House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Housing and Assistant Treasurer the Hon Michael Sukkar MP)

Chapter 1 - Low balance accounts and members under 25

Outline of chapter

1.1 Schedule 1 to the Bill prevents trustees from providing insurance on an opt out basis to members who are under 25 years old and begin to hold a new product on or after 1 October 2019 and to members who hold products with balances below $6,000.

1.2 In all circumstances the member may opt in to insurance offered by the trustee by making a direction to the trustee.

Context of amendments

1.3 Superannuation is a major part of Australia's retirement income system. Together with the Age Pension and savings outside superannuation, it supports Australians in their retirement years.

1.4 Superannuation is now the second-largest savings vehicle for Australian households (accounting for 17 per cent of household assets). It is projected to grow rapidly in the coming decades, as the superannuation system matures.

1.5 Given the importance of superannuation to Australians, the Government is seeking to ensure that people's hard-earned savings are not unnecessarily eroded by inappropriate insurance arrangements.

1.6 Currently, many superannuation trustees automatically provide insurance cover to members upon joining the fund. This arrangement is commonly referred to as 'default insurance' and requires a member to 'opt out' of insurance if the member considers the insurance to be inappropriate for them.

1.7 Default insurance is part of the legislative framework for MySuper products. That is, the MySuper settings generally mandate the provision of death and total and permanent disability insurance on an opt out basis, and also allow income protection insurance to be provided on an opt out basis at the trustee's discretion. Some choice products also include default insurance.

1.8 Under the insurance covenant in the SIS Act, trustees must only offer insurance that does not inappropriately erode the retirement income of members. Despite the covenant, insurance premiums are a key driver to the erosion of superannuation savings for certain member cohorts.

1.9 Young members, members with multiple and/or inactive products, and members with low balances can face significant erosion due to insurance premiums.

1.10 In addition, as a result of the default nature of the insurance and of members being disengaged, many members may not be aware that insurance premiums are being deducted or that they have multiple insurance policies. This leaves the member's retirement savings at risk of being significantly eroded by those premiums.

1.11 These amendments are in addition to the protections included in the Treasury Laws Amendment (Protecting Your Superannuation Package) Act 2019. That Act amends the SIS Act to prevent trustees from maintaining opt out insurance where a member's account has been inactive for 16 months or more.

Summary of new law

1.12 Schedule 1 prevents trustees from providing opt out insurance to new members aged under 25 years and members with balances below $6,000 unless a member has directed otherwise.

1.13 This will better target default insurance cover and prevent inappropriate erosion of retirement savings caused by insurance premiums.

1.14 Members will still be able to obtain insurance cover within their superannuation if they choose to do so.

Comparison of key features of new law and current law

Detailed explanation of new law

1.15 Since 1 July 2019, a trustee must stop providing insurance on an opt out basis to a member who has had a product that has been inactive for 16 months or more unless the member has directed the trustee to continue providing insurance.

1.16 Schedule 1 to this Bill amends the SIS Act to provide additional circumstances when a trustee must not offer or maintain default insurance cover for members unless the member has elected to obtain or maintain the insurance provided.

1.17 The circumstances when a trustee cannot provide opt out insurance for a member under a product, either a MySuper product or a choice product are when:

•

the member is under the age of 25 and begins to hold the product on or after 1 October 2019; or

•

the balance of the product is less than $6,000 and has not been $6,000 or more on or after 1 July 2019.

[Schedule 1, item 1, subsections 68AAB(1) and 68AAC(1) of the SIS Act]

1.18 Where a member meets one of the criteria set out at paragraph 1.17 the trustee may only provide insurance where the member has elected to obtain or maintain the insurance cover. [Schedule 1, item 1, paragraphs 68AAB(1)(c) and 68AAC(1)(c) of SIS Act ]

1.19 From 1 October 2019, the trustee must ensure that each member affected by these amendments can direct the trustee to take out or maintain their insurance where the trustee would otherwise provide insurance benefits to members. Directions by members in respect of their insurance must be made in writing. [Schedule 1, item 1, subsections 68AAB(2) and 68AAC(2) of the SIS Act]

1.20 A written direction by a member who is either under 25 or who has a balance of less than $6,000, to opt in to insurance will be valid indefinitely unless the product subsequently becomes inactive. An election to opt into insurance cover by a member who is under 25 will be taken to satisfy the opt in requirement for low balance products, and vice versa. [Schedule 1, item 1, subsections 68AAB(3) and 68AAC(3) of the SIS Act]

Example 1.1

Aiden is 21 years old and holds a superannuation product with Noze Cachina SuperFund, with a balance of $4,000. He has elected to opt in to death, TPD and income protection insurance despite having a balance of less than $6,000. He does not need to make a separate election to opt into insurance because he is also under 25 years old.

