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Bigger not always better for insurance charges
(Pictured: Brendan O’Farrell)
by Patrick Liddy
My daughter, having recently joined the workforce, was given choice of super funds with a recommendation to go with one of the big well-known industry funds. She is a university student so not much will be going in by way of contributions for some time. She asked my advice.
I’m a fan of industry funds but when I looked at the numbers, I was surprised at the amount that went out by way of insurance, especially since, as a young woman without any dependents, her need for insurance was less than most of us. I thought I should look around on her behalf and was equally surprised to see some significant variations in insurance charges.
I realise that some funds may be ‘handicapped’ through the overall member demographic. This can sometime cause an over imposition of life insurance cost, to the point where it eats up much of the investment through fees for very low balance members. This, of course, is counterproductive to future savings of any balance holder.
A study of the Rice Warner database yielded some interesting results. Now one thing we have been constantly told is that economies of scale bring benefits in cost reductions. Given this, bigger funds should give better results in costs. This is not always the case. And, again, it is reflected in the pricing of group life across a collective fund to individuals.
Having recently been speaking to Intrust Super, I decided to compare its insurance costs with those of several big-brand industry funds. Intrust Super is a $2 billion fund, run by CEO Brendan O’Farrell, and the funds I compared it against are at least 10 to 20 times larger, so they should be getting more substantial scale benefits in this area than Intrust Super. But, at least in this case, they are not.
O’Farrell is always looking for what’s optimal for members and I understand optimal does not necessarily mean the cheapest. In this case, he appears to be very competitive on the life and TPD front with regards to both cost and functionality.
It is said that group life moves in cycles, and maybe this is an aberration, but the pricing differential on ‘like for like’ was massive. So much so it was an inducement that is causing us to change funds. (See Life and TPD comparisons below)
This is interesting as up until now the younger superannuation contributors have been passive. But according to Martina Tuohey, who was on a panel at My Platform Rules conference last month and heads up the Young Super Network, “younger people are becoming more assertive and funds need to be more aware of their needs.”
One of those needs would surely be cheaper life insurance. Having more investment income due to fewer costs in insurance can be more important than investment performance as the compounding rate of interest ‘law’ tells us.
NOTE: This account does not represent a thorough comparison of insurance options among industry funds. Not all the ‘features’ of each insurance options have been analysed for this report. Various exclusions, such as suicide, which is both prevalent in society and expensive to insure, have not been noted. Investor Strategy News does not recommend this as a guide to any comparison of insurance options among super funds.
