The trick super funds use to take more of your money

SUPERANNUATION funds have been caught out falsely labelling ­people as smokers, making them pay higher insurance premiums.

The Australian Securities and ­Investments Commission blew the whistle on the practice on Friday, saying millions of dollars may have to be repaid to workers.

The corporate cop vowed a crackdown on the funds defaulting members into higher-cost life insurance policies. It said they had been ­"unfairly eroding" the retirement nest eggs of average Australians.

"When members are transferred … some trustees automatically classify members as smokers or blue-collar workers unless specific information to the contrary is received from the member," the ASIC report said.

"If the member is not a smoker or blue-collar worker, these default transfer settings can unfairly ­increase insurance premiums and significantly affect the size of the member's superannuation benefit."

ASIC was revealing the results of its examination of the insurance ­arrangements of 47 super funds.

It also revealed that while Australians paid billions each year in ­insurance through super - particularly death, disability and income protection cover - about a quarter of fund members did not know they were covered.

In the 2016-17 ­financial year, workers paid $9 billion in insurance premiums through their super.

The ASIC pointed the finger at a "small minority" of funds who transferred members between policies without checking if they were smokers. It called that unacceptable when "recent data indicates that only around 14.5 per cent of the adult population smoke daily".

It also pointed to recent data showing only around 26 per cent of all workers were in blue-collar roles.

ASIC did not identify which super funds, or how many, undertook the practice, allowing them to collect far bigger insurance fees for the insurer.

It said it would "seek confirmation" from trustees that appropriate changes to default transfer arrangements are being made.

But it also said it would make sure trustees "review current and past practices to determine if they need to take any action regarding existing members", meaning it wants to make sure members who were unfairly charged fees are paid back.

It is believed this could be in the millions of dollars.

ASIC said in its investigation one super fund trustee said it defaulted its members as smokers to ensure that members' claims "were not denied if they declared smoker status sometime in the future".

The corporate cop also pointed to a 2015 Superannuation Complaints Tribunal decision in which a group of super fund members who had been unfairly labelled as smokers were paid back $77,000 by their fund.

Superannuation law expert, Berrill and Watson principal John Berrill, said the practice was not acceptable.

Mr Berrill said the responsibility was on superannuation funds to be aware of what members were paying when they took out policies on behalf of its members.

"Insurance premiums should reflect the real risk members represent."

"To assume everyone is a smoker and therefor load up their premiums is problematic to say the least."

The news comes to light as the finance sector royal commission this coming week puts a focus on rorts in the life insurance sector.

About 70 per cent of life insurance cover in Australia is held within superannuation.

Each year about 46,000 death benefits and 17,000 disability benefits are paid through superannuation.