Helen Rowell, Deputy Chairman - Senate Economics Legislation Committee, Canberra
Public hearing on Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018
The Australian Prudential Regulation Authority (APRA) welcomes the opportunity to appear before the committee today as part of its inquiry into the Government’s superannuation proposals contained in the Treasury Laws Amendment (Protecting Your Superannuation Package) Bill 2018 (the Bill).
APRA supports the policy intent of the proposals, which seek to improve member outcomes by reducing the potential for the retirement savings of members with low account balances to be inappropriately eroded through excessive fees or unnecessary insurance.
APRA has been assessing the potential impact of the proposals, including through targeted consultation with superannuation funds, insurers and other stakeholders within the superannuation sector. APRA has been primarily focused on the initial impact the proposals are likely to have on fee structures, the design and pricing of insurance, the flow on effects on fund members and hence the associated member communication processes that are needed.
The proposal to require the transfer of accounts of less than $6,000 that have not received a contribution for 13 months to the Australian Taxation Office (ATO) will reduce account erosion by removing duplicate accounts. This will provide greater protection to inactive members with low account balances and lead to a sizeable reduction in the number of accounts across the superannuation system. It is also likely to require a review of fee structures by many superannuation funds.
The proposal to limit the fees that can be charged to members with balances under $6000 will also require funds to review their fee structures and may lead to higher fees for members with balances over $6000.
In implementing these proposals, funds will be required to make members aware of the changes through both changes to product disclosure statements and the use of broader member communication processes. It will be particularly important to ensure that inactive account members are aware that their accounts may be moved to the ATO, and their insurance cover consequently ceased, if they fail to make an active contribution or an active decision regarding their insurance.
The proposals in relation to insurance represent a significant shift in the provision of insurance to members in the default market, with members with balances below $6000 and new members under 25 years of age only being offered insurance on an opt-in basis. The precise impact of the insurance proposals is difficult to assess at this time, however it is likely that the removal of these members from the “default” insurance pool (together with the removal of members with inactive accounts) will create upward pressure on premiums for the remaining insured members.
Members impacted by the insurance proposal will need to be made fully aware of the changes to enable them to appropriately consider their insurance needs and the consequences of not opting-in to insurance. Effective member communication is therefore paramount.
To implement all of these proposals, funds will need to work closely with their administrators and insurers to ensure the required system changes and amendments to group insurance arrangements are in place. This will be challenging to achieve by the proposed implementation date of 1 July 2019 given both the complexity and extent of the changes that will be required to be made across the entire superannuation sector. In particular, insurance arrangements will need to be reviewed and re-priced (taking into account actuarial input), underwriting processes reviewed and contractual arrangements re-negotiated accordingly. These processes can be highly complex and time consuming for individual superannuation funds, and will be even more so when the industry as a whole is impacted.
Sufficient time also needs to be allowed for effective communication to members of the changes that are being made, their expected impact and the decisions that members may need to make (particularly in relation to insurance). This in turn will require certainty in the final legislative requirements so that the nature and extent of the changes to insurance and fees can be determined by each superannuation fund, in collaboration with their service providers and to ensure funds’ current disclosure obligations are able to be met.
APRA is therefore concerned that unintended consequences may arise for members and there will be significant pressure on, and heightened operational risk for, superannuation funds and their insurers and administrators, if sufficient time is not allowed to implement the proposals in an appropriate and orderly manner.
As noted in many of the submissions to the Committee, there are a number of options that could be adopted to enable orderly implementation of the proposals, including for example a staged approach to implementation. We would therefore encourage further consideration and discussion with key stakeholders of appropriately targeted transition options.
With those opening comments, my colleagues and I are happy to answer the Committee’s questions.