Default insurance within superannuation is poorly targeted and does not meet customer needs, Choice says.

The consumer group outlines its concerns in a submission to a Productivity Commission review of super competitiveness and efficiency.

“The common line from all sections of industry is that consumers are underinsured and default insurance is required to cover people appropriately,” Choice said.

“We strongly question this assumption.”

Consumers are paying for cover they don’t need and many don’t even realise they have it, according to Choice.

It says assumptions must be challenged and new ideas provided.

“Why can’t someone hold [total and permanent disability] without also paying for death cover? Why should a young person have death cover by default when they have no dependants?

“And why should a system be set up so consumers with multiple accounts automatically pay multiple insurance premiums, further eroding their total funds?”

Actuarial group Rice Warner says in its submission that income protection cover should not be provided within superannuation.

“It is relatively expensive – so there is a trade-off between providing this cover without diminishing retirement benefits,” it says.

It is also only suitable for those still working, so members temporarily off work through unemployment or maternity leave may not be covered.

“The commission should consider whether this form of benefit is better placed outside superannuation, noting that such premiums are tax-deductible.”

In its submission, the Financial Services Council takes issue with an objective contained in the draft report that “the superannuation system provides insurance that meets members’ needs at least cost”.

“While the FSC clearly supports the need for insurance benefits funded by compulsory retirement savings to be made available to members at a cost that does not inappropriately erode retirement incomes, we are concerned that an objective that explicitly references ‘least cost’ without considering the broader social and economic value of default insurance benefits may result in adverse outcomes for consumers.”

The FSC suggests the objective be amended to “the superannuation system provides insurance that delivers valuable protection to society and meets members’ needs at reasonable cost”.

The Productivity Commission expects to hand its research report to the Federal Government in November.