The Federal Government and consumer groups have slammed a "dud" voluntary and non-binding industry code that was intended to introduce greater transparency around life insurance premiums that are automatically packaged into superannuation.
The weakened and voluntary code may force the Federal Government's hand in regulating a sector that draws life insurance premiums from people's superannuation, often without the customer realising it.
Financial Services Minister Kelly O'Dwyer is considering "an appropriate regulatory response" after the voluntary code was slammed as being watered-down and unenforceable within hours of its release.
"The Government is concerned that the superannuation industry has walked away from a commitment to a more robust, mandatory code of practice that had been the subject of earlier consultation," Ms O'Dwyer said in a statement to the ABC.
"Australians should not be sacrificing their superannuation contributions and earnings for insurance they do not need or cannot claim on.
"The Government will consider an appropriate regulatory response in light of the industry's position."
The code released today by the Insurance In Superannuation Working Group (ISWG) claims to provide greater transparency and protection for super members, including simpler and clearer processes for members to opt out of automatic life insurance in their superannuation.
However, the code quickly sparked a backlash from consumer groups, after a year-long review into how the $2.3 billion sector manages insurance premiums within superannuation.
Choice policy advisor Xavier O'Halloran told the ABC that self-interest from insurers about potentially losing some of their revenue from premiums saw the code watered down from a harder draft code released earlier this year.
"It's a wasted effort. After a year of working with consumer groups and others, the industry has delivered a dud code," Mr O'Halloran said.
"It's unenforceable, it's stripped out a lot of the protections that were originally built into it.
"Once it became apparent that the effect on the bottom line of insurers was going to be significant, we saw industry back away from some of the more bold measures that were in the original draft code."
Government concerns and a potential consumer backlash come as large swathes of the financial services sector brace for a Royal Commission into bad and unethical behaviour in the banks and insurance companies.
A key objective of the voluntary code, according to the ISWG, is to ensure that automatic insurance in superannuation "is appropriate and affordable" and does not inappropriately erode retirement income.
Insurers are also required to communicate in "clear, timely and in plain language" when dealing with fund members about insurance in their superannuation.
The review was headed by insurance industry veteran Jim Minto, who maintains that, despite improved protections under the voluntary code, automatic life insurance in superannuation remains valuable for many Australians.
"It delivers enormous benefits without underwriting and must be preserved as a unique aspect of our superannuation system," Mr Minto said.
"This code helps automatic insurance function even better for members, as well as providing enhanced protections where members have decided to acquire 'opt in' life insurance cover through superannuation."
The Insurance in Superannuation Working Group (ISWG) was formed in November 2016 to review automatic insurance premiums within superannuation comprising the Australian Institute of Superannuation Trustees (AIST), the Association of Superannuation Funds of Australia (ASFA), the Financial Services Council (FSC) and Industry Super Australia.
Earlier this year, Australian Super became the first major super fund to make insurance an "opt-in" for younger workers rather an an automatic inclusion.
The decision followed concerns put to the ISWG inquiry, which showed that an overload of unnecessary insurance within superannuation risks a "rapid erosion" of some retirement nest eggs.
Follow Peter Ryan @peter_f_ryan.
