The voluntary code of practice for group life insurance providers falls short of what is expected of an industry code of conduct and doubts have been expressed about its ability to deliver material improvements to super fund member, the Productivity Commission has claimed.
In a draft report on the efficiency and competitiveness of the superannuation sector released this week, the Commission examined group life insurance arrangements in superannuation and found that current practices were not planned but had evolved over time leading to problems.
“…there is no specific policy architecture governing how insurance should be delivered to members”
“Current settings are arguably more a function of history than considered policy decision and design,” the Commission noted, stating the life insurance arrangements have been added to superannuation since the 1950s and requirements amended under Choice of Fund and Stronger Super reforms.
“Accordingly, there is no specific policy architecture governing how insurance should be delivered to members. Rather, the suitability of arrangements relies on the broad obligations of trustees acting in members’ best interests and some degree of regulatory oversight,” the Commission stated. It also added the current arrangements have led to life insurance matters now accounting for a third of member complaints against funds at the Super Complaints Tribunal.
The report acknowledged that some work had been done to address issues in the group life sector via the voluntary Code of Practice, developed by the Industry Super Working Group, but stated the likely effectiveness of the code was uncertain
“The code is a step in the right direction. It contains initiatives that go beyond current regulatory requirements, which, if done well, would improve member outcomes. But it falls well short of what is considered best practice for an industry code of conduct,” the report stated.
The Commission also noted the current code, which is due to take effect on 1 July 2018, was diluted from a draft publicly released in September 2017 and is no longer binding and enforceable on participants and thus did not satisfy the criteria required to be a code approved by ASIC.
“…it falls well short of what is considered best practice for an industry code of conduct”
As a result of this dilution, the Commission claimed “…the deficiencies of the code resulted in widespread criticism” and “…many are now sceptical of its prospects for delivering material improvements to member outcomes”.
The Commission’s report recommended superannuation funds should adopt and implement the provisions of the code but if they did not “…they should be prepared to face additional scrutiny from regulators on their insurance arrangements and be able to explain why adopting the code is not in the best interests of their members”.
The report also recommended that subsequent iterations of the code could be made stronger by making it binding and enforceable on funds, the adoption of standard definitions to improve comparability of insurance cover, and greater clarity around member communications to avoid producing long and excessively detailed annual statements.
