The super change that will save Aussies $2.8 billion in fees

Last month heralded the beginning of the end of a system that's left super fund members holding multiple accounts on which they have needlessly paid fees and insurance premiums, amounting to a colossal waste of money.

Previously, if you didn't nominate a super fund when changing jobs, your new employer would open a new account for you in their default fund. From now on employers will pay your super contributions into an existing account unless you choose otherwise, and that account will follow you from job to job. Under super choice, you can still nominate any fund as your main fund.

Treasury estimates this "stapling" will save Australians $2.8 billion over the next 10 years as fewer people pay fees and premiums on multiple accounts. It will also make it easier for fund members to track their super.

Consumer advocate Xavier O'Halloran, a director at Super Consumers Australia, says stapling means fewer people will be left paying for insurance across multiple super funds for policies they may not be able to claim on. "Paying for duplicate policies can cost you $50,000 over your working life," he says.

Regulators and consumer groups alike have put total and permanent disability cover under the spotlight.

O'Halloran says if you work part-time, are unemployed, work in hazardous occupations or are older, it's harder to claim an insurance benefit.

"They face a higher bar than the standard test when it comes to claims."

Over 90% of Australians have TPD cover through their super fund.

O'Halloran says ASIC did a study to see what the difference was for someone who faced one of these highly restrictive tests versus the standard test.

"It found the denial rate on average was 60% if you faced this more restrictive test whereas the denial rate on the other test was 10%. "Effectively, what super funds are doing is charging people for cover they can't claim on, particularly vulnerable people."

Under pressure to address the problems and ensure it delivers members value for money, the industry is working on a voluntary code of practice.

While the Financial Services Council says its members companies recognise that their own members must be able to claim on the default cover they have been paying for, it will not stop fund trustees from excluding high-risk occupations from default cover.

"For all those people that it won't protect, that are defaulted into a fund that doesn't have cover, they've effectively been carved out from the safety net," says O'Halloran. "If you already have insurance with them, you'll be able to keep it and they'll cover you. But not if you are a new fund entrant."

It highlights the importance of checking your insurance. Mark Kachor, managing director of research firm DEXX&R, recommends you contact your fund to find out about your cover.

"It's probably best doing it in writing so if the worst happens there's a record of what they responded with. Say 'I wish to confirm that I will be eligible for payment under my current cover' and ask them what information they need to confirm it."

Kachor welcomes stapling as it will make it easier for members to manage their insurance cover in the one fund.

And if you value your existing cover because you've been through the underwriting process and obtained a higher sum insured, you don't need to give up your existing fund when moving jobs, he says.

"If life cover is important to you, tell your new employer to pay your SG contributions into it. That's the whole point of choice legislation. Employees determine which fund they're in, 
not employers."

And if another fund happens to be a better performer, you can arrange your affairs to get the best of both worlds.

"Say you've got $1 million worth of cover, you're 60, and you're happy with your cover but not happy with the fund's investment performance. You can roll over $980,000 into a better-performing fund and leave $20,000 behind to pay for the premiums.

"All the contributions continue to come into the old fund and your insurance continues unaltered because it is your default fund. Periodically, you can roll over the contributions that accumulate in it to the better-performing fund and leave, say, $20,000 to pay for your life cover and you still comply with the rules about continuing insurance," says Kachor.

Check ASIC's MoneySmart website to work out how much insurance you need.

Avoid the insurance trap

Check whether the total and permanent disability (TPD) cover you have through super provides you with an adequate financial safety net.

If the dollar amount of cover is too low and/or the definitions of disability are too restrictive, it may be worth looking at what's available outside super.

Insurers offer two main types of TPD policy: any occupation cover and own occupation cover.

Although they sound similar, they are very different.

Under the former, you must be unable to work again in any job suited to you based on your previous training, education or experience. Or any job you can become suited to with education or training.

While the premiums are cheaper, the policies have many exclusions and restrictions that make it harder to claim and offer less likelihood of a payout.

Under the second type of cover, you must be unable to work again in your own occupation, or the job you were working in before your injury or illness. However, this more generous cover is not available through super.

Insurance specialist Roy Agranat, at Fairbridge Financial Services, says one solution is to get your own standalone cover from an outside insurer that allows you to pay the life and any occupation TPD definition premiums from your super account and the own occupation TPD premiums personally. The personal premiums cost is about a third of the TPD premium.

"This way fund members can access the more favourable own occupation definition and still pay the majority of their premium with before-tax dollars."

He says another advantage of having standalone cover is it is portable and not a problem when switching funds.

"If you decide to change super funds, you can simply arrange for the premiums to be drawn from the new fund." Agranat points to another disadvantage of cover in super.

"Fund trustees can change the definitions of TPD at any time and apply them retrospectively."

Before changing your default cover, get professional advice to help you navigate what is, essentially, a very complex environment.

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