1.21 The amendments do not affect a member's right to be covered by insurance until:

•

the end of the period for which premiums have been deducted; or

•

the expiry date of the term of the member's existing insurance cover.

[Schedule 1, item 1, subsections 68AAB(5) and 68AAB(6) of the SIS Act]

1.22 A breach of the new insurance rules is a breach of the RSE licensee law with which the trustee must comply.

1.23 Failure to comply with the RSE licensee law may result in consequences such as a direction from APRA to comply (see section 29EB of the SIS Act), cancellation of the trustee's authority to offer a MySuper product (where relevant - see section 29U of the SIS Act) or cancellation of the RSE license (see section 29G of the SIS Act).

1.24 The obligation in section 68AA of the SIS Act for a trustee to provide death or permanent disability insurance under a MySuper product is turned off while the member meets one of the criteria listed at paragraph 1.17. However, these obligations continue to apply to all other MySuper members that do not meet the criteria.

1.25 Once a MySuper member no longer meets the criteria listed at paragraph 1.17, the requirement under the MySuper rules for the trustee to provide opt out death and permanent disability insurance applies again. [Schedule 1, items 4 and 5, subsections 68AA(8A)(heading) and subsections 68AA(8A) and (8B) of the SIS Act]

Example 1.2

In December 2019, Patricia aged 24 commences work. As Patricia does not choose a superannuation fund she is defaulted into a MySuper product.

Upon joining the fund, Patricia is sent a Product Disclosure Statement which outlines that she will be covered by death and total and permanent disability insurance once she turns 25. Her fund also offers her the opportunity to take up this insurance prior to her reaching this age.

Three years later, Patricia's superannuation balance reaches $6,000. At this time, her fund provides her with insurance cover, in compliance with the MySuper insurance obligations.

Carve-outs

1.26 The new insurance rules do not apply to SMSFs or small APRA funds. [Schedule 1, items 2 and 3, section 68AAD (heading) and section 68AAD of the SIS Act]

1.27 The new insurance rules do not apply where an employer makes contributions to a fund in addition to its superannuation guarantee obligations which covers the full cost of the member's insurance premiums on behalf of the member. [Schedule 1, item 1, paragraphs 68AAB(4)(d) and 68AAC(4)(d) of the SIS Act]

1.28 For this exception to apply, the employer must:

•

notify the trustee that it is paying the employee's insurance premiums;

•

the amount the employer is contributing exceeds the employer's superannuation guarantee obligations for the member; and

•

the excess is equal to or greater than the insurance premiums payable for the insurance benefit for the quarter.

1.29 The new insurance rules do not apply to a defined benefit member, an ADF Super member or a person who would be an ADF member if they had not chosen a fund. [Schedule 2, item 1, paragraphs 68AAB(4)(a), (b) and (c) and 68AAC(4)(a), (b) and (c) of the SIS Act]

Application and transitional provisions

1.30 The measure will impact insurance arrangements that are in place before 1 October 2019.

1.31 Generally, the amendments apply to members who are under 25 years old and who start to hold a choice or MySuper product on or after 1 October 2019. [Schedule 1, item 9, Application of section 68AAC of the SIS Act]

1.32 A person who is under 25 years old and who began to hold a MySuper product or choice product before 1 October 2019 will not be impacted unless on 1 July 2019 the product had either been inactive for 16 months or the balance of the product had not been more than $6,000 since that date. [Schedule 1, items 8 and 9, Application of section 68AAB and Application of section 68AAC of the SIS Act]

1.33 However, the measure will apply to members who hold a product on 1 October 2019 which has not had a balance of $6,000 or more since 1 July 2019. [Schedule 1, item 8, Application of section 68AAB of the SIS Act]

1.34 Obligations are placed on trustees to notify members who have insurance arrangements in place before 1 October 2019 and who might be affected by the new measure to provide these members with an opportunity to elect for their insurance to continue. [Schedule 1, item 8, Application of section 68AAB of the SIS Act]

1.35 To determine the relevant members and products, a trustee must, undertake a 'stocktake' on 1 July 2019, whereby the trustee reviews all members and determines which members have a product with a balance less than $6,000. [Schedule 1, item 8, Application of section 68AAB of the SIS Act]

Notification obligations and elections for insurance under products with balances less than $6,000

1.36 Where a trustee identifies a member with a product with a balance below $6,000 on 1 July 2019, the trustee must give the member a written notice before 1 August 2019 which sets out:

•

that from 1 October 2019, the fund will not provide the member with insurance cover if the balance of the product remains below $6,000;

•

that cover can be maintained if the member elects to do so; and

•

the method for election.

