Your Future Your Super (YFYS) – The Impact on Insurance in Super

It has been three years since the Your Future, Your Super legislation came into effect.

At the time of introduction, there was the expectation of impacts on insurance in super. We have summarised the activity over the three years, including implementation, government and industry response, and early observations.

The Your Future, Your Super legislation came into effect 1 July 2021. The legislation introduced several changes to the super system, including:

A ‘stapling’ mechanism (effective from 1 November 2021) which aims to help reduce the creation of duplicate superannuation accounts (and thus reducing unnecessary fees) as workers change jobs. When an employer onboards a new employee, they must first request the employee’s chosen super fund and if the employee does not provide one, then the employer must make payments into the employee’s existing super account (using information provided by the ATO).
An Annual Investment Performance Test (effective from 1 July 2021) where super funds are required to notify their members if they fail the test and persistently underperforming products are prevented from taking on new members.

Impact on insurance

The two changes outlined above are expected to impact insurance in super. Some of the anticipated impacts were highlighted by the Actuaries Institute in its Your Future Your Super Submission to Treasury in October 2022^[1], as well as in earlier submissions in 2021.

These anticipated impacts are summarised in the table below.

Table 1: Anticipated impacts of the new YFYS regulations

Stapling

Annual Performance Test

Insurability and Full Coverage

A Gradual Membership Profile Change

Tailored Corporate Superannuation Arrangement

Increased Premium Rates for Underperforming Funds

Some super funds exclude or restrict cover for members in dangerous occupations.

If a person is stapled to one of these funds, they will not receive cover if they move to an excluded occupation.

Stapling, combined with the Performance Test and the YourSuper Comparison Tool, results in a higher proportion of members changing funds through choice. This may increase the number of new members joining a fund outside the eligibility window for unrestricted automatic cover compared with the pre-stapling world.

The occupation mix of a superannuation fund’s membership becomes more diverse over time (and less aligned to any specific industry).

Membership growth rates will differ depending on the industry the fund is linked to.

Funds that attract younger members (who may not have an existing stapled fund) are more likely to retain these members and their age profile will change.

Such funds are expected to see faster growth than funds that attract an older membership.

Funds with changing membership profiles may see a change in claims experience if rates do not align with claims experience for age and occupation.

Employees of many medium- to-large-size corporates receive the benefit of tailored insurance cover under their employer’s default superannuation fund.

These arrangements consist of more tailored cover, better meeting member needs, as the member’s salary and occupation are known by the fund. Many employers subsidise partially or fully the employee’s insurance premium.

The impact of stapling is emerging slowly. Where the employer does not subsidise employee premiums, it is expected that the membership size of these funds will reduce.

MySuper products that fail the Performance Test are expected to see negative membership growth due to higher lapses and, if the test is failed in two consecutive years, the inability to take in new members. This may eventually lead to fund merger decisions if sustainability issues are not resolved.

Such adverse membership impacts would place upward pressure on group insurance premiums due to a loss of scale and reduction in new insured lives who may be typically healthier than the average insured member of the fund.

Your Future, Your Super Timeline

Figure 1: Timeline of YFYS changes [2],[3]

Government response

The Government commenced a review of the effectiveness of the YFYS changes in September 2022 requesting feedback from the industry – including the Actuaries Institute – and released the outcome of its review in April 2023^[3] with the following proposed changes:

amendments to the Investment Performance Test testing period; and
adjustments to the notification letter that trustees must send to members if the fund fails the Performance Test.

As part of the consultation process, the following themes were also noted regarding stapling:

Stapling has increased administrative burden on employers’ onboarding processes, particularly where an employment link is not already established.
Some employers are taking measures to encourage new employees to make an active choice of superannuation fund as part of their onboarding process.

As part of the outcomes media release , the Government confirmed its commitment to stapling and has noted that improvements will be made to the process.

Industry response

In October 2021, the Financial Services Council released an enforceable industry standard which removed occupational exclusions and occupation-based restrictive disability definitions in default life insurance cover in superannuation.^[4] This applied for all insurance claims where the date of the claim event is 10 December 2022 or later.

In addressing the insurability challenges introduced by YFYS outlined above, most trustees and their insurers have removed occupation exclusion and restrictions.

Superannuation trustees have modified their investment strategies and fees so that in future, it is expected to be highly unlikely that their MySuper investment products will fail the Investment Performance Test. This is seen in the results of the test over the first 3 years:

Year	New Fail	Second Fail
2021	13	N/A
2022	1	4
2023	0	1

Underperforming funds

Three Annual Performance Tests have been undertaken thus far, and 17 MySuper products have exited the market.^[5] In 2021, APRA revealed that 13 MySuper products had failed the performance test. Using APRA fund-level superannuation statistics and other public information, we have been able to summarise the structural changes that have occurred for these funds.

