offering or maintaining default insurance cover for certain members unless the member has elected to obtain or maintain the insurance provided.

3.15 The circumstances when a trustee cannot provide opt out insurance for a member of either a MySuper or choice superannuation account are when:

•

the member is under the age of 25 and begins to hold the superannuation account on or after 1 July 2019;

•

the balance of the account is less than $6,000 and has not been $6,000 or more on or after 1 April 2019; or

•

the account has been inactive for a continuous period of 13 months or more.

[Schedule 2, item 1, subsections 68AAA(1), 68AAB(1) and 68AAC(1) of the SIS Act]

3.16 Where a member meets one of the criteria set out at paragraph 3.15 the trustee may only provide insurance where the member has elected to obtain or maintain the insurance cover. [Schedule 2, item 1, subsections 68AAA(2), 68AAB(2) and 68AAC(2) of SIS Act ]

3.17 From 1 July 2019, the trustee must ensure that each member affected by these amendments can direct the trustee to take out or maintain their insurance cover. Directions by members in respect of their insurance must be made in writing. [Schedule 2, item 1, subsections 68AAA(2), 68AAB(2) and 68AAC(2) of the SIS Act]

3.18 A written direction by a member, who is either under 25 or who has a balance of less than $6,000, to opt into insurance will be valid indefinitely unless the superannuation account subsequently becomes inactive. An election to opt in to insurance cover by a member who is under 25 will be taken to satisfy the opt in requirement for low balance accounts, and vice versa. [Schedule 2, item 1, subsections 68AAB(3) and 68AAC(3) of the SIS Act]

Example 3.1

George is 22 years old and holds superannuation with Deep Blue SuperFund, with a balance of $4,000. He has elected to opt into death, TPD and income protection insurance despite having a balance of less than $6,000. He does not need to make a separate election to opt in to insurance because he is also under 25 years of age.

George gets a new job as a seafood chef, upon which he is defaulted into a new fund, and he stops contributing to Deep Blue SuperFund.

Despite George's election to opt into insurance, his insurance cover with Deep Blue SuperFund will cease upon 13 months of inactivity unless he makes a new election to maintain his cover, even though the account is inactive.

3.19 The Electronic Transactions Act 2000 provides that if legislation requires a person to give information in writing, that requirement is taken to have been met if the person gives the information by means of an electronic communication.

3.20 Regardless, the amendments do not affect a member's right to be covered by insurance until:

•

the end of the period for which premiums have been deducted; or

•

the expiry date of the term of the member's existing insurance cover.

[Schedule 2, item 1, subsections 68AAA(7), 68AAA(8), 68AAB(5) and 68AAB(6) of the SIS Act]

3.21 A breach of the new insurance rules is a breach of the RSE licensee law with which the trustee must comply.

3.22 Failure to comply with the RSE licensee law may result in consequences such as a direction from APRA to comply (see section 29EB of the SIS Act), cancellation of the trustee's authority to offer a MySuper product (where relevant - see section 29U of the SIS Act) or cancellation of the RSE license (see section 29G of the SIS Act).

3.23 The obligation in section 68AA for a trustee to provide death or permanent disability insurance under a MySuper product is turned off while the member meets one of the criteria listed at paragraph 3.15. However, these obligations continue to apply to all other MySuper members who do not meet the criteria.

3.24 Once a MySuper member no longer meets any of the criteria listed at paragraph 3.15, the requirement under the MySuper rules for the trustee to provide opt out death and permanent disability insurance applies again. [Schedule 2, item 2, subsections 68AA(8A) and (8B) of the SIS Act]

Example 3.2

In December 2019, Luke, aged 26, commences work. As Luke does not choose a superannuation fund he is defaulted into a MySuper product.

Upon joining the fund, Luke is sent a Product Disclosure Statement which outlines that he will be covered by death and total and permanent disability insurance once his account balance reaches $6,000. His fund also offers him the opportunity to take up this insurance prior to his account reaching $6,000, but he chooses not to do so.

Eighteen months later, Luke's superannuation account balance reaches $6,000. At this time, his fund provides him with insurance cover, in compliance with the MySuper insurance obligations.

3.25 A definition of inactive is inserted into the SIS Act. A choice or MySuper product will be considered inactive if no contributions or rollovers have been received in the previous continuous period of 13 months. [Schedule 2, item 1, subsection 68AAA(3) of the SIS Act]

3.26 The period of inactivity is reset when a contribution or rollover is received. That is, the contribution or rollover resets the clock on inactivity for another 13 months. [Schedule 2, item 1, subsections 68AAA(4) and 68AAA(5) of the SIS Act]

3.27 To manage potential administrative and compliance burdens in relation to superannuation accounts with balances that fluctuate around the $6,000 threshold amount, the insurance rules apply to products where the balance has not reached $6,000 at any point in time on or after 1 April 2019. [Schedule 2, item 1, paragraph 68AAB(1)(b) of the SIS Act]

3.28 That is, once the balance of a superannuation account has reached $6,000 on or after 1 April 2019, the requirement to only offer insurance at the member's request ceases unless the account becomes inactive (or where the member began to hold the account on or after 1 July 2019 and is less than 25 years of age).

