Western Australia isn’t the state of excitement as the car number plates tell us; it’s the state of serial rorting.

Corporate excesses and political excesses, they all overshadow the good stories.

West Australians have a history of searching for get-rich schemes, and now there’s a grubby one involving the Government Employees Super Fund of WA, which has seemingly escaped any legal judgment.

Some $6.3 million appears to have been rorted from the fund and its 240,000 members by a small group of fund employees and members who took advantage of faults in the controls on the switching of investments from one area to another (say from property to Australian shares).

News broke last November of the rort and the story sank until this appeared in the Saturday edition of The Sydney Morning Herald:

Five employees of the WA Government Employees Superannuation Board have “tendered their resignations” for their involvement in a market timing scandal that came to light last year.

About 170 of the funds members, including 15 of the fund’s staff, participated in market timing of the funds units. Some are likely to have made tens of thousands each from marketing timing, which while not illegal, comes at the expense of all the funds members. The market timers made off with about $6m, which has been reimbursed to members’ accounts from reserves.

Now it may or may not be illegal to engage in market timing but there’s a smell about this even if the amount involved is relatively small compared to the $8 billion in the funds assets.

If members’ accounts have had funds reimbursed from the funds’ reserves, why, if it wasn’t illegal? Why did the management of the fund feel it necessary to make the restitution?

I know it was a “proper thing” to make this restitution but by paying the money to themselves from their reserves, and not reclaiming the $6 million, the continuing members have been penalised twice.

And reimbursement has the suggestion of monies missing: was the market timing a fraud on the continuing members of the fund by those who engaged in it? If the switching wasn’t illegal then it seems the checks and balances inside the fund were deficient.

So why hasn’t legal action been launched against the staff (the five who have “tendered their resignations”) and others? This is a statement from the website of the fund from last November:

GESB has identified and closed a loophole in its member investment switching process. While the loophole did not affect total funds under management or the performance of the fund, a small minority of members who switched frequently were able to gain an unfair financial advantage at the expense of other members.

Members will not be disadvantaged as a result of the loophole. GESB will adjust members’ accounts where appropriate. Ms Michele Dolin Chief Executive Officer of GESB said the average adjustment would be approximately $28 and the majority of adjustments would be less than $7 with the maximum adjustment in the order of $2,500. GESB’s actuary is finalising the details of the adjustments which will be funded from GESB’s operational risk reserve. Members will see these adjustments in their next account statements.

GESB provides an investment switching capability for its market linked products, allowing members to change their asset allocation between major asset classes ie International shares, Australian shares, Property, Australian fixed interest, Inflation linked bonds and Cash.

As GESB’s funds are invested as a closed unitised pool, the switching behaviour of a small minority of members affected the account balances for members of GESB’s 244,000 market-linked accounts. Independent actuarial modelling indicates that the impact ranges from 0% to 0.15% (i.e. 0 to 15 basis points) with a total impact across the Fund of approximately $6.3m.

Ms Dolin said that investment switching is commonly available in the marketplace and a feature of GESB’s scheme rules. However, GESB’s process timing was not sufficient to prevent members monitoring published market indices and using this information to make switch decisions with relative certainty of the unit price.

This is the sort of activity you can expect from smaller, poorly run funds, not one as large as the main state government employee fund in Western Australia.

What is APRA, the main regulator of Super Funds in this country, doing to investigate the WA Fund?

On the face of it, around 170 people, including 15 staff, have rorted the system to the tune of $6.3 million and will get away with it!

Peter Fray

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