Superannuation funds must better segment their memberships to provide tailored income protection cover, according to Rice Warner.

“Super funds have little knowledge of their members’ current and changing personal circumstances, such as their family make-up, number and age of dependants,” the actuary says in a submission to a Productivity Commission review of the super industry.

“Such details are necessary when determining how much income protection cover is needed.

“A fundamental error members can make with income protection insurance is to assume the standard default cover is adequate. Usually it is not.”

Rice Warner says income protection is difficult to offer efficiently within group life, citing the tricky balance of providing adequate cover without diminishing retirement benefits.

The funds also face the challenge of high-net-worth individuals being able to afford the cover outside super.

Most funds limit income protection benefit payouts to two years, even though they should ideally flow through to retirement.

“The median income protection cover meets only 16% of income protection needs – and 41% of needs for those with cover,” the submission says.

“Just 40% of working Australians have any income protection insurance.”

Rice Warner says funds should place more emphasis on educating members about their income protection requirements and the most cost-effective ways to obtain the cover.

“The funds’ current education programs, including their online super calculators, can go some of the way to encouraging members to think how much income protection insurance is necessary. But calculators are only a starting point.”

Rice Warner says if super funds encourage members to obtain advice on income protection, it is likely to have the additional benefit of more people seeking holistic advice on their overall circumstances.