Central Agencies 2017

Overview

This report highlights the results of the financial audits of NSW Government central agencies. The report focuses on key observations and findings from the most recent financial statement audits of agencies in the Treasury, Premier and Cabinet, and Finance, Services and Innovation clusters.

The report includes a range of findings in respect to service delivery. One repeat finding is that while the Government regularly reports on the 12 Premier's priorities, there is no comprehensive reporting on the 18 State priorities. 

Executive Summary

1. Financial reporting and controls

Audit Opinions Unqualified audit opinions were issued for all agencies' 30 June 2017 financial statements.
Early close Early close procedures continue to facilitate the timely preparation of financial statements and completion of audits, but agencies can make further improvement.
Deficient user administration access User access administration over financial systems remains an area of weakness. Agencies need to strengthen user access administration to critical systems.
Transitioning to outsourced service providers Transitioning of services to outsourced service providers can be improved. Outsourcing services can lead to better outcomes, which may include lower transaction costs and improved services, but it also introduces new risks.

2. Service delivery

Premier and State Priorities   A comprehensive report of performance against the 18 State Priorities is yet to be published. While some measures are publicly reported through agency annual reports or other sources, a comprehensive report of performance against the 18 State Priorities would ensure all State Priorities are publicly reported, provide a single and easily accessible source of reference and improve transparency.
ICT and digital government The Digital Government Strategy was released in May 2017. Targets will need to be set to assess and monitor progress against the Strategy.
Digital information security Not all agencies are complying with the NSW Government's information security policy. This increases the risk of noncompliance with legislation, information security breaches and difficulty restoring data or maintaining business continuity in the event of a disaster or disruption.
Property and asset utilisation Property NSW's performance reporting would be enhanced by developing and reporting on customer satisfaction, reporting against set targets and benchmarking cost of service to the private sector.

3. Government financial services

Prudential oversight
of NSW Government superannuation
funds  
Prudential oversight of SAS Trustee Corporation Pooled Fund and Parliamentary Contributory Superannuation Fund has not been prescribed. Structured and comprehensive prudential oversight of these funds remains important as they operate in a specialised, complex and continuously changing investment market sector, have over 106,000 members and manage investments in excess of $42.4 billion.
Green slip scheme affordability Currently, Green Slips in NSW are the most expensive in Australia. However, CTP reforms are expected to reduce the cost of Green Slips.

1. Financial Reporting and controls

Unqualified audit opinions were issued for all agencies’ financial statements 

Unqualified audit opinions were issued for all agencies' 30 June 2017 financial statements. Sufficient audit evidence was obtained to conclude the financial statements were free of material misstatement. 

Agencies completed early close procedures, but opportunities for improvement noted 

Early close procedures continue to facilitate the timely preparation of financial statements and completion of audits. Except for the NSW Electoral Commission, all agencies complied with the mandatory early close procedures set by NSW Treasury. However, we noted opportunities to improve other aspects of early close procedures. 

User access administration over financial systems remains an area of weakness We identified 16 moderate risk and ten low risk issues related to user access administration across eight agencies. These moderate risk weaknesses increase the risk of users having excessive or unauthorised access to critical systems and information. 

Recommendation:

Agencies should review user access administration to critical systems to ensure:

  • policies for user access creation, modification and deactivation are documented
  • approval is being obtained to establish, modify or delete user accounts
  • regular user access reviews are performed and highly privileged user account activity is logged and monitored
  • evidence of review is maintained.

Transitioning of services to outsourced service providers can be improved 

Outsourcing services can lead to better outcomes, which may include lower transaction costs and improved services, but it also introduces new risks. The transition needs to be carefully managed and requires thorough planning and effective project governance. This should be supported by oversight and direction from senior management and independent project assurance. 

Our 2016–17 audits identified one high risk issue relating to Property NSW's outsourcing of property and facility management services to the private sector. While a high risk issue was also identified in 2015–16 from the Department of Finance, Services and Innovation's outsourcing of transactional and information technology services to GovConnect, there has been an improvement in GovConnect's internal control environment throughout 2016–17.

2. Service Delivery

A comprehensive report of performance against the State Priorities is not published

Progress against the 12 Premier’s Priorities is publicly reported, but a comprehensive report of performance against the 18 State Priorities is yet to be published. While some measures are publicly reported through agency annual reports or other sources, a comprehensive report of performance against the 18 State Priorities would ensure all State Priorities are publicly reported, provide a single and easily accessible source of reference and improve transparency.

Red tape reduction measures were ineffective and are under review

A key aspect of achieving the State Priority to make NSW the easiest state to start a business is making regulatory obligations easier to understand and implement. While initiatives are in place to achieve this priority, an October 2016 performance audit on ‘Red tape reduction’ found that reported red tape savings were inaccurate and the regulatory burden of legislation had increased.

Following release of the performance audit the NSW Government commissioned a review of regulatory practice, known as the ‘Greiner Review’, which drew heavily on our report findings. The draft report has made 35 recommendations aimed at improving the regulatory policy framework. Progress to achieve priorities in Digital Strategy will need to be measured and reported The Digital Government Strategy was released in May 2017 to build on reforms set out in previous ICT strategies. It sets out a roadmap of key priorities and enablers towards a more digital government. Targets and measures have not yet been set to assess and monitor progress.

Not all agencies are complying with the NSW Government's information security policy

The Digital Information Security Policy (DISP) is a key tool that helps ensure a minimum set of information security controls are implemented across NSW Government agencies. Failure to comply with the DISP increases the risk of noncompliance with legislation, information security breaches and difficulty restoring data or maintaining business continuity in the event of a disaster or disruption.

A review of 2016 annual reports found 15 agencies out of 130 (13 in 2015) did not attest to compliance with the DISP and of the agencies that attested to compliance, 34 reported issues associated with their compliance.

Property NSW's performance reporting could be improved

Property NSW's performance reporting would be enhanced by developing and reporting on customer satisfaction, reporting against set targets and benchmarking its cost of service to the private sector.

Premier’s Memorandum M2012-20 'Government Property NSW and Government Property Principles' required Property NSW to set key performance indicators to measure property and asset utilisation performance.

3. Government financial services

Prudential oversight of exempt NSW Government superannuation funds not prescribed

The SAS Trustee Corporation (STC) Pooled Fund and the Parliamentary Contributory Superannuation Fund are exempt public sector funds, meaning they are not required to comply with the prudential and reporting standards issued by the Australian Prudential Regulation Authority (APRA). Structured and comprehensive prudential oversight of these funds remains important as they operate in a specialised, complex and continuously changing investment market sector, have over 106,000 members and manage investments in excess of $42.4 billion.

Under the principles of the Australian Government’s Heads of Government Agreement (HOGA) in 1994, the NSW Government agreed to comply with the principles of the prudential standards for the public sector superannuation funds. However, the HOGA arrangement does not provide a formal regulatory framework for an appropriate level of prudential oversight. Amendments to the Superannuation Administration Act 1996 in November 2015 allows the Minister for Finance, Services and Property to prescribe applicable prudential standards and audit requirements.

