Pressures on super mount

2 Dec 2013 104 month(s) ago

InsuranceInsurance premiums are rising, gobbling up the increases in super contributions. And lobbyists for the financial advice industry are gearing up their efforts to have legislative changes watered down. It is a time for SMSF investors to be wary.

InsuranceAustralia's superannuation industry operates a huge pool of capital; more than $1.5 trillion. So it should come as no surprise that there is a lot of manouevering from powerful providers. There is news today of two examples of this. One is the ratcheting up of insurance premiums, which just happens to match the increases in the superannuation guarantee (the increase in contributions to super from people's wages). The AFR reports that the insurance companies see an increase in business:

"Soaring life insurance premiums are expected to absorb all the rises in the superannuation guarantee for the next six years, prompting some in the retirement savings industry to re-think their insurance strategies.

Sharp rises in claims against death, disability and income protection policies are forcing insurers to increase premiums sold through super funds by about 50 per cent.

As a result, a greater proportion of super contributions is being diverted to pay for life insurance costs, rather than being forwarded to members’ retirement accounts.

Rice Warner, one of Australia’s leading actuarial firms, predicts the planned increase in the level of compulsory contributions to 11 per cent by 2019-20 will be absorbed entirely by rising insurance premiums.

“The price rises in the pipeline will soak up all the super guarantee increases for the next six years,” said Rice Warner principal Richard Weatherhead.

He estimated that insurance costs will double to 2 per cent of salary over the next few years.

REST, one of the biggest super funds in the country with more than $25 billion of assets, said funds were responding to the difficult conditions by looking at ways they could tailor policies to suit different members to ensure they were appropriately insured.

This could potentially mean lowering some members’ level of cover and hence their premiums.

“I still see a number of funds that are providing high levels of cover to members when they’re young, and lower levels when they’re older,” said REST chief executive Damian Hill."

Meanwhile, the lobbying to remove some of the requirements on financial advisers to be more transparent and less conflicted (FoFA), is intensifying. Itr is hard to see how they will not have some success, which should be a warning bell to anyone receiving financial advice:

"Assistant Treasurer Senator Arthur Sinodinos told a Financial Services Council breakfast in Sydney last week that the underlying concern for the government was the cost of advice and the manner in which FoFA, as currently structured, carried with it the danger of advice being made too expensive.

While the Coalition argues Labor’s FoFA reforms involve excessive red tape, there are some concerns within the finance sector that rolling back the legislation will once again expose financial consumers to high charges and weaken restrictions on advisers.

Sources say both Treasury and the Australian Securities and Investments Commission have expressed concern about Coalition plans to change what are known as “best interest” provisions which set out that a financial adviser must act in their clients’ best interests.

There is also speculation that they will be exempted volume-based rebates – commissions garnered on platforms which allow planners to aggregate a range of investments options.

Commissions may also once again be paid under so-called group risk ­provisions. For example, where life insurance or total and permanent disability products are bundled with superannuation arrangements."

The case for having an SMSF, if you are prpeared to do the work yourself, remains.