Thousands Will Lose Cover if Super Threshold Changes – Industry

Thousands of Australians will lose their insurance benefits, and risk being unable to take out new cover, if the Government continues with its plan to increase the ‘lost super threshold’ to $6,000, the industry has warned.

In November 2013, the newly-installed Coalition Government announced it would proceed with the former government’s proposal to increase the lost member small account threshold. The policy would see small superannuation accounts deemed to be ‘lost’ or ‘inactive’ transferred to the taxation office.

The Coalition’s proposal to increase the small balance threshold to $6,000 by 2016 has been met with significant criticism from the industry, with the majority warning against the move.

Members may leave the policy in place to maintain the cover afforded to them

In its submission to the Treasury on the draft legislation, the Financial Services Council opposed the move, saying: ‘Any policy that reduces the level of insurance cover held by superannuation members will impact the level of underinsurance in Australia.’

According to FSC members, the number of accounts that would be captured by the increase from the current threshold of $2,000 to $6,000 is more than 175,000, representing $4.2 billion in sums insured.

The FSC argued that it was possible many of the accounts that fall under the definition of ‘lost’ or ‘inactive’ are in fact maintained for the insurance benefit. ‘Members may leave the policy in place to maintain the cover afforded to them – generally where the investment return is sufficient to cover the premium on an annual basis there would be no activity (active contributions) to the account,’ the FSC said in its submission.

‘As there are no annual contributions, the super account is adjudged “inactive”, the account would be paid into consolidated revenue and the insurance coverage is lost to the account holder.’

The FSC outlined a number of issues which could result from the increased threshold in relation to member protection. They include:

• Members not realising the full impact of the loss of their cover until they need to claim
• The inability of members to be insured again due to increased premiums or reduced benefits due to poorer health
• The loss of benefits no longer available through superannuation due to the new definitions which apply to cover inside super (eg: trauma)
• The potential for increased disputes between insurers and members as a result of a transfer which occurs while the client is eligible to claim/has lodged a claim

Industry submissions on the increased threshold also pointed to the increased burden on the Government in terms of welfare and healthcare costs.

In its submission, industry super fund REST said the loss of insurance benefits would result in a larger number of young people (who typically do not take out individual cover) relying on the health system and/or their families. Without insurance, the fund said, the families of the member would be left with funeral costs, or have to fund the rehabilitation of the member to help them return to work.

…transferral to the ATO will impact loss of insurance for more women than men

The fund also argued that the change would have a disproportionate effect on women.

‘REST’s data shows that women typically have lower account balances and their transferral to the ATO will impact loss of insurance for more women than men,’ the fund said.

‘There are potentially 438,966 REST members who will likely be reported to the ATO as lost as they have not made a contribution in over 12 months, from that number, almost 60% are female. Once they have left REST they may find it difficult to ever obtain insurance as many women are in part-time and casual jobs. This puts a resulting strain upon government social security system.’

The majority of submissions to the Treasury recommended that the draft legislation be changed so the threshold was set at $3,000. There were also recommendations to delay the implementation of the increase until after the Super Stream reforms were completed. Submissions on the legislation have now closed. To view the submissions, click here.