Figure 2: Impacts of Performance Test on underperforming funds[6]

Early impacts of stapling

Using the recent APRA fund-level superannuation statistics, several observations on the impact of the YFYS changes on the superannuation industry can be made (Figures 2 and 3):

growth in new member accounts has primarily been in industry super funds, and to a lesser extent retail funds.
merger activity has been a significant reason for the high number of new accounts, driven in part by initial MySuper product underperformance.

Figure 3: Number of new member accounts by fund type [7]

The annual APRA fund-level statistics, shown in Figure 4 (30 June 2023), allowed us to measure the membership change for all superannuation funds. The total number of accounts grew at a low rate from 30 June 2021 to 30 June 2022, and to 30 June 2023, with increases of 2% and 4% respectively.

The overall increase in member accounts is due to a range of factors including:

an increase in the national labour force;
an increase in members exercising choice as a result of greater awareness of superannuation fund performance; and
offset by the gradual impact of stapling on default membership movements, although this is not having the expected impact due to the employer onboarding process (See Figure 3 above).

Figure 4: Number of member accounts at the end of period

The top five funds (by number of member accounts) have seen larger organic growth in membership (excluding SFT) when compared to the industry. The growth rates for these funds have been higher than the average growth rates at the industry level.

Table 2: Change in top five funds’ member accounts^[7]

Fund Name	Number of Member Accounts (30 June 2023)	Net Movement 1/7/22 – 30/06/23	Net Movement 1/7/21 – 30/06/22
AustralianSuper	3,255,344	14%	9%
Australian Retirement Trust	2,334,304	5%	7%
REST	2,023,006	5%	4%
Host-Plus	1,758,858	12%	5%
Aware Super	1,194,591	4%	3%
All	22,282,260	4%	1%

Corporate superannuation schemes

The impact of stapling on corporate superannuation arrangements is slowly emerging as companies are still in the process of implementing the required changes. Over the last two years, the number of corporate schemes has reduced from 13 to six, with four more exploring or progressing mergers.

Many of these have retained their identity as a sub-fund of a larger fund. Since the introduction of the ATO Employer Onboarding Tool, there has been an uptick in employer compliance with stapling rules although significant enforcement activity is still underway.

While stapling may be seen as putting downward pressure on the future growth of the corporate funds, it is anticipated that the degree of impact varies with the size, sector and the culture of the companies concerned.

For some larger organisations, superannuation and insurance offerings are regarded as an important service and a key part of the value proposition to employees, as evidenced by some of the recent corporate superannuation tender activity. Therefore, such tailored arrangements are likely to continue with a focus of strengthening members’ engagement and increasing the take-up rate.

Implications

Early insights indicate that the impact of stapling is expected to be gradual, and most superannuation funds not impacted by the first Annual Performance Test have experienced modest membership changes that may not require immediate insurance pricing and product changes.

However, the membership changes due to stapling may become material over the medium to long term and these changes may need to be considered in understanding the changing experience and setting appropriate insurance premiums.

The impact of failing the Annual Performance Test on MySuper investment products, while initially significant, is unlikely to have any significant further ongoing impact as trustees have been able to accommodate investment and fee changes that are expected to make it highly unlikely these products will fail the test in future.

Insurance continues to be a key consideration for trustees when undertaking a fund merger. Fund mergers are a consideration for insurers when considering a tender or renewal.

References

^[1] King, A. (2022, October). Your Future, Your Super Review: Consultation Paper. Actuaries Institute. https://www.actuaries.asn.au/Library/Submissions/Superannuation/2022/SubmissionYFYS.pdf

^[2]Australian Government – The Treasury. (2024). Review of Your Future, Your Super Measures. https://treasury.gov.au/consultation/c2022-313936

^[3]Australian Government – The Treasury. (2023, April). Your Future, Your Super Review – Summary of issues. https://treasury.gov.au/sites/default/files/2023-04/c2022-313936-yfys-review.pdf

^[4]Financial Services Council. (2024). Occupational Exclusions In Group Life Insurance Policies In Superannuation. https://www.fsc.org.au/policy/superannuation/occupational-exclusions

^[5] Australian Prudential Regulation Authority (APRA). (2023). Insights Paper – 2023 Performance Test. https://www.apra.gov.au/insights-paper-2023-performance-test

^[6]Australian Prudential Regulation Authority (APRA). (2021). Your Future, Your Super Performance Test – 2021. https://www.apra.gov.au/your-future-your-super-performance-test-2021

^[7] Australian Prudential Regulation Authority (APRA). (2024). Annual fund level superannuation statistics. https://www.apra.gov.au/annual-fund-level-superannuation-statistics

^[8] Ministers Treasury Portfolio. (2023, April 4). Your Future, Your Super Review outcomes. https://ministers.treasury.gov.au/ministers/stephen-jones-2022/media-releases/your-future-your-super-review-outcomes