Covering the bases under choice

In case you haven’t noticed, fund managers have been shifting their superannuation marketing campaigns into gear ahead of choice of fund kicking in next July.

Those watching the recent second cricket test between India and Australia, for example, would have been swamped by Colonial First State’s ‘Chips or French fries’ ad at the end of just about every over.

So far though, advertising has focused on investment choice and performance, with zero attention paid to life insurance.

And most think it will stay that way — despite the recent activity surrounding Rice Walker Actuaries proposal to up to a ninth of the super guarantee into life insurance. (See story p30).

Aviva head of insurance product Rob Donaghy doubts there will be much mention of insurance in commercials leading up to next July.

“I think life insurance is something that’s part of a total package. With choice of funds a lot of people are going to be talking about taking control of their own savings. Sure insurance is part of that, but I think the focus will be on investment options and you’ll be able to get good insurance cover from most superannuation packages anyway.”

As a result he feels choice will not result in superannuation funds changing their life insurance product offerings too much in the near future.

Nevertheless, he believes choice of funds legislation will create some repercussions in the life insurance industry that are worth noting.

Money Management can confirm that three representatives from Treasury recently sat down with some of the big insurance providers in a meeting hosted by the Investment and Financial Services Association (IFSA) to nut out how to ensure people will be adequately insured under choice.

The main worry is that under choice people changing funds could end up with more insurance than they need or no insurance at all, especially if they don’t pay attention to the life insurance component of their new, and indeed their old, super fund.

One of the topics of discussion was the confusion surrounding one sentence in the choice legislation that hints at mandatory term insurance.

Section 32(2)C of the Superannuation Legislation Amendment (Choice of Superannuation Funds) Act 2004 says that when an employee doesn’t decide to choose their own fund (which is often the case) employers will have satisfied the choice requirements only if:

“…the fund complies with the requirements (if any) set out in the regulations in relation to offering insurance in respect of death.”

It’s the ‘if any’ bit that has people confused. Does this mean employers will have to find a fund with life cover for employees who don’t want, or are too apathetic, to choose their own superannuation fund?

IFSA senior policy manager Bill Stanhope, who was heavily involved in the meeting with Treasury, says the answer will probably be yes.

“Employers will have an obligation to ensure a fund has insurance, once the regulations are made,” he says.

“Super funds operating in that space will have to make sure employers are aware they carry insurance.”

Stanhope says this change in the legislation was brought about to stop people winding up without insurance and being unaware of it.

Although he is quick to point out that most funds already offer some sort of insurance cover, albeit often the bare minimum.

This is why Aviva’s Donaghy feels that overall, choice of funds will be a positive for the insurance industry.

Contrary to industry concerns, he feels as long as they receive good advice, customers changing funds will not run the risk of being over or underinsured.

“For people who do change funds, provided they receive good advice from their financial planner, they may realise they don’t have enough cover at present, especially if they are in a default industry fund,” Donaghy says.

ING manager group risk market Paul Trig agrees that choice will be a positive for the industry, but warns there are some cases where employees could end up with less cover by choosing their own super fund, especially if they move out of a fund used collectively by a larger group of employees.

These collectives will often attract lower premiums and an automatic acceptance level (AAL), which will vary based on the composition of the members.

Basically an AAL is a general level of cover that everyone will get as long as they are all part of the same fund.

AALs will generally increase with the number of members, so in a 1,000-member plan the level of cover might be $800,000 for the term, but for a 20-member plan it might only be $200,000.

Trig suggests when choice arrives, employees who are already adequately covered by the AAL, could perhaps stay in that particular fund for insurance purposes, but choose another fund for investment purposes.

Nevertheless he, among others, still fears that AALs will go down as a result of choice.

He says another concern, which was brought up at the IFSA meeting with Treasury, is that some employees might engage in ‘AAL building’.

This involves people taking advantage of the system by joining an industry fund one year and then joining another industry fund the next year, to build up their level of cover.

“Government and industry are still going to have to come up with a way to prevent that,” he says.

On the possibility of AALs decreasing, Trig says the industry will have to take a wait-and-see approach. But he, like most of his industry counterparts, suspects that choice will not have a significant impact.

“The general consensus at the IFSA committee was that the likelihood of someone leaving a fund themselves, or on someone else’s suggestion is not high.”