TWO years ago, the state government’s superannuation operation was flying high.
TWO years ago, the state government’s superannuation operation was flying high.
It had been gearing up for more than a year to burst out of the shackles of government and become a private player, which would have changed the local financial services sector landscape.
GESB Mutual, as it was to have been called, was set to inherit the high-growth trajectory of the $9 billion, 300,000-plus member Government Employees Superannuation Board.
Furthermore, the privatisation had called for GESB to seek inflows for the first time, prompting it to develop a whole new financial planning business to sell its services to new customers and retain existing members in the face of competition.
Employee numbers grew rapidly at this time under the stewardship of chief executive Michele Dolin and chairman Phil Harvey.
At June 30 2008, GESB’s annual report records it had 239 people on the books, a gain of more than 20 per cent in one year from 193 employees at the end of the previous corresponding period.
That was a dramatic rise not just in one year but over the longer term. Employee numbers had been relatively stable in previous years, moving up and down in small increments from 2002 when it recorded 185.
It was probably the peak for GESB. At that date the then Labor state treasurer Eric Ripper had second thoughts as, it appears, new information was presented to him about how much the decision to privatise was likely to cost – both upfront and in ongoing fees and charges.
Nearly two years later, GESB’s fate appears to have been sealed. There will be no brave new world of competition.
Last week, Treasurer Troy Buswell scrapped the mutualisation, announcing a decision to keep government control of GESB and offer its members the choice to leave.
The cost of mutualisation, estimated to be up to $467 million, was too high without tangible benefits to members, Mr Buswell said.
While the treasurer said choice for GESB members was 12-18 months away, the move will almost certainly result in much of the organisation being stripped back.
Much of this will mean the redundancy of staff, structures, branding and technology that Mr Buswell admitted last week had cost tens of millions of dollars to create as part of the preparation for transition to the private sector.
Furthermore, when members are allowed to choose to leave GESB, the exodus is expected to erode the funds under administration – although to what degree is debatable.
Some inside GESB have argued that this is a waste, a destruction of value akin to the break-up of Western Power without moving to sell off the assets and capitalise on their value.
Others see the only comparison with Western Power being the fight that management has put up in order to convince government of its cause. In the case of Western Power, it was to keep the entity intact; with GESB it was to mutualise.
One GESB insider is adamant that a big exodus of funds is inevitable and will hamper the organisation’s ability to offer services and keep fees low, especially given the unusual funds that GESB manages, such as defined benefits schemes and Commonwealth tax exemption.
“There would be a significant attrition rate,” the insider said.
“The entity would very quickly lose its ability to offer the same services as they do at the moment.
“At a certain point it has a powerful gravity effect.
“There will be a point where the organisation changes, that is not a matter of debate.”
However, those within the ranks of government don’t necessarily agree.
Firstly, the estimate of losses from GESB as a result of offering members choice is between 2-4 per cent, something that would certainly slow growth but is not seen as a rapid exodus, especially as GESB’s role as default fund for new government employees will mean inflows continue.
In addition, they claim that unit costs have risen dramatically in the past decade, as GESB moved from a relatively small fund at around $3 billion under administration to a big player with $10 billion, thanks to the Western Australian economy, the growth in the public service, strong equity markets and its captive audience.
“The argument that they need scale to keep fees low is not born out by the costs they have charged over the past 10 years,” one bureaucrat said.
Government insiders dismiss the concerns within GESB that the state will struggle to keep administration costs low in the advent of an exodus of funds. They suggest that even in the worst-case scenario a $1 billion fund could still be cost effective.
One new development for GESB to face may lie in the detail of the federal government’s Cooper Review into superannuation, which is likely to prompt a push for the consolidation of super accounts. More than half of GESB’s 300,000 or so members are thought to have less than $10,000, and the majority of those have less than $1,000. This represents lots of members but relatively little in terms of funds under management.
These members have both a value and a cost that is hard to estimate. If they disappear, however, that will certainly reduce both the fee income and administration burden for GESB.
The captive membership of such a large pool of small account holders may even make GESB attractive as a sale proposition, at least before a big potential drop in member numbers.
That is just one option in front of Mr Buswell as he considers what to do next with GESB.
Another option for the treasurer is outsourcing.
“Some of the costs are quite fixed, you might need to outsource some of the funds administration to manage cost effective services to members,” said one well-placed public servant.
Outsourcing has occurred in other markets, usually preceded by offering members choice. The federal government’s ComSuper moved to offer choice in 2005. Late last year it announced its administration would be outsourced by the middle of 2011.
Whether or not WA has that amount of time to make such a decision is another debatable point, depending which side of the fence you sit on.
Mr Buswell has made a political decision to stop the mutualisation, now he’ll need to ensure the state gets the low-cost superannuation administration he has promised – even if he may want to buy a little time to think about it.
