Merging funds can leverage the benefits of scale to provide better insurance to their membership overall, experts say, but the complexity of melding insurance arrangements can mean some individual cohorts may not be better off.
Some members or member cohorts may end up with less beneficial insurance features or arrangements after a merger, as long as the overall members and the membership are better off, according to Cbus Super group executive Nicholas Vamvakas, in a candid discussion about the challenges funds grapple with when merging.
Sharing insights from Cbus’ recent merger with Media Super at Investment Magazine’s Group Insurance Dialogue, Vamvakas said it can be very difficult to bring two funds together and keep exactly the same insurance offering as insurance arrangements and specific features vary enormously between funds.
Slightly differing definitions in the terms and conditions can make a big difference, Vamvakas said, giving the example of “unable” compared to “unlikely” in a TPD claim. And funds like Media Super that focus on unique cohorts require clauses for unique situations such as journalists working in war zones.
Some funds keep the original pre-merger policies intact, allowing existing members to keep their original insurance offerings, while new members are put into a product they choose. But big issues emerge from this approach, Vamvakas said.
Firstly, it may deny members the benefits of scale that were meant to come from the merger.
“If you can’t bring those pools together under one policy and then go to the insurer and renegotiate the overall outcome for members, you may not be better off in terms of cost and better off in terms of terms and conditions,” Vamvakas said.
In the case of Media Super, Cbus was able to bring the two insurance offerings together under one insurer – TAL – but keep different offerings for different cohorts that were separately branded.
“I think the benefit of scale is that you can bring the cohorts together when you renegotiate the policy down the track,” Vamvakas said. “Equivalency doesn’t mean that every single member will have every term or condition equivalent or better off at the time of the merger.”
This can mean different outcomes for different cohorts, he said.
When Equipsuper brought in the Rio Tinto fund – which had an older membership – the older members were paying significantly more for their insurance than younger members, Vamvakas said. After the funds merged, the cost to older members was reduced, however the cost for younger members marginally increased.
“So you might argue that it wasn’t equivalent,” Vamvakas said. “Now, we were able to get a better outcome overall in terms of the premiums they were paying as a reduction for all members, but there were some members in particular age categories who weren’t immediately better off.”
In mergers that involve defined benefit considerations, “your best friend…is your actuary”, Vamvakas said. When he worked at Equipsuper, which had plans dating back to the 1980s, he would sit down with the actuary every quarter and go through legacy plans line-by-line, checking whether the plans were adequately funded.
Moving to other insurance-related challenges, Vamvakas said the introduction of the Best Financial Interests Duty as part of the previous government’s Your Future, Your Super reforms may question funds’ support of SuperFriend, a mental health support service.
Participating funds direct their insurer to pay a small fraction of each premium to SuperFriend, which then provides mental health support and services back to the funds and to employers more broadly.
Proving this money benefits each individual member – for the purposes of meeting the requirements of the Best Financial Interests Duty – might be difficult, he said. If SuperFriend was effective in reducing the incidence of suicide, then premiums overall should reduce as well, but the problem can be with the application of metrics, “in some situations it is subjective and a broad-based thing”.
One unintended consequence of the Morrison government’s superannuation reforms is the flow-on effect of stapling legislation, Vamvakas said. Young members may begin their career in hospitality and become “stapled” to a fund for that first job. Then if they move to risky construction work that requires different insurance cover of the type Cbus offers, in this situation they may not be adequately covered, leading to potentially tragic outcomes.
More generally, smaller funds “need some relief” from the burden of responding to new legislation, he said.
“There are smaller funds out there who have got eight or ten people in total, and they’re being asked to respond to legislation like this on a week-by-week basis,” Vamvakas said. “It’s tough to survive as a small fund, it’s becoming more and more difficult, as differentiated as you are, just the onus of and the burden of responding to legislation and keeping up.”