Options in GESB future

MORE than a year after the mutualisation of government superannuation fund administrator GESB was halted, the structure remains in place for the entity to take its place in the private sector.

A new high-profile board, 200 employees, a sophisticated management team and myriad new products and services have been built over the past few years to create an organisation that was preparing to enter the competitive financial services sector.

To some, that effort has value beyond the $16 million spent in administrative and marketing expenses to gear up the organisation for privatisation.

To abandon ship now and unwind what has been built would be to wantonly destroy value for the state, akin to the disaggregation of Western Power.

This is one of several arguments echoing down the halls of power as Treasurer Troy Buswell’s review of the proposed mutualisation of GESB draws to a close.

In July, Mr Buswell appointed Rod Whithear, a federal public servant working on superannuation policy, to head the review, which should be completed by the end of this year.

Mr Whithear will have to weigh up the value in allowing GESB to remain as a significant entity, just as he has to assess the risks to the state and the members in all of the options before him.

On the face of it, the choices for the state seem relatively simple. The first is to allow the mutualisation to proceed and give the 13th biggest fund manager in the country its independence. This would also easily provide for members to have choice, which was promised by the government.

It would also create a local superannuation fund administration powerhouse, although history tells that financial services privatisations have a short independent life span – BankWest and SGIO are obvious candidates. Mutuals are also a type of entity that is on the wane.

There is also the potential to sell the entity or at least the business, though GESB, as a fund administrator rather than fund manager, is a low-margin business with little value to a potential buyer.

Another choice is the status quo. That would leave $8 billion in funds as the responsibility of the state and make much of the new structure of GESB redundant. The fact is the state government was never meant to be in the business of financial advice or competing with the private sector for funds.

The administration of the funds could be tendered to the private sector, though some argue GESB, as an entity, still has value to the state without mutualisation because it has administrative, superannuation and actuarial skills that Treasury lacks.

Complicating this latter choice, though, would be the need to offer existing members of most of the various schemes the choice to leave. That is likely to create one-way traffic as significant numbers of members choose alternative fund managers. This expected erosion of funds under administration is seen as likely to slowly kill GESB, which would whither on the vine.

But in Mr Whithear’s deliberations regarding these choices he will need to take account of the two big obstacles that halted the privatisation in the first place: reserve funds and the tax issues.

It is understood GESB sought to take about $350 million in reserve funds as part of its transition to independent status. It is believed Treasury argued a fraction of that was required.

It felt the rest of the funds belonged to the state, which remained liable for about $2 billion in defined benefit pension schemes that could not be mutualised.

Given the highly competitive environment GESB was preparing to enter, and the limitations mutuals have in raising capital, there is no doubt that GESB was sensible to seek every dollar it could. But there are many observers who claim that gifting such a big sum was an inequitable free kick to its proposed members.

The huge question is whether it had any right to these funds and whether or not it actually needs them. This issue also undermines the argument about the value of GESB because it suggests the fund manager may struggle to survive without it.

No government is going set free $8 billion in funds and more than 100,000 members if there’s a risk it will blow up in its face.

The tax issue is much more complex. That problem is focused on the biggest of the GESB schemes, the $5 billion West State Super, an accumulation fund which has the rare status of being constitutionally protected. That means its members pay the 15 per cent superannuation tax when they exit the scheme, rather than when they put funds in, as most people are required to do.

As part of GESB’s mutualisation, West State members would lose their tax protection and be liable for 15 per cent of accumulated funds. While it could be argued that there is little difference between paying 15 per cent on the way in or on the way out, it could be a political disaster if 100,000 members found their account balances had dropped by 15 per cent overnight – $750 million all up.

Some argue there is actually a benefit to the member in paying the tax at exit. It would be a fraction of the $750 million, but it still creates an issue and a potential cost for the state, given it is the government proposing the mutualisation.

It is this issue that is thought to be most hindering the question of GESB’s mutualisation. Without West State, there is very little of GESB left to set free and little value to anyone.