Today Is The Time To Act Like There Is No Tomorrow

Sydney Morning Herald

Saturday May 10, 2008

Simon Hoyle

Most of us have far less insurance than necessary to cover all bases if we were to die or be incapable of earning an income, writes Simon Hoyle.

It's funny how the same approach to two different issues can sometimes provoke wildly disparate reactions. Take retirement savings and life insurance, for example. Life insurance and super go hand in hand for several reasons.

First, insurance is an integral part of any sound, long-term investment plan (and superannuation certainly falls into the "long-term" category).

Second, superannuation funds offer a basic, or "default", level of cover for all members. And third, it's generally cheaper and easier to buy additional life insurance cover through a super fund - particularly when it comes to death cover and total and permanent disability (TPD) cover.

The cost-effectiveness of buying other cover, such as income protection, through a super fund is not as great.

So-called "soft compulsion" programs have been aimed at super and insurance to address both the inadequacy of retirement savings, and of life insurance coverage. But the responses could scarcely have been different.

We all kind of know that for most of us, the compulsory 9 per cent Superannuation Guarantee contributions generally won't create a big enough retirement benefit to live on comfortably.

If we rely on the Superannuation Guarantee alone, many of us face a drop in income, and hence living standards, when we retire.

And we all also kind of know that we're probably not properly insured - if we were to suddenly die or be incapable of earning an income, most of us have far less insurance than we need to meet our financial obligations, let alone look after loved ones into the future.

In fact, the Investment and Financial Services Association (IFSA) says that "the average level of cover provided through superannuation represents just 20 per cent of the needs of the average Australian".

In a report published last year, IFSA said: "Average group life cover levels are around $70,000, which is $165,000 short of the average new mortgage."

When the financial services group Plum launched its "Escalator" program in September 2006, it was roundly applauded as being a smart way to address the issue of inadequate retirement savings. The Escalator program signs people up today to make higher contributions to superannuation at a later date. Participants are deemed to be "in" the program by default; to avoid the future commitment they must actively opt out.

But since most of us understand that making greater super contributions will ultimately be good for us, and because most of us are a bit lazy and apathetic, people in the program generally do not bother to opt out. Escalator has been successful in the workplaces where it has been introduced. Plum says 19 of its 82 employer clients have implemented the program, and another 19 are considering doing so.

Even if we believe we have enough life insurance cover through our superannuation fund, and we do not need to buy any more, the basic, or default, levels are simply inadequate for most people.

The funds manager BT aimed to increase the level of insurance of members of its super funds by introducing an opt-out scheme. The manager planned to automatically enrol members for higher insurance cover (at a higher cost), unless they specifically advised BT that they did not want the extra cover.

The move provoked such an outcry and backlash that BT was forced to withdraw the plan.

The general inadequacy of insurance does not receive as much publicity or attention as the general inadequacy of retirement savings. Investors spend a lot of time thinking about how to accumulate wealth. But fewer of us spend enough time thinking about how to protect that wealth.

Insuring our lives, our incomes and other intangible assets can help ensure gearing strategies can continue even if our income ceases; it can help us take care of our financial obligations should we die or be unable to work; and it can help us avoid having to prematurely unwind a long-term investment plan and realise assets to fund medical and other expenses, or to fund day-to-day living costs.

"I think [BT's plan] was a good idea," says Brad Jeffrey, head of Watson Wyatt's superannuation consulting and actuarial practice.

"I've been trying to think what went wrong for them. They got a fair bit of negative publicity about it, and they decided to kill the project. So whoever generated that publicity killed it, and that seems quite sad, to me.

"I don't know if they had some issues with their communication approach and style, or whether someone in particular took exception to it and got more publicity than they deserved. But it was a pretty sad outcome."

Jeffrey recently wrote a research paper on how superannuation funds can be used to address underinsurance issues. Jeffrey says the superannuation debate has (rightly) focused on the long-term nature of retirement savings, but the shorter term issues, including insurance, also need to be addressed.

"It's great to see people starting to focus on retirement savings adequacy, but we have a bit of a concern that people are taking their eye off the short term," he says.

"You need to consider [the implications of] not getting through to retirement in the normal way you would expect to get there, as well as saving for it. There's a short term and a long term when you're looking at retirement savings, and you have to look at the risk of something happening to your savings plans."