Recommendation:

The Treasury should liaise with the respective Trustees to implement appropriate prudential standards and oversight arrangements for the exempt public sector superannuation funds.

CTP reforms expected to reduce the cost of Green Slips

Currently, Green Slips in NSW are the most expensive in Australia. Average premiums for Sydney Metropolitan vehicles increased by 10.4 per cent to $703 between 1 January 2016 and 31 December 2016. CTP reforms are expected to reduce the cost of Green Slips as well as deliver other benefits. The State Insurance Regulatory Authority will need to ensure it has appropriate processes in place to track and report against the expected benefits.

Management expense ratio remained stable, however no target was set for the PCS Fund

The management expense ratio (MER) is an industry recognised ratio to measure the performance of funds and investment managers in the superannuation sector. The NSW Government’s main superannuation funds have maintained the MER at consistent levels over the past two years, however the Parliamentary Contributory Superannuation (PCS) Fund does not set an MER target to measure performance.

Recommendation:

The Fund Secretary for the PCS Fund, in conjunction with the Trustee, should consider establishing an appropriate management expense ratio target to measure performance.

1. Introduction

This report sets out the results of the 30 June 2017 financial statement audits of NSW Government's central agencies and their cluster agencies.

Central agencies play a key role in ensuring policy coordination, good administrative and people management practices and prudent fiscal management. The central agencies and their key responsibilities are set out below.

Description of Central Agencies_November 2017
Note: The Audit Office of NSW is an independent agency aligned with the Premier and Cabinet cluster, but not commented on in this report.

The report has been structured into three chapters focusing on:

  • financial reporting and controls
  • service delivery
  • government financial services.

A full list of agencies that this report encompasses by relevant cluster is included in Appendix 3.

1.1 Snapshot of the clusters

A snapshot of the financial results of the Treasury, Premier and Cabinet and Finance, Services and Innovation clusters for the year ended 30 June 2017 is shown below. While superannuation and insurance are part of the Treasury cluster the financial results of these sectors have been separately shown below.

Superannuation fund agencies are not controlled by the NSW Government as they manage member funds as fund trustees. The financial results and balances of superannuation funds shown below are not consolidated into the total state sector financial statements.

Snapshot of Central Agencies_November 2017
Notes:
  1. The financial results of the Public Service Commission are reflected in the Premier and Cabinet cluster financial results
  2. Superannuation member benefit payments and employer and member contributions are netted and reflected within the line item ‘Net change in defined benefit member benefits’ in the Income Statement. This is included within total expenditure above.

1.2 Changes to the clusters

The Premier and Cabinet cluster was impacted by the following agency and staff changes effective 1 April 2017 arising from the Administrative Arrangements (Administrative Changes - Public Service Agencies) Order 2017

  • Destination NSW, Combat Sports Authority of NSW, New South Wales Institute of Sport, Office of Sport, State Sporting Venues Authority, Sydney Cricket and Sports Ground Trust,
    Sydney Olympic Park Authority and Venues NSW transferred from the Premier and Cabinet cluster to the Industry cluster
  • Trustees of the ANZAC Memorial Building transferred from the Premier and Cabinet cluster to the Justice cluster
  • employees principally providing support for the portfolio responsibilities of the Minister for Regional New South Wales transferred from the Department of Industry
    to the Department of Premier and Cabinet
  • employees principally providing support for the portfolio responsibilities of the Minister for Trade and Industry transferred from the Department of Premier and Cabinet to the Department of Industry
  • employees principally involved in the administration of legislation allocated to and including support for portfolio responsibilities of the Minister of Veteran Affairs transferred from the
    Department of Premier and Cabinet to the Department of Justice.

The following independent agencies were transferred from the Finance, Services and Innovation cluster to the Treasury cluster:

  • Insurance and Care NSW effective 15 March 2017 under the Administrative Arrangements (Administration of Acts - Amendment No 1) Order 2017
  • Workers Compensation Nominal Insurer, NSW Self Insurance Corporation, Sporting Injuries Compensation Authority, Workers' Compensation (Dust Diseases) Authority, Lifetime Care and Support Authority of NSW, Building Insurers' Guarantee Corporation effective 13 April 2017 under the Administrative Arrangements (Administration of Acts - Amendment No 2) Order 2017.

2. Financial reporting and controls

Confidence in public sector decision‑making and transparency is enhanced when financial reporting is accurate and timely. Appropriate financial controls help ensure the efficient and effective use of resources and administration of agency policies. This chapter outlines our audit observations, conclusions or recommendations related to financial reporting and controls of agencies for 2016–17.

Observation Conclusion or recommendation
2.1 Quality of financial reporting
Unqualified audit opinions were issued for all agency financial statements. The quality of financial reporting continues to remain strong across the clusters.
2.2 Timeliness of financial reporting
Most agencies complied with the statutory timeframes for completion of early close procedures and preparation and audit of financial statements. Early close procedures continue to facilitate the timely preparation of financial statements and completion of audits, but agencies can make further improvement.
2.3 Financial performance and sustainability
We assessed the performance of agencies listed in Appendix six against some key financial sustainability indicators. This highlighted two agencies with negative operating margins of more than ten per cent and one agency with a liquidity ratio of less than 0.5. These agencies have strategies in place to remain financially sustainability and manage their liquidity. Our analysis found that, overall, the agencies are not at high risk of sustainability concerns.
2.4 Internal Controls

User access administration over financial systems remains an area of weakness. Sixteen moderate risk and ten low risk issues related to user access administration across eight agencies were identified. 

Recommendation: Agencies should review user access administration to critical systems to ensure:

  • policies for user access creation, modification and deactivation are documented
  • approval is being obtained to establish, modify or delete user accounts
  • regular user access reviews are performed and highly privileged user account activity is logged and monitored
  • evidence of review is maintained.

Transitioning of services to outsourced service providers can be improved. Our 2016–17 audits identified one high risk issue relating to Property NSW's outsourcing of property and facility management services to the private sector.

While a high risk issue was identified in 2015–16 from the Department of Finance, Services and Innovation's outsourcing of transactional and information technology services to GovConnect there has been an improvement in GovConnect's internal control environment throughout
2016–17.

Outsourcing services can lead to better outcomes, which may include lower transaction costs and improved services, but it also introduces new risks. The transition needs to be carefully managed and requires thorough planning and effective project governance. This should be supported by oversight and direction from senior management and independent project assurance.
2.5 Human Resources    
The percentage of full‑time equivalent staff with annual leave greater than 30 days in the Finance, Services and Innovation, Premier and Cabinet and the Treasury clusters is 7.9 per cent, 17.1 per cent and 18.4 per cent respectively. Agencies have strategies in place to reduce annual leave balances that are greater than 30 days. The effectiveness of these strategies will need to be monitored to ensure they are helping to achieve the desired outcome.

