The fear of giving members ‘financial advice’ is keeping super funds from talking directly to their members about insurance. In advance of this month’s Australian Institute of Superannuation Trustees Insurance Symposium, STEPHEN SHORE hears the industry’s case for being allowed to talk death, TPD and income protection with members, and about how they can best look after members anyway through more skilful deployment of default options.
Underinsurance is often blamed on low levels of engagement with super fund members. There is evidence, however, that member awareness is improving. Anecdotally, it seems more people are calling their fund to enquire about insurance, and employers are beginning to list insurance as an important driver of their satisfaction with a fund. But underinsurance persists, because what should be a simple discussion to have with members is made anything but by a prescriptive regulatory regime around ‘financial advice’.
According to Jeff Bresnahan, managing director at SuperRatings, estimating the level of insurance a member needs is not a complicated calculation, and should only take a couple of minutes. But any advice that takes personal details into account is considered financial advice by ASIC. Most funds themselves either do not have a licence or choose not to offer financial advice, so they are unable to tell members what an appropriate level of cover might be.
Instead, funds offer to transfer members to a financial planning service. While financial planning is seen as a key service for members, the funds offering it admit few people actually use it. Glenn Palmer, general manager insurance at AustralianSuper, says members prefer an answer on the spot. “The number of members that we refer to Industry Funds Financial Planning (AustralianSuper’s outsourced financial planning service) who actually go on to get that advice would be very, very small; a tiny percentage.”
Industry bodies IFSA and AIST agree that regulations should be relaxed to allow funds to provide limited advice. Fiona Reynolds, chief executive at AIST, says financial planners are generally not interested in people with small account balances. Nor do people need to go to see a financial planner about basic financial planning issues such as the Government’s co-contribution scheme, insurance and member fund or investment choice, she says. “Super funds should be able to give advice about products and services available in the fund,”
IFSA has suggested to the Government that funds should be able to provide limited advice without an SOA, as long as the person giving the advice is a holder of the Regulatory Guide 146 qualification (still better known as PS 146). However David Whiteley, executive manager at Industry Super Networks, says there is no need to change the definitions of personal and general advice.
He cautions that changing the line in the sand of what constitutes financial advice opens up risks to the protection of consumers. “Consumer protection should be the top concern for governments and regulators,” he says. “If a trustee of a super fund offers advice, it falls under their fiduciary responsibility to ensure that it is in the best interest of the member. The emphasis should be on removing conflicts of interest when providing advice on a member’s superannuation, including insurance.” Palmer says even if regulations were to change, AustralianSuper isn’t waiting for that day before it seeks to better inform its members. Palmer’s fund, like several others, has circumvented regulations around advice by adding an insurance calculator to its website. “Because members can play around with different variables such as age and salary themselves, it is not really financial advice,” Palmer says. “It’s more of a self-service situation.”
Calculators can help members estimate what their level of cover should be, but most of those on fund websites at the moment are basic, he says. “We are currently working with software which should improve our insurance calculator, asking questions that will better tailor the answers.” Brad Jeffrey, head of actuarial and employee benefits practice at Watson Wyatt, says if funds give their members tools such as the calculator and general insurance education, it is a call to action. “People will then be much more likely to go and get financial advice,” he says.
Despite signs interest is increasing, most funds are still resigned to the idea that the paternalistic approach is the most practical way of boosting members’ insurance levels. Some funds claim to have had a lot of success with increasing the default level of insurance, while others have decided against it because of perceived ethical problems. At AustralianSuper, Palmer says feedback on the raising of default cover from one to three units in November 2006 had been good, with less than 1 per cent of members choosing to opt out to a lower level of cover.
Of course, given the reason for raising the default cover in the first place was to address member apathy, Palmer admits it would be brash to infer that the lack of complaint meant 99 per cent of members were pleased with the new levels of default insurance.
BT Financial Group was never in danger of suffering such an illusion, after it wrote to superannuation customers in January to tell them that it would be launching an opt-out insurance product, Base Cover, in April. If members did not want their level of insurance to automatically increase, they were required to opt out of Base Cover before January 18. A BT spokesperson says around 1 per cent of superannuation customers responded to the letter with concerns about the “process” in which the new product was being offered. This prompted BT to conduct an internal review, and through phone interviews it realised that a significant number of the members were unaware that their insurance cover and premiums were about to be increased.
In March, BT decided to cancel the project. BT chief executive, Rob Coombe, said: “We must ensure that our customers are fully aware of and understand any offer being made to them and that they consciously accept any change to their insurance profile.” Jeffrey of Watson Wyatt says there will always be mixed responses to funds assuming the responsibility of adequately insuring members. “Some will say, ‘hey thanks for doing that and looking after me’, while others will say ‘hey you’ve gone behind my back’,” he says.
Jeffrey says insurance could be made more popular through the better use of age-based defaults, designing them to more accurately reflect demographics following a positively skewed curve that peaks at around 30 years of age, rather than the sliding linear scale that some funds have in place, which arguably can overinsure some younger members. But some young people do have dependents, a mortgage and other liabilities, he says. “Default options are always an imperfect compromise. There’s a fine line between under, adequate and over insured,” Jeffrey says.