Jeffrey agrees that some insurance is better than no insurance, but he says the concern is that too many people consider some insurance to be enough.

"You should not just accept [your super fund's] default levels as being adequate," he says - and here there's a parallel with the long-term aspect of super. We do not generally accept the default, or 9 per cent, Superannuation Guarantee contribution as being adequate, either.

"People look at defaults as implying that this is the right number, that someone has thought about this for me," Jeffrey says. But he points out that is not the case. Particularly in super funds whose insurance arrangements are quite old, this attitude can be misguided.

"Some funds have default arrangements that were put in there five, 10 or 15 years ago," Jeffrey says. "They were put in there on a cost basis, not an adequacy basis: 'What does a dollar [premium] a week get me?', not 'how much do I need?'."

Jeffrey says anyone looking for more life insurance cover should look at their super fund first.

It is more tax-effective to buy insurance through a super fund: contributions to the fund come from pre-tax dollars, whereas if you buy the insurance yourself you must use after-tax income. And there are economies of scale and other efficiencies that come when insurance is offered to a large group of people, such as the members of a super fund.

From July 1, super funds will be required to provide a minimum default level of cover (see table). But for many people, the default is still too low.

Jeffreys points put this legislated minimum scale was put in place in 2005, although it only comes into effect this year.

"My point is that it's an inadequate scale. I wouldn't want people to see it as a rubber stamp by the Government. It's an anachronism that it exists, but it exists. Don't take [the scale] as any kind of rubber stamp or implication that it's reasonable."

Jeffrey says there needs to be mechanisms to make it easy and cost-effective for these people to obtain the cover they need. He says opt-out schemes still have a role to play, despite BT's recent experience.

If a group of fund members can be targeted at an employer level, there's a better chance of communicating effectively to them the reasons for and details of the proposed changes.

This can help avoid the kind of situation - like the one reported in the Herald a couple of months ago - where members of a superannuation fund failed to read the documents they had been sent, and then objected to having been signed up to a higher level of insurance apparently without their knowledge.

This lack of interest or engagement (and sometimes unfortunate timing, if documentation reaches members at a time that is not convenient for them) is what ultimately stymied the BT plan.

In a statement shortly after BT withdrew its "opt-out" plan, its chief executive, Rob Coombe, said: "Customer feedback and research confirming low levels of engagement with regard to superannuation have raised concerns at BT Financial Group about the appropriateness of 'opt-out' insurance processes and the likelihood that members have fully understood and considered their options in these arrangements.

"After considering customer feedback and targeted research confirming low levels of member engagement with super mailings, amongst other factors, BT will no longer introduce its planned BT Base Cover insurance to a number of its corporate and personal super products as scheduled,' he said.

"As a superannuation provider, we are constantly looking for ways to better protect and secure the financial wellbeing of our members.

"But we must strive to 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."

YOUR OPT-IN OPTIONS

* Read the information sent to you by your superannuation fund. Much of it may be boring, but it may contain something, such as an opt-out insurance scheme, that could affect you directly.

* Carefully consider the offer being made. Check the pricing against similar offers made by providers other than your super fund (or by the provider endorsed by your super fund).

* Assess your insurance requirements, and obtain professional help if needed. There?s no one-size-fits-all level of cover; the amount you need will depend on your investment plan (whether it involves gearing, for example) and the level of your other financial commitments.

* If you have any questions, contact your fund and have them answered. If they cannot answer your questions clearly and concisely, that?s their fault, not yours.

* If it seems too complicated, or there are aspects that you do not understand and your fund cannot explain, seek independent advice. Ask your fund if they can

arrange a no-cost referral to a financial planner.

* Investigate your payment options. For example, if higher insurance cover means a higher premium (and it almost always will), rather than reducing the portion of your

contribution that goes towards building your retirement savings, see if you can make an additional contribution to cover the higher premium instead.

* If you decide against accepting the offer, be sure to respond in a timely manner, and clearly opt out of the planned scheme. You cannot be forced to buy something you do not want, but if you miss a deadline your fund may deem you to have accepted the offer.

© 2008 Sydney Morning Herald

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