Incorrect assumptions made by Treasury could cause thousands of superannuation fund members to lose their life insurance cover, according to an industry association.
The Corporate Super Specialist Alliance (CSSA) has warned that in preparing the draft MySuper legislation, the Treasury has made incorrect assumptions as to the status of insurance cover when a member leaves a fund. As a result, Treasury has concluded that an automatic transfer of super members to MySuper funds by 1 July 2017 will not result in lost insurance benefits to members.
According to CSSA President, Douglas Latto, this assumption is putting thousands of Australians at risk of underinsurance.
“When an employee leaves their employer, and is no longer eligible to be a member of that employer’s corporate fund, and no instruction has been received from the member, current practice is that benefits are transferred to a personal fund, with, in most cases, the insurance cover being transferred as well.
“This is commonly known as ‘flipping’. With the introduction of MySuper in July 2013, this practice will disappear.”
Tranche 3 of the MySuper legislation, which was released for consultation earlier this month, contained an automatic consolidation clause. This clause would see all super accounts where a member had not made an investment choice (ie: default funds) transferred to MySuper accounts, which do not pay commissions to advisers, by 2017. Treasury are proposing that members are given the option to opt-out of the arrangement, but the CSSA argues that this will lead to a loss of benefits.
“As we know, without advice, many people will not fully understand the consequences and simply do nothing – especially when they are likely to have other things on their mind, such as starting a new job,” Mr Latto said.
In order to mitigate this risk, the CSSA used its submission on the draft legislation to lobby for an opt-in process for the transfer to MySuper. Consultation on the legislation closed on 16 May, with the next iteration of the Bill expected to be tabled in Parliament shortly.
And starting a new job will usually mean new insurance cover?
And many funds offer continuation options.
Is it better to ensure someone is paying for cover they need versus accumulating cover they have forgotten about which only erodes the value of their retirement savings?
Many people retain super funds for the insurance cover alone. I dothis myself. It is cheaper than retail insurance and doesn’t effect my cash-flow. If my insurane was cancelled as a result of an automatic transfer I’d be very upset.
I understand your point James, but most people do not have enough cover anyway, and many choose to keep cover, so an opt-in to the transfer would seem to make much more sense than an opt out. Once cover is cancelled it has gone, and if the new employer fund is a Mysuper fund it may only have a very low level of automatic cover.
What if you can’t get new insurance cover at the new job because you now have some medical issues? Whoops.
Most experienced advisers recommend you don’t let your old cover lapse till the new cover is in place. Simple but smart advice.
All Treasury needs to do is change their proposal for the auto transfer of funds to MySuper from opt-out to opt-in and the problem is solved as the consuequences of any loss of benefits that the CSSA correctly argues may occur will then rest with the member and what is wrong with that?
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