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Harsher penalties for thieving employers only part of super’s solution

Bill Shorten speaks at the ALP conference. Images: Getty

Employers who fail to pay their employees’ super could face much tougher penalties including jail sentences, under a series of superannuation reforms proposed by the Labor Party.

In a bid to protect employees, opposition leader Bill Shorten also announced changes to enable employees to pursue superannuation-thieving employers through the courts — and not just through the tax office.

While measures ensuring payment are critical, it’s also important to consider what happens to your superannuation once it’s deposited inside a fund.

Insurance in super

“My take is that insurance is a risk product,” CEO of Raiz Invest, George Lucas told Yahoo Finance.

“When you’re young at 21 you don’t really have any dependents, you don’t have a mortgage, why are you taking out life insurance?”

Life insurers are scoring $3 billion a year in fees charged to savers younger than 25, analysis by The Australian reveals.

And accounts with less than $6,000 are coughing up more than $2 billion a year insurance premiums.

Is this a problem?

It’s a question numerous reports and inquiries have intended to answer.

The Productivity Commission’s inquiry into superannuation described the current system as “outdated” and warned that the epidemic of unconsolidated accounts is costing Australians millions in “zombie” fees, including insurance fees.

As it stands, insurance in super operates as an opt-out service. That is, you pay for it unless you make a deliberate choice to opt out.

The Productivity Commission recommended insurance and super be offered on an opt-in basis for savers younger than 25 — a proposal that’s been supported by the Liberal party.

But insurers, major funds and even consultancy firms argue life insurance is there to protect against the unthinkable.

But it also helps to keep fees down for older members.

Big four accounting firm KPMG has suggested insurance premiums could surge 26 per cent if an opt-in system was brought in.

This, they argued, would actually hurt low-income earners and women the most as higher premiums erode savings.

The CEO of the self-managed super fund association also argued changing the insurance system would disadvantage those who specifically use APRA-regulated funds for the insurance benefits. These small-balance funds are held in addition to savers’ larger self-managed funds.

The Australian Prudential Regulation Authority has even warned the changes would ultimately cost high-balance members more.

However, the Grattan Institute questions whether this is a cause for concern at all.

After all, the aim of insurance is to pool risk, not to apply cross-subsidies.

“The current system appears to have very substantial cross-subsidies,” Grattan researchers, John Daley and Brendan Coates said in a submission to Treasury earlier this year.

“Analysis by both Rice Warner and KPMG in submissions to this committee claim that the proposed changes to default insurance would lead to large increases in insurance premiums. This strongly suggests that those who are young, have inactive accounts, or small balances, are cross-subsidising everyone else.

“It is not obvious why it is desirable for there to be an insurance cross-subsidy for those who are old or have large balances.”

‘There are a lot of rotten eggs out there’

Either way, paying for more than one insurance product is unnecessary and a waste of money in most instances.

So the message comes back to consolidating.

As Raiz’ Lucas noted, the Royal Commission has revealed “there are a lot of rotten eggs out there”. And while diversification is often considered a good thing, that doesn’t hold true for diversifying across super funds.

And it’s not just insurance fees. As the Productivity Commission noted, we’re not just paying millions for accidental insurance policies, we’re also paying the general fees.

“No matter which way you dice the numbers, people are paying roughly $100 a year for their superannuation,” Lucas said, referring to funds’ flat fees.

“You do get into this problem where if people don’t understand that they’re paying a flat fee which they keep paying on smaller balances if they don’t consolidate.”

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