The biggest financial swindle in Australian history was not masterminded by a smooth-talking shyster in silk tie and fancy loafers. It didn’t involve complex money shifting to the Bahamas, the establishment of sham companies or falsified documents.
By Jessica Irvine.
The biggest financial scam ever perpetrated against ordinary Australians unfolded – and continues to unfold – in plain sight.
The government knows it’s happening. Regulators know it’s happening. The people responsible for safeguarding the money being effectively stolen know it’s happening.
And no one is doing anything significant to stop it.
And you still probably have no idea about what I’m talking about.
Worse – if you have no idea what I’m talking about, or lack the desire to understand the detail to follow, it’s even more likely that you’re caught up in it.
And if you tune out again now, you’ll miss what I think is an opportunity for millions of Australian to receive potentially thousands of dollars each in financial redress.
I’m talking about the duplicate charging of fees and insurance premiums across multiple superannuation accounts – the most significant structural problem bedeviling our mammoth $2.6 trillion super industry.
The issue is under the microscope this week at the royal commission into misconduct in the finance sector.
Service fees deducted after members had died
Senior counsel assisting Mr Michael Hodge QC describes four breach events that Nulis had reported to APRA and ASIC including the fourth event where Nulis kept charging fees on accounts of members who had died.
More specifically, as outlined by senior counsel assisting, Michael Hodge, QC, in his introductory remarks on Monday: “We will examine whether trustees are acting in the best interests of members in circumstances in which they know that they have members that have multiple accounts within the same fund.”
There are three types of insurance products offered through super. Death cover, otherwise known as life insurance, pays a lump sum or income stream to your beneficiaries if you die. Total and permanent disability insurance pays you a benefit if you become seriously disabled and are unlikely to work again. Income protection insurance pays an income stream if you are temporarily unable to work.
The vast majority of Australians who have their super sitting in their employer’s default fund will have the first two types of cover. Costs can vary, but premiums for these products can be as high as $2,000 a year, deducted straight out of retirement nest eggs – often without the member noticing.
Australia’s super system is fairly unique in the world in providing insurance in this way. The US doesn’t, nor does Britain. Canada does; so does Chile. Australians can opt out of the insurance cover, but few do.
Having insurance products sitting in super is a historical quirk; the result of unions wanting to get a good deal for workers. In addition to bolstered retirement savings, the architects of super wanted cheaper life insurance for workers. Through bulk buying and spreading coverage across younger and healthier workers, premiums are generally cheaper.
But, somewhere along the way, things got messy. The idea of a job for life died and the Australian workforce scattered to the winds, switching employers more often, and accumulating multiple super accounts.
Policy failed to keep pace and the legacy is multiple super accounts – the true dark heart of our super industry.
Paying duplicate admin fees on such accounts is bad enough – but it is possible to mount an argument that such fees reflect the cost of managing the money.
But to deduct insurance premiums for policies that members would never be entitled to claim on – so called “zombie policies” – that’s tantamount to theft. This is particularly the case for income protection policies, which can only be claimed from one insurer.
The problem is widespread. According to evidence presented to the royal commission this week, around 2.5 million people have two or more super accounts with insurance cover.
The Productivity Commission recently estimated Australian are paying $2.6 billion extra a year because of unintended multiple accounts. That’s $1.9 billion in excess insurance premiums and $690 million in excess administration fees.
And that’s not even including the foregone returns in retirement that money could have earnt.
According to the Productivity Commission, the retirement balance of a typical worker who held two accounts across their working life, compared with just one, would be over 6 per cent, or $51 000, worse off.
Younger workers, low income workers and people with interrupted work lives are hardest hit, sometimes by as much as $125,000.
And the problem is getting worse. Insurance premiums in super have skyrocketed over the last three years, as insurers have sought to recoup the cost of higher claims rates, as people become more aware that they have cover.
In line with the Productivity Commission’s recommendations, the Minister for Financial Services, Kelly O’Dwyer, announced as part of this year’s budget that insurance in super would become “opt-in” for workers aged less than 25, for inactive accounts and for balances below $6,000.
This is expected to preserve a whopping $3 billion in retirement savings for around 5 million individuals.
Kelly O’Dwyer announced that insurance in super would become “opt-in” for workers under 25, for inactive accounts and for balances below $6,000.
Photo: Alex Ellinghausen
The Productivity Commission wants the government to go further, adopting a new centralised system whereby workers are issued with one super account at the start of their working lives, defaulting into a “best in show” product determined by an independent panel, which would follow them for their working life.
It points the finger of blame at policy makers for letting duplicate accounts multiply, suggesting “much (but not all) unnecessary balance erosion is beyond funds’ control”.
But the royal commission is honing in on the super trustees themselves – the people appointed to act in members “best interests” and ensure they are only offered insurance if it “does not inappropriately erode the retirement income of beneficiaries”.
For funds to insist they are unaware of duplicate accounts and duplicate insurance policies is too cute by half.
That may have been true years ago, but better data matching, including the “Super Match” system, already allows funds to better see when members already have accounts with insurance.
Arguably, funds are already failing their “best interests” duties by continuing to sign members up to duplicate accounts and policies.
Where it is clear funds have signed a member up to a duplicate policy, it is already possible to go direct to the super fund to have the premiums refunded.
If everyone affected did so, the potential refunds would be substantial.
Further law reforms are needed to set a clear, proactive requirement for funds to identify if members have existing accounts and insurance policies and consolidate them.
But it’s also time for consumers to wake up to the scam.
It’s not just time to get angry about the super insurance swindle. It’s time to get even.