Former New South Wales Treasury head Michael Lambert has recommended a dramatic overhaul of the state's government superannuation funds, including the merger of several schemes with State Super and the separation of State Super's investment function from its administration.
Lambert recommended the Judges Pension Scheme, the Parliamentary Contributory Superannuation Scheme and the defined benefit component of the Energy Industries Superannuation Scheme (EISS) be consolidated into State Super, with the accumulation component of EISS transferred to First State Super.
About half of EISS's $2 billion in funds was in defined benefit schemes, while the other half was in accumulation benefit schemes, the report said.
"It is recommended that the defined benefit portion is transferred to State Super and the accumulation portion is transferred to First State Super," it said.
"The Parliamentary Contributory Superannuation Scheme is too small to be effective either in respect to benefit administration or investment management. It is proposed that the scheme is transferred to State Super.
"Similarly, the judges scheme is too small to be efficient and it is proposed to also be transferred to be administered by State Super."
Lambert also proposed to split out the investment function of the $30-billion State Super, because the state was liable for the risks taken under State Super's investment strategy, but had no control over its management.
"The issue here is that, in the main, the investment risk is to the account of the state, but the state does not have direct influence over the risk-return trade-off decisions," the report said.
"State Super administers closed defined benefit schemes of the state, with the state underwriting the benefit provided and hence being exposed to the investment return generated.
"Under the current arrangement, the superannuation trustees oversight not only the administration of the schemes but also the investment function, though the main principal for the investment function is in fact the state as the scheme underwriter and funder.
"If the state wishes to have greater direction over the investment strategy of State Super and, in particular, over decisions with respect to the risk-return trade-off, one option is to separate the investment function from the superannuation scheme administration function, as occurs with QIC and QSuper in Queensland.
"The option would be to transfer the investment function to Treasury Corporation."
If NSW Treasury chose to go down that path, the state would need to have full regard to the interests of members, the report said, and that would require the separation of the funds of members from those of the state.
Lambert made his recommendations in the NSW Financial Audit 2011, an audit report on the state's finances.
Although it dates from September 2011, the report was only published on 22 February 2012.
At that time, NSW Treasury said the state government had no plans to accept specific recommendations of the report that were not already adopted in the budget, the government's NSW 2021 plan or the NSW Commission of Audit Interim Report (the Kerry Schott report).
A preliminary scan of the relevant documents by Investor Weekly found no reference to the recommendations.
But at the end of last year, NSW Auditor-General Peter Achterstraat did flag the benefits of a potential merger of EISS, as reported by Investor Weekly in December 2011.
NSW Treasurer Mike Baird at the time said he would look further into the issue and make a decision later in 2012.
A NSW Treasury spokesperson on Monday confirmed a potential merger of EISS was still under review.
EISS chief executive Richard Powis said he was aware of the recommendations, but no merger discussions had taken place.
"[The reports] have made suggestions of how it may go. [But] I've had no discussions on that at all," Powis said.
