5.4 Statistically appropriate rates

Default arrangements are those arrangements between an employer and a trustee of a superannuation fund under which the employer agrees to direct contributions paid on behalf of those employees – who make no election about where the employer is to pay their contributions – to a default product in the trustee’s fund.

Due to the compulsory nature of superannuation in Australia, default arrangements are a significant feature of Australia’s superannuation system. When starting a new job, up to two-thirds of members make no election about where their contributions should be paid, and default to their employer’s default fund, and about half the accounts in Australia’s superannuation system are in MySuper (or default) products.[1]

The features of the default product offered through an employer’s plan will often be different to the standard default product offered by the trustee. For example, sometimes the default product for the employer is ‘tailored’, in that features such as investment strategies and insurance policies are suited to the circumstances of the employee members. In respect of insurance, the premium costs charged through the employer plan are usually discounted by insurers, or subsidised by employers.[2]

Where members cease employment with the employer, they will cease to be part of the employer plan. On this happening, the member will be transferred from the employer plan to a personal plan and be subject to the terms of the standard default product offered by the trustee. These members are often referred to as ‘delinked’ members.

ASIC Report 591 observed that, on transferring members from an employer plan to a personal plan within the same superannuation fund, some trustees were automatically classifying members as ‘smokers’ or ‘bluecollar workers’ unless they received specific information from the member to the contrary.[3] The rates that are charged for members classified in this way are generally at the higher end of the scale of premiums.

Defaulting members to these higher rates does not reflect the likelihood of the member being a smoker or a bluecollar worker. As ASIC noted in Report 591, only around 14.5% of the adult population of Australia are daily smokers, and only around 25% of all workers are engaged in ‘bluecollar’ work.[4]

In charging members premiums for insurance offered through the fund, trustees are subject to their general covenants under section 52(2) of the SIS Act, including the obligation to act in the member’s best interests, and to their insurance related covenants under section 52(7) of the SIS Act, including only to offer or acquire insurance of a particular kind, or at a particular level, if the cost does not inappropriately erode the retirement income of beneficiaries. Both are relevant to the assumptions a trustee may make when charging premiums to a default member.[5]

Where a trustee complies with its covenants under section 52 of the SIS Act, there is no need for any further protections to be put in place to ensure that the rate being charged to default members, where they have given no indication or information to the trustee about their circumstances, is statistically appropriate. But, as ASIC’s work shows, default members are vulnerable. There is, therefore, merit in providing some further protection.

Trustees must be required to make proper arrangements about the premiums that will be charged to default members. That can be achieved by APRA amending SPS 250 to require that any status attributed to default members (such as ‘bluecollar’, smoker, or other status affecting the premium to be charged for insurance) is fair and reasonable. Ordinarily that would require consideration of whether the status attributed is statistically appropriate.

Recommendation 4.15 – Status attribution to be fair and reasonable

APRA should amend Prudential Standard SPS 250 to require RSE licensees to be satisfied that the rules by which a particular status is attributed to a member in connection with insurance are fair and reasonable.

[1]Productivity Commission, Report 91, Superannuation: Assessing Efficiency and Competitiveness, 21 December 2018, 104.

[2]See ASIC, Report 591, 7 September 2018, 17.

[3] See ASIC, Report 591, 7 September 2018, 17.

[4] See ASIC, Report 591, 7 September 2018, 17.

[5] See, eg, ASIC, Module 6 Policy Submission, 33 [144].