2.1 Quality of financial reporting

Audit opinions

Unqualified audit opinions were issued for all agencies’ financial statements

Unqualified audit opinions were issued for all agencies' 30 June 2017 financial statements. Sufficient audit evidence was obtained to conclude the financial statements were free of material misstatement.

Key audit matters

The workers insurance schemes’ actuaries identified issues with the quality of data

Valuation of insurance scheme liabilities

Last year we recommended that Insurance and Care NSW continue to address the data quality issues identified by the schemes’ actuaries.

Whilst action has been taken during the year the actuaries of the Workers Compensation Nominal Insurer and NSW Self Insurance Corporation schemes identified areas where data quality could be further enhanced. Continuing to address these issues will reduce uncertainty in the valuation process and assist with monitoring the schemes' claims liability management. The combined value of outstanding claims liabilities was $21.7 billion at 30 June 2017.
 

Financial statements impacted by significant transactions and new standards

Concession granted on titling and registry services

A 35 year concession was granted to a private sector operator for the provision of titling and registry services effective 30 June 2017. The NSW Government received upfront cash proceeds of $2.6 billion for granting the concession. The Department of Finance, Services and Innovation recognised a deferred liability of $2.7 billion for the upfront proceeds and assumption of employee liabilities by the operator. The upfront cash proceeds were transferred to the Crown Entity.

The operator will be entitled to earn revenue from customers for providing the services under the concession arrangement. Up to 30 June 2017, titling and registry services were provided by Land and Property Information, a division of the Department of Finances, Services and Innovation. Revenue recognised from titling and registry services for the year ended 30 June 2017 was $200 million, with a surplus of $114 million returned to the Crown Entity.

The Registrar General has an ongoing role monitoring the performance of the operator.

Sydney International Convention Exhibition and Entertainment Precinct

Place Management NSW recognised a finance lease asset and corresponding liability of $1.3 billion for the International Convention Centre (ICC), which opened in December 2016. This is the first of the buildings under the Sydney International Convention Exhibition and Entertainment Precinct project to be completed.

The operation of the ICC is managed by a private service provider. The ICC reported a profit for the period of $3.43 million, which exceeded the set target by 15.3 per cent.

AASB 1056 Superannuation entities

The new standard superseded the 1993 accounting standard (AAS 25) and became effective for the 30 June 2017 financial statements. It significantly changed the reporting requirements including the format and presentation of financial statements.

The new standard aligns the financial reporting to be consistent with the requirements of other Australian Accounting Standards. Important changes include recognition of member liabilities in the balance sheet and a separate statement of changes in member benefits.

Superannuation agencies materially complied with these new requirements.

AASB 124 Related parties

All not for profit agencies in the Treasury, Premier and Cabinet and Finance, Services and Innovation clusters were required to include disclosures about related party relationships and transactions for the first time in their financial statements. AASB 2015 6 extended the scope of AASB 124 ‘Related party disclosures' to include not for profit public sector entities. Agency financial statements disclosed the:

  • compensation paid to their key management personnel
  • nature of related party relationships
  • amount and nature of their related party transactions, outstanding balances and commitments and outstanding balances (including commitments).

The agencies materially complied with these new disclosure requirements. While there is still room for improvement, no high or moderate risk findings on related party disclosures were reported to management.

2.2 Timeliness of financial reporting

Most agencies complied with their statutory financial reporting timeframes

One agency did not comply with the statutory timeframe for completion of early close procedures, 32 agencies did not comply with the statutory requirement to prepare financial statements and the audit of three agencies was not completed within the statutory timeframe. All financial and non financial information of the 32 agencies that did not prepare financial statements has been captured in the consolidated financial statements of their parent entity and was subject to audit.

Appendix four of this report provides detailed information on the timeliness of agency financial reporting and audit reporting.
 

Agencies completed early close procedures, but opportunities for improvement noted

Agencies completed the mandatory early close procedures set by NSW Treasury. However, we noted opportunities to improve other aspects of early close procedures:

  • the impact of significant transactions were not always assessed or only partially assessed. Agencies can be more proactive identifying, assessing and documenting the impact of complex transactions
  • inter-agency balances and transactions with other government agencies were not always reconciled
  • key account balances were not always reconciled or reviewed in a timely manner
  • the impact of new and revised accounting standards, including the impact arising from related party disclosures was not fully assessed.

2.3 Financial performance and sustainability

As part of our audits we obtain an understanding of the entity and its environment, including an entity’s financial performance and sustainability. Strong financial performance underpins an agency’s overall performance, providing a platform for achieving its service delivery objectives.

We assessed the performance of agencies listed in Appendix six against some key financial sustainability indicators. Our analysis found that, overall, these agencies are not at high risk of sustainability concerns.

Two agencies with a negative operating margin of more than ten per cent

A negative operating margin indicates that insufficient revenue is being generated to fund operations and assets renewal. Over the longer term negative operating results may not be sustainable.

An analysis of agencies with a negative operating margin of more than ten per cent is below.

Table_operating margins_Central Agencies_November 2017

Eight other agencies had a negative operating margin of between nil and ten per cent in 2016–17. Of these, seven agencies had a positive operating margin in at least one of the previous two financial years, except for the Ombudsman's Office. The Ombudsman’s Office negative operating margin was 2.8 per cent in 2015–16 and 2.4 per cent in 2014–15.

One agency with liquidity ratio of less than 0.5

A liquidity ratio below one is an indicator that an agency may not be able to pay their debts as and when they fall due and may need to call on borrowing facilities or funding support to meet their obligations.

An analysis of the agency with a liquidity ratio of less than 0.5 is below.

liquidity ratio barangaroo_ Central Agencies

Eight other agencies have a liquidity ratio of 0.5 to 1. These agencies are mainly funded by parliament or their cluster lead agency and as a result are not at high risk of liquidity problems.

Seven agencies with expense growth of 50 per cent or more

There has been large fluctuation in agency employee related/personnel services and other expense growth over the last 12 months. Generally, these fluctuations have occurred due to changes in the agencies operations or because of specific projects and programs. The increased expenditure has been met by additional approved funding sources.

An analysis of agencies with expense growth of 50 per cent or more is below.

Expense growth graph _Central Agencies_November 2017
Expense growth graph _Central Agencies_November 2017
Expense growth graph _Central Agencies_November 2017

2.4 Internal Controls

Breakdowns and weaknesses in internal controls increase the risk of fraud and error. We report deficiencies in internal controls, matters of governance interest and unresolved issues identified to management and those charged with governance. We do this through our Management Letters, which include our observations, related implications, recommendations and risk ratings. The table below summarises Management Letter issues across all agencies by category and risk rating.

