5.2 MySuper

Section 68AA of the Superannuation Industry (Supervision) Act 1993 (Cth) (the SIS Act) requires each trustee[1] authorised to offer a MySuper product to provide MySuper members with a permanent incapacity benefit and a death benefit by way of life insurance.[2] These benefits must be provided unless the member opts out of either or both of the insurances.[3] A failure to provide the benefits is a breach of an RSE licence condition.[4]

Section 68AA was inserted to protect members against the risk of not being able to accumulate a sufficient amount of retirement savings (for themselves or their dependants) as a result of being unable to work because of injury, illness or death.[5] Section 68AA was a way of setting minimum levels of default life insurance and total and permanent disability insurance.[6]

As with all policies of insurance, group life policies are contractual arrangements that hinge, first and foremost, on the terms agreed between the parties. Those terms, and their operation, may also be affected by relevant legislation including the Insurance Contracts Act. But the ordinary operation of the policy as between insurer and insured will turn most significantly on the coverage provided by the terms of the contract, including any key definitions of, and exclusions to, that coverage.

There are particular requirements relevant to the insurance that must be offered to MySuper members under section 68AA of the SIS Act. I describe these below. Importantly, none prescribes any particular forms of key definitions, terms or exclusions.

The first requirement concerns minimum levels of cover for death benefits offered through a MySuper product. The minimum level of coverage varies depending on the member’s age:[7]

• if the person is aged from 20 to 34 years – $50,000;
• if the person is aged from 35 to 39 years – $35,000;
• if the person is aged from 40 to 44 years – $20,000;
• if the person is aged from 45 to 49 years – $14,000; and
• if the person is aged from 50 to 55 years – $7,000.

The second requirement concerns the minimum cost of that cover. Both are set by the Superannuation Guarantee (Administration) Regulations 2018 (Cth).[8] The minimum premium is $0.50 per week, or the equivalent, for a person who is under 56 years of age.

The third requirement relates to the conditions for the release of benefits.[9] These include retirement, death, terminal medical condition and permanent incapacity.[10]

The minimum level of cover, minimum cost of that cover and the prescribed conditions of release comprise the irreducible core minimum of a MySuper group life policy for death insurance. Aside from conditions of release, there are no mandatory or proscribed terms for default group life policies.

5.2.1 Standardising MySuper insurance

Key definitions, terms and exclusion clauses are central to the rights of an insured under a policy of insurance. They are the machinery that, when triggered, will require payment to be made by an insurer to an insured. The amount of cover offered under a policy is evidently an important aspect of cover. But it is only one aspect. Alone, the amount of cover offered says nothing about the insured’s rights to claim under the policy, or about the value of one policy compared with other policies.

Insurance contracts can often be difficult for the average consumer to navigate and understand. And subtle differences in definitions, terms and exclusions from one policy to another can make the task of comparing policies particularly challenging.

In many cases, default members will not have made any active choice about the fund they have joined or considered the insurance offered through that product. Often a member will join the default fund chosen by their employer.

Even when a member chooses the fund or product, the choice will almost always be made without advice. It will be for the member alone to form a view about the merits or demerits of the product, and the insurance offered through it. But members are not always able to identify how key terms, definitions and exclusions will affect their coverage under their policy.[11] And whatever consideration a member gives to these issues will be given in the course of considering the broader benefits of a superannuation fund.

ASIC Report 591 noted the difficulties that consumers face when comparing definitions in policies such as the definition of total and permanent disability. ASIC considered there was scope for improvement in this regard, including by the use of standardised definitions in policies.[12]

Because life insurance within MySuper is default insurance, and because the value of a policy turns so heavily on key definitions, terms and exclusions, there is merit in considering the extent to which insurance within MySuper funds can be standardised, or at least standardised in key respects.

The Insurance in Superannuation Voluntary Code of Practice is a step in that direction.[13] But it is not a mandatory code. Its effect will not be uniform, and it is not enforceable. To achieve a consistent result, standardisation should be effected by or under the relevant legislation. Only then will it apply across the industry.

Changes to key terms, definitions or exclusions will affect when an insured can claim under the policy. Changes will almost certainly affect the cost of insurance premiums, and will affect how much superannuation the member will have at retirement.[14] Hence, the adoption of standardised terms should be carefully considered, and the consequences of change identified, before they are implemented.

I recommend that Treasury, in consultation with industry, determine the practicability, and likely pricing effects, of legislating universal key definitions, terms and exclusions for default MySuper group life policies.

That review should also consider:

• the merits of prescribing higher minimum coverage for life insurance than is currently provided for by the Superannuation Guarantee (Administration) Regulations;
• the merits of prescribing minimum coverage for permanent incapacity insurance;
• the merits of prescribing maximum coverage for life and/or permanent incapacity insurance; and
• the merits of prescribing a fixed level of coverage for life and/or permanent incapacity insurance so as to set a standard amount of default insurance across all MySuper products.

[1] Being each trustee of a regulated superannuation fund. See SIS Act s 19 for the definition of ‘regulated superannuation fund’.

[2] SIS Act s 68AA(1).

[3] SIS Act s 68AA(5).

[4] SIS Act s 29E(1)(a).

[5] Explanatory Memorandum, Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Bill 2012 (Cth) 23 [2.3].

[6] Explanatory Memorandum, Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Bill 2012 (Cth) 23 [2.4].

[7] Superannuation Guarantee (Administration) Regulations 2018 (Cth) reg 14(5).

[8] Superannuation Guarantee (Administration) Regulations 2018 (Cth) reg 14(1). See also Superannuation Guarantee (Administration) Act 1992 (Cth) s 32C(2)(d).

[9] Superannuation Industry (Supervision) Regulations 1994 (Cth) reg 4.07D, Sched 1.

[10] Superannuation Industry (Supervision) Regulations 1994 (Cth) Sched 1 Items 101–103.

[11] See, eg, ASIC, Module 6 Policy Submission, 31 [133].

[12] ASIC, Report 591, 7 September 2018, 20; see also ASIC, Module 6 Policy Submission, 31 [132].

[13] See also ASIC, Module 6 Policy Submission, 32 [134].

[14] See Treasury, Module 6 Policy Submission, 13 [67].