Fiduciary duty forgotten in related party insurance arrangements

Super fund members in retail funds with binding insurance nominations are getting a raw deal, an Australian Prudential Regulation Authority working paper has suggested.

Authors Kevin Liu and Bruce R Arnold said members of 'bound' funds, where the trustee was required to use a related insurance company by way of the trust deed, paid more for insurance and purchased higher levels of insurance.

Liu and Arnold looked at 52 retail sector funds and found that in 20 cases, the trustee was related to an insurance company, and in all but one of those cases, they were 'bound' to source member's insurance through that provider.

It said members of bound funds paid average annual premiums of $252, or twice the cost of all other fund types, while receiving only 20 per cent more benefit.

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Trustees may be breaking their fiduciary duty, the paper said, by allowing "the insurer to earn a super-profit to the detriment of members".

"The very existence of bound funds suggests that offering both superannuation and insurance is part of a single business model," they said.

The paper also said that in proportionally more of the related-party arrangements, members were not given a group life option.

Liu and Arnold said the cost differences could be due to self-selection, in the case of a superannuation account being opened solely for the purpose of insurance, or product features which could over time deliver a comparable level of benefit.

However, they did not think so, as the data was analysed over a six-year period.

The authors suggested trustees assess their fiduciary duty in regard to sourcing the best insurance arrangements for members.

They said if trustees were bound by the trust deed, life insurers should be discouraged from price-fixing, due to their duties under the Life Insurance Act 1995.