Internal Controls table_Central Agencies_November 2017
Internal Controls table_Central Agencies_November 2017
Internal Controls table_Central Agencies_November 2017

Information technology controls

User access administration over financial systems remains an area of weakness

Recommendation

Agencies should review user access administration to critical systems to ensure:

  • policies for user access creation, modification and deactivation are documented
  • approval is being obtained to establish, modify or delete user accounts
  • regular user access reviews are performed and highly privileged user account activity is logged and monitored
  • evidence of review is maintained

We identified 26 management letter issues (16 moderate and 10 low risk) related to user access administration at the Department of Finance, Services and Innovation (7 issues), Insurance and Care NSW (6 issues), the Treasury (4 issues), Barangaroo Delivery Authority (2 issues), NSW Treasury Corporation (2 issues), New South Wales Electoral Commission (2 issues), State Insurance Regulatory Authority (2 issues) and State Archives and Records Authority of NSW (1 issue). Moderate risk issues included:

  • approval for new users not obtained
  • audit logging and review of highly privileged/super user account transactions not performed
  • user access reviews not performed
  • terminated users not removed from the system in a timely manner.

These weaknesses increase the risk of users having excessive or unauthorised access to critical financial systems and information, which could compromise the integrity and security of financial data residing in these systems.

Transitioning to outsourced service providers

Transitioning of services to outsourced service providers can be improved

Our 2016–17 audits identified one high risk issue relating to Property NSW's outsourcing of property and facility management services to the private sector. This follows on from a high risk issue identified in 2015–16 from the Department of Finance, Services and Innovation's outsourcing of transactional and information technology services to GovConnect (further details below).

Outsourcing services can lead to better outcomes, which may include lower transaction costs and improved services, but it also introduces new risks. The transition needs to be carefully managed, requiring:

  • thorough planning and implementation of project governance and risk management frameworks. This needs to be supported by oversight and direction from senior management and independent project assurance
  • regular reporting to the project steering committee and approval for key decisions
  • proactive contract management and enforcement of key contractual commitments
  • clearly agreed KPI’s and regular performance reporting by the service provider against project milestones and performance indicators
  • agreement on the service provider's system of internal control and independent assurance over the design and effectiveness of the controls. Contracts should specify penalties where internal controls are not designed and operating effectively
  • post implementation and benefit realisation review to identify improvement opportunities and to share learnings with the NSW public sector.

Key observations from Property NSW’s transition to a new property and facility management service provider include:

  • project controls and documentation, including the risk register were not up-to-date and high level risks were unresolved
  • transition plan was not complete or approved by the Steering Committee before transition
  • data verification testing was not undertaken in a coordinated plan and user acceptance testing results were not documented
  • data migration results were not documented
  • approval from the Project Steering Committee was not obtained for go live
  • agreed KPIs were not being achieved after go-live
  • controls implemented at the service provider were not fully operational and user-entity controls to monitor the service provider were not designed or implemented after go-live. Property NSW’s monitoring of the service provider was also impacted by limitations in reporting from the service provider.

Property NSW continues to work with the service provider to resolve the identified exceptions. We understand Property NSW plans to engage an independent auditor to test the effectiveness of relevant key service provider business processes and information system controls in 2017–18.

Improvement in internal control environment at GovConnect

Last year, GovConnect received qualified audit opinions from its service auditor on the design and operating effectiveness of controls for the period from 14 December 2015 to 30 June 2016 covering payroll services, information technology, general ledger, accounts receivable, fixed assets and accounts payable. This included an adverse opinion on payroll services. An adverse opinion is issued when there are material and pervasive deficiencies related to the design, implementation or operating effectiveness of relevant controls.

The Department of Finance, Services and Innovation (DFSI) has worked during the year with GovConnect to improve its internal control environment. This resulted in the service auditor removing the adverse opinion on the design and effectiveness of controls over payroll and issuing unqualified opinions on several of the business process activities. Qualified opinions were received for the year ended 30 June 2017 on information technology services provided by Infosys and the DFSI SAP system general ledger, payroll and accounts payable business process activities. However, the service auditor noted that the issues subject to qualification were remediated from 30 April 2017 onwards.

DFSI will need to continue to work with GovConnect to strengthen the internal control environment and end to end processes across DFSI, other client agencies and GovConnect. DFSI advises that this is one of the objectives of the GovConnect Restart Programme.

GovConnect provides transactional and information technology services to DFSI, the Department of Premier and Cabinet and the Treasury and several of their cluster agencies. DFSI manages the contractual arrangement with GovConnect.

2.5 Human Resources

Annual leave

Treasury Circular TC16/03 ‘Managing Accrued Recreation Leave Balances’ requires agencies to manage accrued employee recreation leave balances to a maximum of 30 days or less on an ongoing basis, within the constraints of relevant industrial instruments and legislation.

The percentage of full time equivalent staff with annual leave balances greater than 30 days in the Finance, Services and Innovation, Premier and Cabinet and the Treasury clusters is 7.9 per cent, 17.1 per cent and 18.4 per cent respectively.

Agencies have strategies in place to reduce annual leave balances that are greater than 30 days. The effectiveness of these strategies will need to be monitored to ensure they are helping to achieve the desired outcome.

The following table highlights the number of staff by cluster with annual leave more than 30 days.

Annual Leave graph_Central Agencies_November 2017

The implications of high leave balances include:

  • possible work health and safety issues
  • disruptions to service delivery when key employees take lengthy periods of leave
  • employee fraud remaining undetected
  • an increasing financial liability over time as salaries increase.

3. Service Delivery

This chapter outlines our audit observations, conclusions and recommendations relating to service delivery for 2016–17. 

Observation Conclusion or recommendation
3.1 Premier and State priorities

The Department of Premier and Cabinet monitors the achievement of targets and the implementation of initiatives to deliver the 12 Premier’s Priorities.

Responsible ministers and agencies manage the 18 State Priorities. A comprehensive report of performance against the 18 State Priorities is yet to be published.

While some measures are publicly reported through agency annual reports or other sources, a comprehensive report of performance against the 18 State Priorities would ensure all State Priorities are publicly reported, provide a single and easily accessible source of reference and improve transparency.
Where possible, independent sources are used to measure performance, however without independent assurance there is an increased risk that the target measures are inaccurate, not relevant or do not fairly represent actual performance.

Performance against the State Priority to make NSW the easiest state to start a business is not currently published.

A key aspect of making NSW the easiest state to start a business is making regulatory obligations easier to understand and implement.

Initiatives, such as easy to do business and red tape reduction are in place to help achieve this priority.

The regulatory policy framework is under review following an October 2016 performance audit on ‘Red tape reduction’ that found the regulatory burden of legislation had increased.
3.2 Financial management
Revenue NSW earned record crown revenue of $30.0 billion in 2016–17 to support the state's finances. Record crown revenue has been driven by the sustained increase in duties revenue, which has increased by 93.7 per cent over the last five years. This is a consequence of the continued strength in the property market over this time and large one off NSW Government business asset sales and leases.
3.3 ICT and digital government
The Digital Government Strategy (the Strategy) was released in May 2017 to build on reforms set out in previous ICT strategies. The Strategy’s priorities and enablers aim to support digital innovation. Targets and measures will need to be set to assess and monitor progress against the Strategy.
The Digital Information Security Policy (DISP) is a key tool that helps ensure a minimum set of information security controls are implemented across NSW Government agencies.