Example 3.3

Cedric opens a MySuper account on 1 August 2019. He is 30 years old. He does not opt in to insurance and is not therefore defaulted into insurance until his account reaches $6,000, upon which time he is provided with death and TPD insurance in accordance with the MySuper insurance rules.

Cedric's account subsequently falls below $6,000, due to Cedric making a partial rollover to his SMSF. Cedric continues to make contributions to his MySuper account. Cedric's insurance cover in his MySuper account will be maintained, despite his balance now being below $6,000.

3.29 Members who elect to maintain insurance in inactive accounts with balances of less than $6,000 will not have their balances transferred to the Commissioner under the changes contained in Schedule 3.

3.30 The date of 1 April 2019 is when the trustee must identify certain members of the fund who may be impacted by the new insurance rules and notify these members of the impact (the stocktake date).

3.31 Paragraphs 3.40 to 3.43 further explain how these amendments affect the existing insurance arrangements of members holding a choice or MySuper product in the lead up to 1 July 2019. Paragraphs 3.46 to 3.56 explain the notification obligations on trustees.

Notification requirements

3.32 From 1 July 2019, the timing and frequency of assessing whether a member holds a product that meets one of the criteria listed above is at the trustee's discretion. However, the requirements imposed on trustees to not offer opt out insurance to these members, as well as the notification requirements for inactive members, necessitate that trustees make these assessments at a reasonable frequency.

3.33 It is expected that the regulations will require a trustee to provide a written notification from 1 July 2019 to members who hold accounts that have been inactive for six or nine months. This is designed to communicate that if the account continues to be inactive for a total of 13 continuous months, insurance will only be maintained if the member directs the trustee to do so.

3.34 The notices are to cover how the member can maintain insurance cover and what will happen if no direction is made to the trustee.

3.35 It is also expected that regulations will require a trustee to provide a written notification to a member who has an inactive account but has elected to maintain insurance cover. The notice will explain that the particular account remains inactive but that the member has elected to maintain the insurance cover. The notice will also explain what the member needs to do to cancel the insurance cover at a later date.

Carve-outs

3.36 The new insurance rules do not apply to SMSFs or small APRA funds. [Schedule 2, item 1, section 68AAD of the SIS Act]

3.37 The new insurance rules also do not apply where an employer makes contributions to a fund, in addition to its superannuation guarantee obligations, which cover the full cost of the member's insurance premiums, on behalf of the member. [Schedule 2, item 1, paragraphs 68AAA(6)(d), 68AAB(4)(d) and 68AAC(4)(d) of the SIS Act]

3.38 For this exception to apply, the employer must:

•

notify the trustee that it is paying the employee's insurance premiums;

•

the amount the employer is contributing exceeds the employer's superannuation guarantee obligations for the member; and

•

the excess is equal to or greater than the insurance premiums, payable in relation to the insurance cover for the quarter.

[Schedule 2, item 1, section 68AAE of the SIS Act]

3.39 The new insurance rules do not apply to a defined benefit member, an ADF Super member or a person who would be an ADF member if they had not chosen a fund. [Schedule 2, item 1, subsections 68AAA(6), 68AAB(4) and 68AAC(4) of the SIS Act]

Application and transitional provisions

3.40 The measure will impact insurance arrangements that are in place before 1 July 2019.

3.41 Generally, the amendments apply to members who are under 25 years old and who start to hold a choice or MySuper product on or after 1 July 2019. [Schedule 2, item 5]

3.42 A person who is under 25 years old and who began to hold a MySuper or choice product before 1 July 2019 will not be impacted unless, on 1 July 2019, the person's superannuation account had either been inactive for 13 months or the balance of the account had not been more than $6,000 since 1 April 2019.

3.43 The measure will apply to members who hold a superannuation account that, on 1 July 2019, has been inactive for a period of 13 months (including the time before 1 July 2019), or which has had a balance of not more than $6,000 since 1 April 2019. [Schedule 2, items 3(2) and 4(1)]

3.44 Schedule 2 places obligations on trustees to notify members who have insurance arrangements in place before 1 July 2019 and who might be affected by the new measures, to provide these members with an opportunity to elect for their insurance to continue. [Schedule 2, items 3(3), 4(2) and 4(6)]

3.45 To determine the relevant members and accounts, a trustee must undertake a 'stocktake' on 1 April 2019, whereby the trustee reviews all members and determines which members have an account:

•

with a balance less than $6,000; or

•

which has been inactive for six months or more.

