Students paying $75 million for ‘nothing’
What's the verdict on whether student superannuation actually benefits students?
“Every year, I reckon, maybe it’s […] $50-100 million, the super industry is charging Australian young people that kind of money, for nothing.”
I’m speaking with Andrew Maloney, the Managing Director of Student Services Australia. We’re on the top floor of their office building in Chippendale, where his staff manage a textbook and notes exchange, a university tutor-matching site, and the ‘Lost on Campus’ app. He’s just shown me the back-of-the-envelope maths that inspired the creation of Student Super, a super fund designed to solve one of the “big problems” facing students.
Here’s the pitch:
Currently, employers must pay 9.5 per cent on top of employee’s wage into a super fund. This will increase to 10 per cent in 2021, gradually increasing to 12 per cent in 2025.
Take working-age high school students, of which there are 800,000 in Australia. Combine that with a domestic university student population of 1,100,000, and you get a total workforce of around 2,000,000 students. Half of those are employed—37 per cent of the high school students, and 67 per cent of uni students.
Maloney is waiting for the hard data, but based on two years of student focus groups, he says that around 50 per cent of students have had their super balance set to zero by super fund fees.
That’s 50 per cent of 2,000,000 working students, or in other words, a million students. And assuming $100-$200 in annual fees, students lose $50-100 million dollars of super to fees every year.
“For nothing.”
Student Super’s fees are designed to fix this problem. The fund will not charge members any fee for balances up to $1,000, which will be held in a Westpac cash account. Any amount above $1000 will be invested in custom mixes of Macquarie Index Funds, curated by Activus Investment Advisors, a high-profile Australian partnership. Customers with balances between $1,000 and $4,999 will receive a 50 per cent discount on the account fee. The account fee itself is set at $78 per annum, plus 0.99 per cent of an account’s total funds.
Student Super manages this reduction primarily by cutting fees that they consider ‘unnecessary’ for first time super holders. Chief among these are fees for insurance, often packaged with a super account, as a compulsory or ‘opt out’ add on.
Take the most common type of super account, the MySuper fund. Originally a Gillard government policy, MySuper-type accounts were introduced in 2014 as part of a range of super reforms. Employers have to use one of the default MySuper funds if they create accounts for their employees.
This happens most frequently with first time employees, who don’t have a pre-existing account and tend to be student-aged. The ABC reported in 2017 that of the 28 million total superannuation accounts in Australia, 15 million, or 53 per cent are ‘MySuper’ funds.
MySuper is designed to offer “a simple, low cost default superannuation product”. But, per government regulation, these funds are required to “offer life and total and permanent disability (TPD) cover on an opt-out basis”. That is, they include insurance fees by default.
It’s questionable whether students benefit much from packaged insurance. ASIC reported in 2017 that 16% of TPD insurance claims were rejected, and the ABC has reported that casual employees, again overwhelmingly student-aged, face far more stringent tests to receive a payout than permanent workers performing the same task and claiming the same insurance.
Student Super won’t be selling insurance. Maloney reflects on the packaging of insurance with super products: “On a national scale it’s OK, because if you’re painting with a broad brush, it is a good policy to have life insurance in super—it’s generally a good idea. It’s just a bad idea for really young people because you’re not likely to die.”
“If that fee means that your balance goes to zero, therefore you have no life insurance.”
Student Super talks big about having competitive fees. But whether it will deliver on this promise is another question, with Maloney predicting the industry average is due to decrease. Student Super is technically the “promoter” of the fund ‘Student Super Professional Super’. The fund itself is a ‘sub fund’ of the Tidswell Master Superannuation Plan run by Tidswell Financial, a subsidiary of Trustee Partners.
According to the Australian Financial Review, Trustee Partners, which launched in 2016, is “a new tech-focused business that will provide compliance, administrative or supervisory services to superannuation funds”. Simply put, it’s a startup that handles the administrative and regulatory side of super funds for other startups wishing to enter the industry.
The SMH reported in 2017 that its most high profile customer, Spaceship, “[wanted] to get out of a critical licensing arrangement” with Trustee Partners, with the SMH implying that fees were one of the deciding factors.
This raises a question: how can Student Super claim to charge low fees given its trustee’s reputation for doing exactly the opposite? Maloney (a Spaceship member) responded by saying they had the benefit of negotiating with two different potential trustees when establishing the fund, allowing them to re-work the terms of the agreement.
If the low-fee approach bears fruit, students stand to reap the benefit. Early contributions to super are arguably the most important: they compound the most over an account’s lifetime and are made at a time when fees make up a larger proportion of the total amount than they will later. This means that protecting early contributions from high fees, as Student Super promises to do, will allow for greater early growth.
Further, the Federal Government’s introduction of the First Home Super Saver Scheme last year adds a new side to this question. Now, voluntary super contributions—above the percentage your employer must contribute—can be withdrawn up to $30,000 to buy a new home. At the same time, under the Low Income Superannuation Tax Offset the government will refund tax on voluntary super contributions by 15 per cent each year an account holder’s annual income is under $37,000. This means you could use your super account as if it is a savings account, with bonus contributions from the government, to save for a home. The potential to use a super account in this way is at its highest if fees are kept low and growth kept high, again as Student Super promises.
This may sound good, but whether students will in fact sign up to Student Super remains to be seen. Its advantage, whether they turn out to be the a good financial choice or not, will be the student-based marketing experience of Maloney and Student Services Australia.
For instance, while still a student himself, Maloney worked with Commonwealth Bank to open a $3 million dollar credit line with Apple for students to buy computers. More recently, Maloney co-founded flatmates.com.au with business partner Thomas Clement. The service connects people looking for flatmates and was a runaway success. Maloney and Clement sold the business for $25 million in 2016.
But Student Super faces its biggest competition from industry super funds which similarly bill themselves as looking out for their members’ needs. Super funds are either industry or retail funds. Industry funds are general run as ‘mutual’ funds, where profits are redistributed amongst members. Retail funds are run by commercial organisations, where a portion of profits are expected to goes to shareholders. Super ratings agency Chant West reported that industry funds outperformed retail funds by 0.8 percent per year on average over the past five years, and so Student Super, as a retail fund, will also have to work hard and prove their results against this.
Student Super doesn’t have many direct competitors. In particular, it’s hard to find similar student-targeted funds. Commonwealth Bank is a regular presence at OWeek but does not necessarily market super products to students. First State Super runs their ‘student club’ in partnership with marketing company StudentEDGE, but their super products don’t seem to offer specific benefits for students..
Ultimately, Student Super’s success will come down to students’ cost-benefit analysis. Will the low fee Student Super option provide greater returns than comparable low fee retail or industry funds? Do those comparable funds let them opt-out of insurance cover?
Honi asked university-oriented UniBank, a division of Teachers Mutual Bank that markets to university students, if they had considered similar products. Mike Lanzing, UniBank’s General Manager, told Honi they “would encourage students in any financial decisions to shop around for options that are low-fee and in line with ethical values”.
Maloney’s pitch: “Just don’t charge them a fee”.
The information contained in this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
A previous version of this article read “Commonwealth Bank and First State Super market their super products heavily to students, but don’t actually offer a student-specific service.” This line has been amended.