A review of 2016 annual reports found 15 agencies (13 in 2015) did not attest to compliance with the DISP and of the agencies that attested to compliance, 34 reported issues associated with their compliance.

The Strategy’s priorities and enablers aim to support digital innovation. Targets and measures will need to be set to assess and monitor progress against the Strategy.

Failure to comply with the DISP increases the risk of noncompliance with legislation, information security breaches and difficulty restoring data or maintaining business continuity in the event of a disaster or disruption.

3.4 Property and asset utilisation

Property NSW's performance reporting could be
improved. M2012-20 'Government Property NSW
and Government Property Principles' required
Property NSW to set key performance indicators
to measure property and asset utilisation
performance.
 

Property NSW's performance reporting would be enhanced by developing and reporting on customer satisfaction, reporting against set targets and benchmarking cost of service to the private sector.

3.1 Premier's and State Priorities

Coordination of Priorities

The Department of Premier and Cabinet is responsible for supporting the implementation of initiatives to deliver the 12 Premier’s Priorities.

The Premier’s Implementation Unit (PIU) facilitates progress of the 12 Premier’s Priorities by coordinating and working jointly with key agencies to monitor the achievement of targets and the implementation of these initiatives. The PIU does this by working with the lead agencies that have accountability for these priorities and targets.

The 18 State Priorities are managed by the responsible ministers and agencies, with the Department of Premier and Cabinet helping to coordinate progress reporting.

A comprehensive report of performance against the State Priorities not yet published

The 12 Premier’s Priorities are published at the website https://www.nsw.gov.au/premiers-priorities. However, a comprehensive report of performance against the 18 State Priorities is yet to be published. While some measures are publicly reported through agency annual reports or other sources, a comprehensive report of performance against the 18 State Priorities would ensure all State Priorities are publicly reported, provide a single and easily accessible source of reference and improve transparency.

Performance against the Premier's and State Priorities is not audited

The Priorities have not been independently audited. Where possible, the Department of Premier and Cabinet uses independent sources to measure performance, however without independent assurance there is an increased risk that the target measures are inaccurate, not relevant or do not fairly represent actual performance.

We will deliver a performance audit on ‘Progress and measurement of the Premier's Priorities’ during 2017–18.
 

Clusters responsible for delivery of the Priorities

Clusters across the NSW public sector play a key role delivering the Priorities. They deliver projects and initiatives aimed at driving improved performance and achieving set outcomes. The Priorities provide a basis to measure and assess agency performance.

The Finance, Services and Innovation, the Treasury and Public Service Commission have lead roles in delivering priorities.

Reporting on the priorities relating to managing the state's finances and increasing government transactions delivered by digital channels are at section 3.2 and 3.3 respectively.

Performance against some other priorities follows.

Premier’s Priority on improving government services

Consumer satisfaction target met, while business satisfaction index remains stable

There was a reported 0.6 point increase in the consumer satisfaction index during the year and a 2.6 point increase from the 2015 baseline year, which brings the index to 79.3 in line with the set target.

The business satisfaction index remained stable, decreasing slightly from a reported 78.4 to 78.3, however there has been a 1.7 point increase overall from the 2015 baseline year.

Premiers Priority on Improving Government Services graph_Central Agencies_November2017

The Finance, Services and Innovation cluster leads this priority.

State Priority: Make NSW the easiest state to start a business

Performance against this priority is not currently published. However, initiatives in place to help achieve this target include:

  • easy to do business initiative led by Service NSW
  • red tape reduction measures, which are now led by the Better Regulation division within the Department of Finance, Services and Innovation.

The Finance, Services and Innovation cluster leads this priority.

Red tape reduction measures were ineffective and are under review

A key aspect of making NSW the easiest state to start a business is making regulatory obligations easier to understand and implement.

An October 2016 performance audit on ‘Red tape reduction’ found that reported red tape savings were inaccurate and the regulatory burden of legislation had increased. Following release of the performance audit the NSW Government commissioned a review of regulatory practice, known as the ‘Greiner Review’, which drew heavily on our report findings. The draft report has made 35 recommendations aimed at improving the regulatory policy framework.

The Department of Premier and Cabinet advise that the NSW Government is currently considering its response to the final report of the review of the NSW regulatory policy framework.

3.2 Financial Management

The Treasury is responsible for the management of the state’s finances and assets. This includes consolidation and management of the state’s finances and delivery of the Budget, provision of fiscal, economic, commercial and financial policy advice and management of the state’s Balance Sheet.

Management of the state’s finances

The Treasury leads the delivery of the State Priorities to maintain the AAA credit rating and to contain expenditure growth within revenue growth.

Further analysis and details on the management of the state’s finances is included in our Report on State Finances, which can be accessed at this link.

State revenue and taxation

Record crown revenue collected in 2016–17

The Office of State Revenue (now Revenue NSW), a division of the Department of Finance, Services and Innovation has a key role in the management of state finances. It administers state taxation, manages fines, recovers state debt and administers grants and subsidies.

Revenue NSW earned $30.0 billion from taxes, fines and fees in 2016–17 ($27.3 billion in 2015–16) on behalf of the Crown Entity.

Administered State Revenue graph_Central Agencies_November 2017

Record crown revenue is mainly driven by the sustained increase in duties revenue. Duties revenue has increased by 93.7 per cent over the last five years, which has been driven by the continued strength in the property market over this time and one off NSW Government business asset sales and lease transactions. Except for ‘Other’ administered revenue, all remaining revenue streams have increased gradually over the same period.

Performance against efficiency and effectiveness targets

Revenue NSW’s performance against some unaudited efficiency and effectiveness measures follow:

Performance Measures Revenue_Central Agencies_November 2017

Revenue NSW reported a reduction in the cost to collect $100 of taxation and $100 of fines over the past three years. 

The combined cost to collect $100 of taxation and fines was $0.57 in 2016–17. This is lower than the Western Australian Office of State Revenue, which reported a cost to collect $100 of revenue of $0.76, but higher than Queensland Treasury Revenue Services, which reported a cost to collect $100 of revenue of $0.40.

Revenue collected from compliance activities was $464 million and continues to exceed the annual target.

Following recommendations from a June 2015 performance audit on ‘Efficiency and effectiveness in tax collection’ Revenue NSW reports annually on its performance. The report can be found at this link.

Reporting outcomes from customer education initiatives could be enhanced

A focus of Revenue NSW's 2021 strategic plan is on customer experience and education. Measuring the success of these programs on the effectiveness of tax collection would allow Revenue NSW to better target its customer experience and education programs.

