Superannuation Stapling - are you reviewing your insurance offering inside Super?

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In our recent Mercer Marsh Benefits 2021 The Five Pillars of People Risk report – the second highest People Risk for HR Managers was Talent Attraction, Retention & Engagement. The war on talent has intensified due to the COVID-19 pandemic, with factors such as closed borders, restricted overseas travel, and the changing nature of the work environment all contributing to making Talent Attraction, Retention & Engagement a key concern for employers.

With wages forecast to remain flat in the short to medium term, Employee Benefits are a key component to addressing the Talent Attraction, Retention & Engagement issue. Here in Australia, a robust flexible benefits offering is limited due to Fringe Benefits Tax, and our superannuation (pension) offering of employer mandated superannuation contributions (currently 10%), which must include the offer of death and disability insurance to protect employees. However, with the upcoming Stapling legislation taking effect from 1 November 2021 (for all new employees), employers will need to review the impact of this change on their insurance offering now, and into the future.

What is Stapling?

Briefly, Stapling changes how employers pay superannuation contributions for any new employee from 1 November 2021 onwards. Unless the new employee nominates a fund of their choice (which includes the new employer’s superannuation plan), the employer must check with the Australian Taxation Office and pay the superannuation contributions to the new employee’s existing (termed Stapled) fund. This shift of responsibility has the potential to have a major impact on an employer’s existing superannuation offering, including the insurance component available to employees in that fund.

Stapling: Short-term Insurance Issues

The short-term impact of Stapling on insurance will likely depend on whether the employer pays for insurance inside of superannuation on behalf of the employee:

Employer Pays: there are two main items to review if the employer is using insurance inside of superannuation as part of their benefits package:

The ability to provide cover to all employees will be reduced – Choice of Fund has always made this an issue, but with Stapling this is now amplified which could result in major gaps in cover. This is particularly an issue if insurance is a requirement of the employee’s employment contract.
The cost of insurance and the policy terms will gradually become an issue as the employee opt-in rate drops. There is already a strong argument to fund Salary Continuance Insurance outside of superannuation for tax reasons, greater flexibility of design, and early intervention / return to work strategies, though with Stapling questions now need to be asked around Life cover and what alternatives there are to combat cost due to drops in membership.

Employee Pays: The Mercer 2021 benefits survey shows that most employees fund their insurance arrangements via their superannuation contributions. From an employer’s perspective, this has little impact – though it does bring in the question of providing a competitive vehicle for employees to fund their insurance arrangements which feeds into Talent Attraction, Retention & Engagement.

Stapling: Long-Term Insurance Issues

Group insurance pricing and product terms are determined by the “pool” of members available. Typically, the larger the pool the better terms that can be obtained. Mercer Partner Tim Jenkins notes, “Group insurance arrangements through superannuation have allowed larger employers to deliver tailored insurance to their employees on competitive terms – these arrangements may be under threat over time as a result of Stapling.”

Some of these potential long-term effects for insurance inside superannuation include:

Pricing: When fund demographics become stable over time (i.e. more and more people maintain their Stapling choice of fund when changing jobs), this will start to have an impact on the aging of the fund membership, which will affect both pricing and the application of cross-subsidies.
Occupation Ratings: These may become less of factor as default employer memberships become less relevant, resulting in a blurring of blue-collar/white-collar industries. This will also lead to a rise in cross-subsidisation.
Communication: The importance of engaging with employees will become a major focus. Employees will need constant engagement to not only maintain them within the fund, but also to ensure they are aware of advantages of the tailored insurance arrangements designed to meet their needs.
Policy Terms: With decreasing membership, attractive policy terms such as high Automatic Acceptance Limits may become harder to obtain. Similarly, it may be hard to maintain eligibility rules that may have been previously accepted by the insurer on the assumption that a certain number of new entrants would be joining the fund.

Conclusion

With the war on talent intensifying due to COVID-19, more than ever, now is the time to review your employee benefits offering. This extends to the default superannuation arrangements given the new Stapling legislation coming into effect 1 November 2021 and the impact this will have on your group insurance arrangements.

If you would like to talk to an expert to assist you with insurance arrangements inside of superannuation, please contact david.fraser@mercermarshbenefits.com.

This document is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Marsh shall have no obligation to update this publication and shall have no liability to you or any other party arising out of this publication or any matter contained herein. Any statements concerning actuarial, tax, accounting, or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, accounting, tax, or legal advice, for which you should consult your own professional advisors.

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