Superannuation funds and their insurers have been slammed by the government and consumer advocates after the sector over-promised and under-delivered on its Insurance in Superannuation Code of Practice, unveiled on Monday, December 18, 2017.

Minister for Revenue and Financial Services Kelly O’Dwyer told Fairfax Media the government “remains concerned that retirement savings are being eroded by insurance premiums [that] do not always get value for money”. Choice spokesman Xavier O’Halloran was scathing, calling it a “huge disappointment” and “fruitless”.

“They’ve wasted a year and come up with a compromised, unenforceable code,” O’Halloran told Fairfax.

The leader of the industry working group that developed the code insists it represents a “significant step forward”, and lays the ground work for better regulations that could save ordinary Australian workers about $3 billion a year.

The Insurance in Superannuation Industry Working Group (ISIWG) was formed in December 2016 in direct response to intensifying pressure from government and key regulators for the industry to deliver better value for default group insurance members. This was prompted, in large part, by a scandal that engulfed the Commonwealth Bank of Australia’s life insurance arm, CommInsure, after its former chief medical officer turned media whistleblower.

When it launched, the working group promised to deliver a binding code of conduct by the end of 2017, with a transition period of 12 months. What the ISIWG has delivered is a voluntary code of practice with a three-year lead time to comply for those funds that do sign on.

Because the code is voluntary, plans for an independent code administrator have also been dumped, meaning there will be little oversight of compliance among participating funds.

Funds baulked at binding code

KPMG partner superannuation advisory, Adam Gee, told Investment Magazine he was disappointed to see the code had been “watered down” following the release of an earlier draft for consultation.

Gee said this reflected that many funds had complained to their association representatives about the onerous nature of the draft code, flagging they would simply cease their membership if compliance was mandatory.

The Association of Superannuation Funds of Australia (ASFA), the Australian Institute of Superannuation Trustees (AIST) and the Financial Services Council (FSC) are the bodies behind the code. In 2016, the FSC launched its own life insurance code of practice that applies to its life insurers members. This new code applies to super funds.

ISIWG chair Jim Minto, a former chief executive of life insurer TAL Australia, said it proved impractical for the participating industry associations to make adoption of the code a condition of membership.

“We tried really hard but the brutal reality is that we can’t deliver a mandatory code, only legislation or regulation can do that,” he said.

Minto said the official position of the working group is that it would like to see the voluntary code form the basis of new regulations that would have the power to hold the entire industry to higher standards.

In the interim, he is hopeful the voluntary code will lead to improvements at some funds.

Minto said the frameworks for benefit design and claims handling outlined in the code would lead to higher standards. In particular, he described guidelines stipulating how many days funds have to respond to certain member queries as “extremely bold and challenging”.

The code also includes guidelines for how funds should make it easier for members to opt out of group insurance, and when and how funds should cancel insurance on behalf of inactive members.

One of the most controversial changes to the draft code for the final version concerns how funds assess whether default policies are affordable for their members. As in the draft, the final code names 1 per cent of total salary as a cap on insurance premiums; however, the final version applies at an aggregate level and removes the obligation for funds to monitor this for each individual account.

You have to start somewhere

Phase two of the code, due in 2018, will propose standard definitions for key group insurance terms.

Minto said that while the code may be imperfect, it is a good starting point. He estimates that, if implemented industry-wide, it would lead to about a 30 per cent drop in the total value of group insurance premiums collected each year.

The latest available official statistics show that in the financial year ended July 30, 2016, the group insurance sector collected $8.2 billion in premiums and paid out $3.8 billion in claims.

“This is just the first iteration of the code and the meat and potatoes will be in how many funds say they are going to adopt it,” he said.

Minto described the proposal as pragmatic, having been informed by the work of nearly 200 industry professionals. He was hopeful that many funds would adopt it.

“The recent changes to insurance arrangements at a number of major funds in recent months is a sign that the implementation of the code is already under way,” he said. “Those funds that have an insurance review scheduled in the next 12 months will be informed by the code and many of those that don’t may consider bringing those reviews forward.”

KPMG’s Gee said Minto’s estimate of a 30 per cent drop in premiums collected if the code were enacted industry-wide sounded realistic.

“The active member ratio across the industry is sitting at about 68 per cent, so just the steps to cancel payments from those accounts would make a big difference,” Gee said; however, he was less optimistic than Minto about how many funds would embrace the code and to what extent they would implement it.