Some programs Revenue NSW have in place to improve customer experience include education roadshows, website upgrades to make access to information and resources easier and the Service NSW mobile app (allows users to pay fines, track payments and review photos of infringements).

3.3 ICT and digital government

The Department of Finance, Services and Innovation leads whole of government ICT strategy and reform. According to the ICT Metrics Report 2015–16 the NSW Government spent over $2.6 billion through its agencies on ICT to facilitate public sector service delivery and service reform.

Digital Government Strategy

Progress to achieve priorities in the Digital Strategy will need to be measured and reported

The Digital Government Strategy was released in May 2017 to build on reforms set out in previous ICT strategies. It sets out a roadmap of key priorities and enablers that aim to support digital innovation across NSW Government. Currently, targets and measures have not been set to assess and monitor progress.

Some priorities highlighted in the Strategy include:

  • continued migration of transactional services to Service NSW
  • establishment of a NSW Data Ecosystem to optimise lawful data sharing and use
  • development of whole of government approach to management of digital identity and personal information in alignment with community expectations and privacy law
  • testing the use of artificial intelligence to enhance service accessibility while maintaining algorithmic transparency
  • using predictive self learning tools to measure data quality.

We understand targets and measures are under development. The Digital Government Strategy can be accessed at www.digital.nsw.gov.au.

Increasing government transactions conducted via digital channels

Transactions delivered by digital channels increased 19.7 percentage points

The Department of Finance, Services and Innovation reported that the percentage of government transactions conducted via digital channels has increased 19.7 percentage points over the last two years. This represents a reported increase of 31 per cent in digital transactions between June 2016 and August 2017 and a 16 per cent increase in digital transactions between June 2015 and June 2016. The target for government transactions conducted via digital channels is 70 per cent by 2019.

Government transactions conducted via digital channels graph_Central Agencies_November 2017

Service NSW is the key contributor to this priority, delivering a single point of contact for government customer services.

To achieve the target Service NSW is increasing its partnerships with government agencies, expanding its offering of digital transactions and aiming to improve the online user experience to encourage greater digital take up.

Data centre reform

The Department of Finance, Services and Innovation advised that 95 per cent of data centre space in GovDC was being taken up by NSW Government agencies and marketplace providers at 30 June 2017 (81 per cent at 30 June 2016).

GovDC are expanding their facilities to meet future demand with additional data halls at the two sites scheduled to be completed in November and December 2017.

The NSW Data Centre reform strategy required all agencies (except State Owned Corporations) to relocate their data rooms and infrastructure from current facilities into GovDC or other suitable cloud services by 30 August 2017.

Digital Information Security

Not all agencies are complying with the NSW Government’s information security policy

Agencies listed in Schedule 2 and 3 of the Public Finance and Audit Act 1983 (except State Owned Corporations and universities) are required to attest to compliance with the core requirements of the Digital Information Security Policy (DISP) in their annual reports. Compliance with the core requirements the agency is attesting to is not subject to independent certification.

A review of 2016 annual reports found 15 agencies out of 130 (13 in 2015) did not attest to compliance with the DISP. Of the agencies that attested to compliance, 34 reported issues associated with their compliance. The agencies reported that this was due to ongoing programs to meet the certification requirements (22 agencies), development of the Information Security Management System (five agencies) and transitioning of IT services (seven agencies).

The DISP is a key tool that helps ensure a minimum set of information security controls are implemented across NSW Government agencies. Failure to comply with the DISP increases the risk of noncompliance with legislation, information security breaches and difficulty restoring data or maintaining business continuity in the event of a disaster or disruption.

Previous performance audits have raised concerns over compliance with the NSW Government’s information security policies. A 2010 performance audit on ‘Electronic Information Security’ found that progress towards compliance and certification had not been effectively monitored and a 2015 performance audit on ‘Security of Critical IT Infrastructure’ found that three key agencies in the NSW Public Sector partially scoped and excluded key business processes and technology from their risk assessment and Information Security Management System.

The DISP requires the Information Security Management System to be based on a comprehensive risk assessment to identify any business area or function to which risks apply. However, effective monitoring of compliance is required by the Department of Finance, Services and Innovation to ensure that agencies are scoping in their key business processes and completing comprehensive risk and control assessments to comply with the DISP’s objectives.

The Department of Finance, Services and Innovation advised that:

  • a summary report on attestation in agencies’ annual reports is prepared for the ICT and Digital Leadership group, which is comprised of members from all clusters
  • the Digital Information Security of Practice acts as a forum to share information and help with the implementation of the policy. It also advised that the DISP is currently under review. We will deliver a performance audit on ‘Cyber security’ during 2017–18.

It also advised that the DISP is currently under review. We will deliver a performance audit on ‘Cyber security’ during 2017–18.

3.4 Property and asset utilisation

Property NSW plays a key role in whole of government real property and asset utilisation. Its services include leading property reform, property portfolio and asset management, delivering transactions and major projects, heritage conservation and valuation services. It held property plant and equipment assets of $959 million at 30 June 2017 and recognised property rental income from owned and leased properties of $512 million during 2016–17.

Property NSW is supported in this role by Premiers Memorandum ‘M2012 20 Government Property NSW and Government Property Principles’ (the Premiers Memorandum), which sets out 16 government property operating principles and six guiding principles. PM2012 20 was established following recommendations made in the Property Asset Utilisation Taskforce Report published in September 2012.

Performance against property principles

Property NSW's performance reporting could be improved

Property NSW reports performance against several key performance measures in its annual report, including utilisation, vacancy rates, commercial property portfolio returns and average capital and operating expenditure per square metre of space.

Property NSW's performance reporting would be enhanced by:

  • developing and reporting on customer satisfaction measures
  • reporting against set targets
  • where possible, benchmarking to the private sector on cost of service.

The Premiers Memorandum stated that Property NSW would be accountable for and set appropriate key performance indicators to achieve:

  • strong customer satisfaction
  • benchmarked financial returns on its property portfolio and investments
  • effective real property asset utilisation and service quality
  • competitive cost of service
  • added value in client real property asset repositioning developments.

Property NSW requires relevant and reliable information to deliver its mandate

The Premiers Memorandum requires agencies to provide information to Property NSW on property ownership, property acquisition and disposal plans and total asset management planning.

Failure of agencies to provide this information could limit or reduce Property NSW's effectiveness improving the management of the NSW Government's real property portfolio.

We will deliver a performance audit on ‘Property asset utilisation’ during 2017–18.

4. Government financial services

This chapter outlines our audit observations, conclusions and recommendations specific to NSW Government agencies providing financial services.

Observation Conclusion or recommendation
4.1 Key issues

The SAS Trustee Corporation (STC) Pooled Fund and the Parliamentary Contributory Superannuation (PCS) Fund are not required to comply with the prudential and reporting standards issued by the Australian Prudential Regulation Authority (APRA). Amendments to relevant legislation allows the Minister for Finance, Services and Property to prescribe applicable prudential standards and audit requirements.