[Schedule 2, paragraphs 3(3)(a) and 4(2)(a)]

Notification obligations and elections for insurance under products with balances less than $6,000

3.46 Where a trustee identifies a member with an account balance below $6,000 on 1 April 2019, the trustee must give the member a written notice before 1 May 2019 which sets out:

•

that from 1 July 2019, the fund will not provide the member with insurance cover if the balance of the account remains below $6,000;

•

that cover can be maintained if the member elects to do so; and

•

the method for election.

[Schedule 2, items 4(2)(b) and 4(3)]

3.47 If a member with a superannuation account balance of less than $6,000 has made an election prior to the 1 April 2019 stocktake, then the election is deemed to be effective on or after 1 July 2019 and the member does not need to be provided with a written notice. An election made prior to the 2018-19 Budget night will also be effective after 1 July 2019. [Schedule 2, item 4(5)]

3.48 While the amendments do not require a member to have made the election in writing, if insurance is provided by the trustee on an opt out basis after 1 July 2019, and the member has not asked for it to be provided, the trustee may be in breach of the RSE licensee law. A trustee will need to be able to demonstrate that a member has elected to maintain cover, other than in writing by, for example, a record of a meeting or a note following a telephone conversation.

3.49 Where a member has simply contacted the fund to make a claim on their existing insurance, made an enquiry about the insurance offered by the fund or made a general enquiry about their superannuation account, this would not suffice to demonstrate that the member has elected to have insurance cover.

3.50 For the trustee to be able to demonstrate that the member has elected to have insurance cover, the election must be directly related to the insurance cover and must demonstrate that the member has decided to have insurance provided through superannuation.

Example 3.4

Lola has recently joined the workforce and has a superannuation balance of $2,000. She is worried her employer has not been making superannuation guarantee contributions so she calls her fund to find out if the right contributions have been made. The fund representative provides Lola with details on the contributions that have been made and her account balance and Lola is comforted that her employer is making the right contributions.

The representative asks Lola if she had any other questions, or wanted to know about the insurance the fund offers but Lola declines as she is running late to her next university lecture.

This conversation should not be taken to be Lola electing to have insurance provided by her fund.

Example 3.5

Emily is consolidating her multiple superannuation accounts and wants to improve her understanding of the types of insurance offered by each provider. She makes enquiries with each provider and after some thought decides to roll all her superannuation into one particular fund given its insurance offering. The combined balance of her consolidated superannuation savings is $4,500.

She contacts her fund and explains to the fund representative that she would like total and permanent disability and income protection insurance provided through her choice product.

The fund representative makes the necessary arrangements including by making a note of the conversation on Emily's file. The trustee would be able to use this to demonstrate that Emily has elected to have insurance.

Example 3.6

In 2017, Fletcher sought personal financial advice. As a result, Fletcher now has a single superannuation account, to which he is making ongoing contributions. His account has a balance of $4,000 and he holds individually underwritten insurance within his superannuation.

Fletcher's fund has maintained a file for Fletcher with includes the statement of advice and underwriting paperwork. As a result, Fletcher's fund maintains his insurance cover after 1 July 2019 despite his account having a balance below $6,000.

Notification obligations and elections for insurance through inactive products

3.51 Where a trustee identifies a member with a superannuation account, which on 1 April 2019 has been inactive for at least 6 months, the trustee must give the member a written notice before 1 May 2019 that says:

•

from 1 July 2019, the fund will not provide the member with insurance cover if the account remains inactive;

•

cover can be maintained if the member elects to do so; and

•

sets out the method for election.

[Schedule 2, items 3(3)(b) and 3(4)]

3.52 A member with an inactive account on 1 April 2019 does not need to be given a written notice if the member has made a written election between 2018-19 Budget night and the 1 April 2019 stocktake. [Schedule 2, item 3(6)]

3.53 An election made before 2018-19 Budget night is not deemed to be effective on or after 1 July 2019.

3.54 This reflects that the account has been inactive and there is a higher risk that the insurance associated with the account may no longer be appropriate. Therefore, it is important to ensure that the member makes a conscious decision for cover to be maintained in an inactive account.

Notification obligations for insurance products first held between 1 April 2019 and 1 July 2019

3.55 Each trustee must also ensure a member with a superannuation account that was acquired after 1 April 2019 but before 1 July 2019 is given a written notice that says:

•

from 1 July 2019, the fund will not provide the member with insurance cover if the account balance is less than $6,000 and it has not been more than $6,000 since 1 April 2019;

•

cover can be maintained if the member elects to do so; and

•

sets out the method for election.

[Schedule 2, item 4(6)]

3.56 If the member does not make an election before 1 July 2019 and the balance of the account is less than $6,000, insurance will not be provided from 1 July 2019.

3.57 ASIC is the regulator responsible for the notification requirements in the transitional provisions. [Schedule 2, item 6]