Your Future, Your Super

Are employers ready for the unintended consequences of the Your Future, Your Super legislation?

The government’s incoming legislative changes known as Your Future, Your Super (YFYS) are designed to further enhance the retirement outcomes of Australians. However, looking more closely at the regulation, in addition to other recent legislative changes (Putting Members’ Interest First and Protecting Your Super) shows that they have delivered unintended consequences in relation to the life insurance needs of ordinary working Australians.

What are the legislative changes?

The Your Future, Your Super legislation, coming into effect 1 November 2021, is purposed toward correcting issues such as the creation of multiple Super accounts under different employers, reducing the costs of superannuation maintenance and holding underperforming funds accountable to members. One of the main changes it creates is that Superannuation now ‘follows’ employees, rather than allowing further additional accounts to be created.

The rationale for these changes is to better align the Superannuation legislative framework with the needs of Australia’s population and to make investments in Superannuation work better for employees.

What are the unintended consequences for employees?

There is a potential for serious consequences to follow the commencement of the YFYS legislation. The most serious relates to the default insurance provided under most superannuation policies. 

Presently, when an employee joins a new employer and joins their employers default superannuation fund, the new account typically provides insurance that meets the needs of that specific employer and/or occupation.

Once the YFYS legislation comes into effect, the reforms will include stapling of the individual’s first superannuation account and a new super fund underperformance assessment. Due to insurance often being included as part of the superannuation product, this is problematic due to the risk of underinsurance occurring.

The ultimate risk of this legislation is that stapling of an employee to a specific default fund for the duration of their career, particularly where that fund is the default fund for the individual’s first casual employment, will exacerbate the underinsurance of the working Australian population.

For example, if Mary joins ABC Superannuation Fund at the age of 17, and is afforded $50,000 insurance cover, this coverage amount will remain with Mary throughout her working life, despite her income and insurance needs growing significantly above this level. 

Presently, changing jobs, employers or indeed careers is considered a life event. This in turn allows an individual to default into a new employer’s superannuation arrangements and benefit from the associated default insurance coverage, with that default insurance typically designed for the needs of the firm’s employee cohort. Stapling prevents this from occurring.

What do employers need to look out for?

Superannuation has not only played a pivotal role in the wealth creation of Australians, but also the wealth protection. This is due to superannuation being a universal vehicle to which a default level of insurance was provided to the majority of working Australians.

In 2020, there were 50,900* individual life and disability insurance claims paid from insurance housed inside Superannuation arrangements.

The rise of illness and injury continues to significantly impact upon the health and wellbeing of the Australian population which further exacerbates the problem. A study conducted by the Australian Government’s Institute of Health and Welfare, determined that Australians lost 4.8 million years of healthy life due to living with illness and dying prematurely. The disease groups causing the most burden on the population were cancer (18% of the total burden), cardiovascular diseases (14%), musculoskeletal conditions (13%), mental & substance use disorders (12%) and injuries (8.5%). Together, they accounted for around two-thirds of the total burden in Australia.

The result of all the legislative changes and stapling employees to default insurance coverage has effectively reduced the universal nature of insurance coverage and created an inability for employers to effectively rely upon or provide their employees with adequate insurance via superannuation. 

The combination of the changing legislative provisions, coupled with the rising burdens of chronic disease management, results in a significant increase in risk for employers. The lack of a universal or consistent approach to the default level of insurance cover available to employees and/or their dependants, means that employers are left with an increasingly moral risk surrounding how to effectively support employees, while protecting their organisations financially, in the event of a non-workplace death, long-term illness or injury. 

What can you do?

The result of this legislation is employers are looking to mitigate the impact on their employees and business through ensuring they have a defined framework to support their employees in the event of a non-workplace death, long-term illness or injury.

The challenges that are being seen with this legislation are increasingly being dealt with by employers introducing insurance arrangements outside of superannuation. Group Salary Continuance insurance arrangements (otherwise known as income protection) are an increasingly cost-effective way to not only transfer the burden of this risk, but also enhance an employer’s overall attraction and retention to staff members.

Speak to Howden’s experts today to find out how your organisation and employees can be better protected. 

* APRA Life Insurance Claims and Disputes Statistics December 2020 (issued April 20 2021)