Structured and comprehensive prudential oversight of these funds remains important as they operate in a specialised, complex and continuously changing investment market sector, have over 106,000 members and manage investments of more than $42.4 billion.

Recommendation: The Treasury should liaise with
the respective Trustees to implement appropriate
prudential standards and oversight arrangements for
the exempt public sector superannuation funds.

Currently, Green Slips in NSW are the most expensive in Australia. Average premiums for Sydney Metropolitan vehicles increased by 10.4 per cent between 1 January 2016 and 31 December 2016.

CTP reforms are expected to reduce the cost of Green Slips. The State Insurance Regulatory Authority will need to ensure it has appropriate processes in place to track and report against the expected benefits.
4.2 Financial performance and sustainability
Net unfunded superannuation liabilities were $15.0 billion at 30 June 2017.

Under the Fiscal Responsibility Act 2012, the NSW Government’s target is to eliminate unfunded superannuation liabilities by 2030.
The superannuation funds’ strategic asset allocation and investment strategies are monitored and adjusted to help achieve a fully funded position by 2030.
The Home Warranty Scheme commenced in 2011. Over this time total premiums collected have not been sufficient to cover expected claim costs. Funding arrangements introduced during 2016–17 allow the Home Building Compensation Fund to apply to the Crown for reimbursement of unfunded realised losses from under-pricing of premiums.

Other reforms are planned to address the long term sustainability of the home building compensation scheme.
4.3 Investment performance
The NSW Government’s main superannuation funds have maintained the management expense ratio (MER) at consistent levels over the past two years. The Parliamentary Contributory Superannuation (PCS) Fund does not set an MER target. MER is an industry recognised ratio to measure the performance of funds and investment managers.

Recommendation: The Fund Secretary for the PCS Fund, in conjunction with the Trustee, should consider establishing an appropriate management expense ratio target to measure performance.

4.1 Key issues

Prudential oversight by NSW Government

Prudential oversight of exempt NSW Government superannuation funds not prescribed

Recommendation
The Treasury should liaise with the respective Trustees to implement appropriate prudential standards and oversight arrangements for the exempt public sector superannuation funds.

STC Pooled Fund and the PCS Fund are exempt public sector funds under the Superannuation Industry (Supervision) Act 1993. The funds are not required to comply with the prudential and reporting standards issued by the Australian Prudential Regulation Authority (APRA).

Structured and comprehensive prudential oversight of these funds remains important as they operate in a specialised, complex and continuously changing investment market sector, have over 106,000 members and manage investments in excess of $42.4 billion. Structured and comprehensive prudential oversight would help to:

  • enhance risk management practices
  • strengthen governance frameworks
  • increase the efficiency of operational and financial processes.

Under the principles of the Australian Government’s Heads of Government Agreement (HOGA) in 1994, the NSW Government agreed to comply with the principles of the prudential standards for the public sector superannuation funds. However, the HOGA arrangement does not provide a formal regulatory framework for an appropriate level of prudential oversight.

Amendments to the Superannuation Administration Act 1996 in November 2015 allows the Minister for Finance, Services and Property to prescribe applicable prudential standards and audit requirements, but no standards have been prescribed to 30 June 2017.

While the Trustee of the STC Pooled Fund advised that there is no legal requirement for the fund to comply with APRA standards, the Trustee is committed to continue complying with the better practice guidelines appropriate for large superannuation funds. As part of its ongoing assessment of prudential compliance, the Trustee of STC Pooled Fund commenced a formal gap analysis against APRA prudential standards in early 2017.

Changes to the Parliamentary Contributory Superannuation Fund

Three former members’ pensions suspended following conviction of a serious offence

As recommended in a 2014 Auditor General’s Report to Parliament, the NSW Government amended Section 19AA of the Parliamentary Contributory Superannuation Act 1971 (PCS Act) on 1 June 2017. The amendment affects former members who are convicted of a serious offence, after ceasing to be a member for conduct that occurred while the person was a member.

Following the amendment, affected members will no longer be entitled to receive a pension and must repay any pension or lump sum benefit received to the PCS Fund.

The Fund Secretary advised there are three affected members whose pensions have been suspended at 1 July 2017. The Fund plans to initiate recovery action after the appeal period.

Green slip scheme affordability

CTP reforms expected to reduce the cost of Green Slips

Under the reformed CTP scheme to commence from 1 December 2017 the State Insurance Regulatory Authority expects the average price of a Green Slip to be reduced by more than $100.

The Motor Accident Injuries Bill 2017 was passed by the NSW Parliament on 30 March 2017. The Bill will replace the current CTP scheme under the Motor Accidents Compensation Act 1999 from 1 December 2017.
 

Green Slips in NSW are currently the most expensive in Australia

Average premium prices in NSW continue to be the most expensive in Australia with the Australian Capital Territory the next most expensive at $586 at 31 December 2016.

Average premiums for Sydney Metropolitan vehicles were $703 at 31 December 2016 ($637 at 31 December 2017). The increase in average premium prices over the 12 month period was 10.4 per cent. Premium price increases have been impacted by increasing claims frequency and low bond yields, resulting in low investment returns for insurers.

Average CTP Price_Central Agencies_ November 2017

Key objectives and expected benefits of the CTP reforms are to:

  • reduce the cost of Green Slip premiums
  • reduce the time it takes to resolve a claim
  • increase the proportion of benefits provided to the most seriously injured road users
  • reduce the opportunities for claims fraud and exaggeration.

The State Insurance Regulatory Authority will need to ensure it has appropriate processes in place to track and report against the expected benefits.

4.2 Financial Performance and sustainability

Superannuation funds

NSW Government superannuation agencies manage, administer and invest approximately $51 billion of assets for some 128,000 public sector employees. The table below summarises the financial performance and position of the NSW Government’s main superannuation funds (the Funds):

  • SAS Trustee Corporation Pooled Fund (STC Pooled Fund)
  • Energy Industries Superannuation Scheme (EISS Fund)
  • Parliamentary Contributory Superannuation Fund (PCS Fund).
superannuation funds graph_Central Agencies_November 2017

Net unfunded superannuation liabilities were $15.0 billion

This includes $14.4 billion in unfunded liabilities related to the STC Pooled Fund and PCS Fund and a further $630 million related to the Judges Pension Scheme. The Judges Pension Scheme is established and governed by the Judges Pension Act 1953 and is a pay as you go pension scheme included in the Crown Entity’s financial statements. The unfunded liability has been measured under the new Australian Accounting Standard, AASB 1056 ‘Superannuation entities’.

Under the Fiscal Responsibility Act 2012, the government’s target is to eliminate unfunded superannuation liabilities by 2030. Our Report on State Finances contains more detail on the states superannuation funding position.

Member benefit payments continue to increase

Benefits paid to members during the year by the Funds totalled $5.1 billion ($5.1 billion in2015–16). In 2016–17, total annual benefits have increased by $0.9 billion or 19.8 per cent in comparison to 2013.