[Schedule 1, item 8, Application of section 68AAB of the SIS Act]

1.37 If a member who holds a product with a balance of less than $6,000 has made an election prior to the 1 July 2019 stocktake, then the election is deemed to be effective on or after 1 October 2019 and the member does not need to be provided with a written notice. [Schedule 1, item 8, Application of section 68AAB of the SIS Act]

1.38 While the amendments do not require a member to have made the election in writing, if insurance is provided by the trustee on an opt out basis after 1 October 2019, and the member has not asked for it to be provided, the trustee may be in breach of the RSE licensee law. A trustee will need to be able to demonstrate that a member has elected to maintain cover, for example, through a record of a meeting, a note following a telephone conversation, or holding a record of a written election.

1.39 Where a member has simply contacted the fund to make a claim on their existing insurance, made an enquiry about the insurance offered by the fund or made a general enquiry about their superannuation savings, this would not suffice to demonstrate that the member has elected to have insurance cover.

1.40 For the trustee to be able to demonstrate that the member has elected to have insurance cover, the election must be directly related to the insurance cover and must demonstrate that the member has decided to have insurance provided through superannuation.

Example 1.1

Lola has recently joined the workforce and has a superannuation balance of $2,000. She is worried her employer has not been making superannuation guarantee contributions so she calls her fund to find out if the right contributions have been made. The fund representative provides Lola with details on the contributions that have been made and her balance and Lola is comforted that her employer is making the right contributions.

The representative asks Lola if she had any other questions, or wanted to know about the insurance the fund offers but Lola declines as she is running late to her next university lecture.

This conversation should not be taken to be Lola electing to have insurance provided by her fund.

Example 1.2

Emily is consolidating her multiple superannuation accounts held across multiple funds and wants to improve her understanding of the types of insurance offered by each fund. She makes enquiries with each fund and after some thought decides to roll all her superannuation savings into one particular product with a fund given the insurance offering. The combined balance of her consolidated superannuation savings is $4,500.

She contacts her fund and explains to the fund representative that she would like total and permanent disability and income protection insurance provided through the product.

The fund representative makes the necessary arrangements including by making a note of the conversation on Emily's file. The trustee would be able to use this to demonstrate that Emily has elected to have insurance.

Example 1.3

In 2017, Fletcher sought personal financial advice. As a result, Fletcher now has a single product, to which he is making ongoing contributions. He has a balance of $4,000 and he holds individually underwritten insurance within his superannuation given his unusual personal circumstances.

Fletcher's fund has maintained a file for Fletcher which includes the statement of advice and underwriting paperwork. As a result, Fletcher's fund maintains his insurance cover after 1 October 2019 despite his superannuation savings having a balance of less than $6,000.

Notification obligations for insurance for products first held between 1 July 2019 and 1 October 2019

1.41 Each trustee must also ensure that a member who acquired a product after 1 July 2019 and before 1 October 2019 is given a written notice that says:

•

from 1 October 2019, the fund will not provide the member with insurance cover if the product balance is less than $6,000 and it has not been more than $6,000 since 1 July 2019;

•

cover can be maintained if the member elects to do so; and

•

sets out the method for election.

[Schedule 1, item 8, Application of section 68AAB of the SIS Act]

1.42 If the member does not make an election before 1 October 2019 and the balance of the product is less than $6,000, insurance will not be provided from 1 October 2019.

1.43 ASIC is the regulator responsible for the notification requirements in the transitional provisions. [Schedule 1, item 10, Administration of the application and transitional provisions]

Consequential amendments

1.44 The Treasury Laws Amendment (Protecting Your Superannuation Package) Act 2019 amends the SUMLM Act to insert a new circumstance when amounts must be paid to the Commissioner of Taxation (that is, when an account is a low balance inactive account).

1.45 However, an account will not be considered inactive if insurance is being provided.

1.46 Schedule 1 to the Bill amends the definition of low balance inactive account in the SUMLM Act to recognise when a member still has a right to have insurance even though the account is less than $6,000. [Schedule 1, items 6 and 7, paragraph 20QA(1)(a) and subsection 20QA(3) of the SUMLM Act]