Revealed: The sneaky super habit that costs members thousands

The financial watchdog has uncovered an insidious and little known practice by superannuation fund trustees that could be costing some members many thousands of dollars.

When transferring members between super funds, some trustees have been designating the members as smokers by default for insurance purposes, even though the trustee had no evidence that that was the case.

Others designated members as ‘blue collar workers’ by default, again with no evidence on which to base that decision.

This meant that those workers were charged higher insurance premiums for the life cover they received as part of their fund membership, with the premiums deducted from their super savings.

It can be cheaper to get life insurance through your super fund membership because funds buy the cover in bulk from insurers. But the downsides are that the cover is often more limited than is available in the private insurance market, usually ends at a specific age, such as 65 or 70, and can’t be transferred from fund to fund so if you move, you lose your existing cover. And the premiums are deducted from your super balance, which reduces the amount you have saved for retirement unless you make additional contributions to cover the premium charged.

In one case, a super member was charged about $77,000 more in premiums because they were deemed a smoker by their fund trustee, even though they did not and never had smoked. That member took their super fund to the Superannuation Complaints Tribunal to demand a refund, which the fund trustee refused.

The tribunal decided that although the trustee had told the member of its default ‘smoker’ position in a welcome letter about the fund, that amount of communication wasn’t enough to ensure a disinterested super saver understood the importance of the issue. 

The tribunal forced the fund to refund the member the difference between the smoker premiums they had paid and the lower premiums they should have paid as a non-smoker.

The Australian Securities and Investments Commission (ASIC) said it was looking into the practice.

“There are low levels of smoking in the community, with only 14.5 percent of adults being daily smokers,” the financial regulator said in a report on Friday.

“In these circumstances, it is statistically appropriate to assume a person is not a smoker, in the absence of other information about that member or that group of members.”

ASIC said that even if super trustees communicated their default position to members, a “disengaged” member could suffer a significant financial disadvantage by failing to update the fund on their smoking or other status.

“Inappropriate defaults can be adverse to consumers, as they are unlikely to notice the change in status that has been applied to their member account and take action to fix the issue. We are taking follow-up actions with funds about the issue of defaults,’ ASIC’s deputy chairman Peter Kell said in a statement released with Friday’s report.

ASIC promised to make public the names of super trustees that it felt were failing to meet best practice standards when it came to defaults.

Have you ever been asked by your super fund whether you smoke? Were you aware of this issue?