While Health Super and First State Super boasted a “cultural and strategic fit” when the two funds first announced a merger at the end of 2010, they still had a lot of work to do to join the two plans together.

Twenty months or so on from the announcement, getting members on the same page in terms of their insurance coverage has been among the biggest challenges resulting from the combination, Michael Dwyer, First State chief executive, says.

The task of combining insurance plans and making sure all 750,000 members had at least equal or better coverage under the combined scheme’s new plan meant setting up a separate working group and hiring actuary Rice Warner to advise specifically on the task.

Shades of difference

Among the sticking points, Health Super provided income protection as part of its default coverage, whereas First State had death coverage and total and permanent disability (TPD) as default with income protection optional. Health Super had automatic salary continuance, whereas First Super had an opt-in arrangement.

Also, Health Super’s mainly contract and part-time staff made certain provisions like sick leave redundant, whereas First State’s members, comprising of the New South Wales public service including health workers, police and teachers, relied heavily on such provisions.

Despite what Dwyer describes as the “light blue collar” similarities in the two super funds’ membership profiles, he says, when it comes down to it, the differences between plans can be significant.

The approach CommInsure takes with funds in a merger or successor fund transfer situation, according to head of industry funds Frank Crapis, is to assess the levels of risk associated with the new profile, review the benefits and levels of cover to determine if it’s still appropriate to the majority of members and offer options to help manage price.

“For example, we may suggest separate categories to address the insurance risk, that is, heavy blue, blue, white and professional occupation categories,” he says. “This ensures that the right risk is in the correct category. Sometimes the occupation classification can be difficult to obtain. In these instances, the categories can be based on the participating employer type or by asking the member for qualifying questions upon first becoming a member of the fund, such as questions on salary, sedentary nature of the work and university qualifications.”

The best of both worlds?

There are some basic issues super funds need to address at the time of a merger to reduce or eliminate risks relating to the group insurance coverage of their members.

Phil Patterson, a Towers Watson senior consultant, highlights the main ones: ensuring members are equally or better off under the new plan; that a selection of design is chosen; that pricing is made comparable between the merging plans; and operational risk of the insurer is addressed.

“The biggest difficulties you have merging funds is merging designs,” Patterson points out.

Sometimes funds will opt to use one of the existing plan designs or create a third design, which he says can be a good political option and can also take the best parts from both funds’ designs. 

When it comes to testing operational risk, Patterson says it’s important to ensure the insurer will be able to cope with the administration generated by the claims of the merged entity. Usually, he adds, a merger is a good time for funds to initiate a tender process for their insurance provider.

In terms of understanding the comparability of pricing of insurance between the respective plans, Julie Lander, CareSuper chief executive, says one of her top priorities in the merger with Asset Super announced in September last year was to work out a dollar value for single units of total and permanent disability, income and death coverage.

“You have to work out what a dollar is buying and then you have to make sure the members are getting at least that minimum value of coverage,” Lander says.

In the case of Asset and CareSuper, the cost of existing coverage for each fund ended up being quite similar, according to Lander.

Ages and stages

As a result of the merger and subsequent review of insurance options, Asset Super’s three-tiered options in the 15–22, 23–27 and 28- plus age groups were consolidated into CareSuper’s existing two age groups comprising of 16–29 and 30-plus-year olds, with varying levels of death, and total and permanent disability coverage. After a tender process, the fund selected CareSuper’s incumbent provider, CommInsure.

“Our members aren’t too different, they are mainly office-based and clerical staff… You have to be careful if you have blue-collar workers coming in because you could be at risk of pushing the premium up,” she says.

It’s not uncommon for funds to create a separate category at the time of a merger if the profile of incoming members differs significantly from the profile of the fund’s design.

Categorising insurance

AustralianSuper has five separate insurance categories and a sixth corporate category; each offer distinct categories of insurance profiles relating to legacy merged entities. Around 80 per cent of the fund’s members reside in the standard industry option provided by the fund, according to Noel Lacey, AustralianSuper’s general manager of product.

When the fund was formed in 2006 as a result of the merger between Australian Retirement Fund, the Superannuation Trust of Australia and Finsuper, the fund maintained Finsuper as a separate insurance category that catered to members who are predominantly employed in the financial services sector. Around 5 per cent of the fund membership still resides within this insurance option.

Then in 2011 when AustralianSuper bought Westscheme, rather than fit the predominantly Western Australian workforce into the existing insurance options, the fund created a separate Westscheme insurance category, in which around 15 per cent of the overall membership base currently resides, according to Lacey.

Creating a new category of insurance at the time of a merger can reduce the risk in terms of matching premiums and pricing to the overall risk pool, Lacey says.

Providing members equivalent value

Beyond the headline issues – including dollar-for-dollar matching of premiums and creating categories to group risk profiles – there are some finer details contained in the options and features of the respective insurance plans that are just as important to address when two funds merge.

“Insurance is about value, but terms and conditions of benefit features are as important as value in premiums themselves because they dictate price,” Lacey comments.In particular, he notes, in some plans a “life event” may trigger cover, whereas in some plans it may not.Other important options and features to consider when comparing plans include automatic acceptance limits and the period of time designated by a plan for the beneficiary covered by total and permanent disability or death needs to wait after an event.

Insurance is about value, but terms and conditions of benefit features are as important as value in premiums themselves because they dictate price.”

“Some plans you have to be in a pine box before you get paid; the cheaper ones will be harder to make claims… of course, in a merger, you have to provide members with equivalent value,” Lacey says.

Where the responsibility falls for members who may have recently returned to work on light duties after an accident between the time when two funds merge is another “finer detail” Lacey points to that could present significant risks for combining membership bases. This would be reflected in the takeover terms of the merging funds’ policies.

“A new fund might say a member returning from an accident is on restricted duty, not yet eligible for new coverage, and may not be technically covered. In this case, either the fund or member will have to pay for continuing coverage and the trustees will be held responsible,” Lacey says.

Lacey’s final word of advice: get insurers to sign off on discussions and decisions along the way during a merger process.

“Funds will have more chance of [insurers] supporting their decisions if they are along for the ride,” he says.

CommInsure’s Crapis agrees: “Ultimately, the final design and offering needs to ensure that the member-equivalence rights test is met and decisions are well documented.”

Smith is head of content and managing editor of Professional Planner and Investment Magazine.
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