Funds detail lost in Gesb’s black box

THE mysterious workings of the state's monopoly superannuation provider, Gesb, have fascinated me for some time now.

They have recently become a mainstream event, fuelled by the pay rise awarded to chief executive Michele Dolin, which swung the media spotlight onto her and the organisation she runs.

The pay issue may prove more than just a bit of a distraction. Treasurer Troy Buswell had already commissioned a review into Gesb but his comments regarding the pay issue show he has become increasingly frustrated by the superannuation fund, which oversees one of the state's most important obligations.

As I have explained before, the problems at Gesb stem from the former state government's attempt to mutualise the fund manager, which is just a privatisation under another name. What seemed like a simple idea has become a very messy affair.

That is because the privatisation did not involve all the Gesb schemes and a significant number of liabilities were to remain with the government.

This meant splitting Gesb's asset base and that's where things got tricky. To the outsider Gesb has all these various scheme names, but when you look at the accounts it's more like one big black box.

Take for instance the reserves that the super fund holds as a buffer for all manner of potential issues.

Those reserves had built up within this black box structure, created presumably from surpluses generated by various assets, including the defined benefit schemes such as Gold State Super, which were going to be left behind in the mutualisation.

Reserves reached more than $1 billion at the peak of the global markets' surge.

Each year the reserves have gone up or down based on investment income, which, the fine print tells us, is really just an actuarial determination.

In other words, it's not really investment performance of each scheme at all; it's all about allocations. Critics believe most of the reserves were related to income from Gold State-linked assets

As the table I've put together shows, the reserves allocated to various schemes and the fund manager itself have crept up over time. Some reserves in some years have been difficult to pin down. It is little wonder that the reserves have been at the heart of the year-long stand-off between Gesb and Treasury.

Had Gesb not planned to break up, this black box structure may have worked fine. But the decision to privatise the fund manager meant there's been a big argument over who owns these assets.

In the interim period, the Global Financial Crisis has emerged to hit Gesb. As a result, one presumes, it has had to call on its reserves built up in the good days to hold back the tsunami of negative returns.

In two years, more than $600 million in reserves have evaporated.

Just where they have gone or how they were applied within the black box is not easy to understand. In this year's annual report, the fund's actuary has warned Gesb's asset base is $396 million short to fund accrued liabilities and must increase employer contributions to make up the shortfall.

But the argument over these funds goes further.

At the time of the mutualisation's legislative process, member of parliament Max Trenorden questioned the cost of the whole process.

“There is a cost process here, and we will pass this bill today without any knowledge of that cost process," Mr Trenorden told parliament in 2007.

“Is that responsible?" he asked at the time.

Mr Trenorden told WA Business News last week he was still concerned about the cost, which he fully expected to rise under current circumstances.

Other critics have argued that reserve funds, including those generated from Gold State assets, were being used to pay for the mutualisation process and other developments from which not all members would benefit.

Gesb, which now employs 220 people and has spent more than two years gearing up to enter the commercial world, is getting a lot more expensive to run. Notably, it is increasingly dipping into its reserves for operational needs, including matters connected to the mutualisation process and planned delivery of choice to members.

In 2005-06, Gesb's administrative expenses were $27 million, a year when net assets rose from $4.73 billion to $6.26 billion. Last financial year those same expenses were $45.9 million as net assets fell from $8.31 billion to $7.94 billion.

Over the same period, total expenses attributed to reserves jumped from $3.7 million in 2005-06 to $40.4 million last year. To be fair, it is estimated as much as $11 million of that latter figure is linked to the defined befit scheme expenses, but even taking that out of the equation it is a huge jump.

Of those expenses funded by reserves, $11 million was an advance payment to Gesb Mutual Ltd, the entity that is supposed to be the vehicle for the proposed privatisation. That money is repayable if the mutualisation doesn't go ahead.

Because Gesb is a black box, it's hard to know on what basis these expenses are attributed.

What is clear is that reserves have declined.

From the way I read the accounts, Gold State has reserves of just $111 million, according to the 2008-09 annual report. That is down from $525.6 million attributed to Gold State at the end of 2006-07.

Arguably, this is how reserves should work. In good times, money is put aside for a rainy day.

But if Gesb had been mutualised on June 30 2008, it is unclear how much of those reserves would have been available to the government to help it meet its obligations with regard to Gold State when the GFC hit.

More clarity would go a long way in allaying the fears of critics that the mutualisation of Gesb is placing a heavy burden on taxpayers.