The insurance gap gamble: how superannuation legislative changes have exposed employers

The insurance gap gamble: how superannuation legislative changes have exposed employers

The reforms of the Protecting Your Super (PYS), Your Future Your Super (YFYS) and Putting Members’ Interests First (PMIF) have significantly reshaped the insurance landscape within Australian superannuation, inadvertently increasing moral hazard risks for employers. The PMIF reforms build on the Treasury Laws Amendment (Protecting Your Superannuation) Act (the PYSP) that was passed in March 2019. These legislative changes aim to preserve retirement savings by preventing the automatic deduction of insurance premiums from low-balance or inactive accounts. 

At the same time however, a dramatic increase in personal underinsurance has occurred. Howden foreshadowed the impacts of these changes in 2021, and we are now seeing the consequences - it’s been estimated that approximately 50% of Australians have lost default life and disability insurance that was previously provided under superannuation¹. 

While it’s true these reforms are acting in the interest of individuals, by preventing the erosion of their retirement pot, they have left millions of Australians without life, TPD (total and permanent disability) or income protection insurance. 
As a result, there has been an abrupt increase in personal underinsurance and employers now face a growing moral hazard.

Caught in the crossfire: the employer’s dilemma in a time of underinsurance 

Without adequate personal cover, your employees are more likely to request employer-funded ex-gratia leave in the event of illness or injury. This presents as a risk for employers but conversely also presents as an opportunity to address personal underinsurance and therefore improve the financial wellbeing of their people.

Around one in three people will experience a period of over three months off work due to illness or injury at some point in their professional lives. The likelihood of these extended absences are particularly alarming for employers.  

“It is estimated that annually there is 5,000 sets of beneficiaries of death benefits who do not receive any life insurance proceeds as a result of these legislative changes. In addition, without the PYS and PMIF changes there would have been an additional 11,000 individuals a year receiving around $1.5 billion in TPD benefits².”

Evidently the consequences are multi-faceted and far-reaching – the recent legislative changes demand attention and proactive strategies from employers. 

Ethically, there is a duty of care as an employer towards your employees, especially in times of crisis. Practically, providing financial or emotional support on an ad hoc basis is unsustainable and inconsistent. Guidelines become blurred and the tension between care and operational viability heightens.

So, what’s the solution? Employer-sponsored income protection

Employers are realising what’s now at stake after this surge in personal underinsurance. They are responding to this change by introducing employer sponsored Life and Salary Continuance Insurance (Income Protection). This works in the favour of both the employer and the employee.

Introducing Salary Continuance Insurance (Income Protection) is one of the most tangible ways for a company to deliver care to their most important asset, their people. Financial security for employees delivers a profound impact on the culture of a company and their ability to attract and retain talent.

The employer advantage: why this matters to your business

• Attraction and retention - providing income protection can draw in more talent and provide greater satisfaction and retention of current employees. Income protection is a highly valued employee-benefit and is one of the most tangible ways to show care for employees.
• Risk management - income protection can help mitigate risks by transferring moral hazard and balance sheet risk to a structured insurance framework. This will allow your company to support your employees in the event of illness and injury. 
• Risk vs reward - income protection is undoubtedly a smart decision for an employer. It’s a relatively low-cost solution that is FBT exempt and delivers a multitude of benefits, starting from just $400 per employee per year.

This rise in personal underinsurance is not just a personal issue, it’s a growing business risk. By offering your employees sponsored income protection, you’re safeguarding your people and your operations – the engine that powers your business.

¹ https://www.apra.gov.au/putting-members%E2%80%99-interests-first-%E2%80%93-frequently-asked-questions

²Association of Superannuation Funds of Australia, Developments in Insurance Provided Through Superannuation, 28 February 2024, https://www.superannuation.asn.au/wp-content/uploads/2024/02/Developments-in-Group-Insurance-in-Superannuation_27022024.pdf [accessed 26 June 2025].