The increasing member benefit payments are attributable to:

  • the ageing profile of members
  • the increasing life expectancy of members, which has risen from 76 years in 1987 to 82 years in 2017.

A breakdown of benefit payments is below:

benefit payments between pension and lump sum_Central Agencies_November 2017

Insurance and compensation schemes

The table below summarises the financial performance and position of insurance and compensation agencies

insurance and compensation performance_Central Agencies_November 2017

The Workers Compensation Nominal Insurer (Nominal insurer) and the New South Wales Self Insurance Corporation reported net losses of $988 million and $149 million respectively for the year ended 30 June 2017. However, these agencies continue to maintain positive net assets.

The Nominal Insurer’s net loss was primarily caused by decreasing investment returns and increases in the outstanding claims provision following the 2012 Workers Compensation reforms. All other insurance and compensation agencies reported a positive net result and net assets.

Prolonged losses or an excess of liabilities over assets could indicate an insurance or compensation scheme is unsustainable over the longer term. Further analysis on key sustainability indicators for the Nominal Insurer and NSW Self Insurance Corporation is below.

Nominal Insurers funding ratio slightly below target

The Nominal Insurer’s funding ratio was 119 per cent in 2016–17, which is slightly below its target range of 120 per cent to 140 per cent. The funding ratio compares total assets to total liabilities. It measures the extent to which an insurer’s assets can cover its liabilities, even in adverse conditions. Given the long tail nature and inherent risk of Workers Compensation schemes, a buffer is held (assets in excess of liabilities) to protect against volatilities in claims and investment performance.

The Nominal Insurer’s funding ratio result for 2016–17 was calculated using a 75 per cent probability of adequacy (PoA). The PoA is the level of confidence that the estimated claims liability will be sufficient to cover the future claims cost.
 

Nominal Insurers premiums collected have decreased over five years

The Nominal Insurers premiums have decreased over the last five years, while claim payments have remained relatively stable. Premiums collected were $2.8 billion in 2012–13, reducing by 21.4 per cent to $2.2 billion in 2016–17.

Premium rates and investment returns will need to be closely monitored to ensure the scheme collects sufficient premiums to cover costs and maintain its funding ratio.

NSW Self Insurance Corporation’s premiums exceeded claims paid between 2012–13 to 2014–15. Hindsight refunds have increased over the last two financial years, which has reduced net premiums paid by agencies. Hindsight adjustments are an incentive for agencies to improve their claims performance. It provides an adjustment to premiums paid by an agency and is designed to reflect the actual claims costs to the fund.

premiums to claim payments_Central Agencies_November 2017

Funding arrangements to support the Home Building Compensation Fund

Last year, we recommended a review of the home building compensation scheme (the scheme) to address the sustainability gap between premiums and expected claims.

Funding arrangements introduced during 2016–17 allowed the Home Building Compensation Fund to apply for reimbursement of losses from the under pricing of premiums. In August 2017, the Home Building Compensation Fund was reimbursed $138 million from the Crown Entity.

The graph below compares the total premiums collected to the expected claim costs since the scheme commenced in 2011.

home warranty claims development graph_Central Agencies_November 2017

Other reforms are planned to address the long term sustainability of the home building compensation scheme. This includes:

  • giving the State Insurance Regulatory Authority more power to assess, approve or reject premiums and establishing an operational fund for administrative costs
  • allowing private sector providers to enter the market and premiums to be calculated based on a builder’s individual risk
  • establishing the Home Building Insurers Guarantee Fund as a safety net.

The scheme in its current form provides a safety net for contracted residential building work for homeowners. Insurance under the scheme is required for projects over $20,000.

NSW Treasury Corporation

The table below summarises the financial performance and position of NSW Treasury Corporation (TCorp):

NSW Treasury Corporation Graph_Central Agencies_November 2017

TCorp achieved a positive net result over the last two years, enabling it to declare dividends to the NSW Government of $80.0 million in 2016–17 and $21.0 million in 2015–16. An analysis of its performance against some key ratios follows.

Net interest margin

The graph below shows TCorp’s net interest margin over the last five years. TCorp’s net interest margins has remained stable over the five years at about 0.2 per cent.

Net interest margin graph_Central Agencies_November 2017

Cost to revenue

The graph below shows the ratio of TCorp’s cost to revenue for the last five years.

Cost to Revenue Ratio TCorp graph_Central Agencies_November 2017

TCorp’s cost to revenue ratio increased from 23 per cent in 2012–13 to 37 per cent in 2016–17. TCorp’s 2016–17 result was better than its budgeted target of 47 per cent. This was primarily due to:

  • higher than budgeted revenues associated with the management of TCorp’s balance sheet and funding risk management activities
  • lower than budgeted salary and staff expenses.

Investment management fees

The graph below shows TCorp’s funds under management and the percentage of investment management fees over the last five years.

Investment management fees TCorp graph_Central Agencies_November 2017

TCorp’s funds under management increased in 2014–15 as part of the NSW Government’s strategy to amalgamate investment management functions of SAS Trustee Corporation (STC) Pooled Fund and Insurance and Care NSW (formerly Safety, Return to Work and Support). In 2016–17, funds under management increased further from the proceeds of the NSW Government’s asset recycling program.

TCorp’s average investment management fees decreased from 0.08 per cent in 2012–13 to 0.06 per cent in 2016–17. The decrease is due to the amalgamation of the investment management functions of STC Pooled Fund and Insurance and Care NSW.

4.3 Investment Performance

Superannuation fund investments

The Funds did not exceed their long term investment targets

The PCS Fund and STC Pooled Fund met their annual targets, while neither of the funds met their long term 10 year rolling target return.

A key objective of superannuation funds is to meet their long term investment targets, as investment performance affects the net assets available to pay member benefits.

The investment returns for these funds and targets are below.

investment returns table_Central Agencies_November 2017

The target returns are reviewed by the fund’s actuary on an annual basis. For the STC Pooled Fund and PCS Fund, the target return for 2016–17 was a base rate of 4.5 per cent plus consumer price index. The 10 year rolling target for STC Pooled Fund is similarly calculated, while the PCS Fund has historically used custom benchmarks incorporating exposure in various asset portfolios. For both funds, the targets are determined with the aim of eliminating the unfunded liability and meeting member benefit payments in the long term.

Management expense ratio remains stable, however no target was set for the PCS Fund

Recommendation
The Fund Secretary for the PCS Fund, in conjunction with the Trustee, should consider establishing an appropriate management expense ratio target to measure performance.

The Funds have been able to maintain the management expense ratio (MER) at relatively consistent levels over the past two years.

The PCS Fund continued to have the lowest MER over the last two years, while the EISS Fund met its target the last two years. The PCS Fund does not set a target MER to measure its performance against.

STC Pooled Fund’s MER marginally exceeded its target over the last two years. This was due to additional performance fees on some of its unlisted assets where the investment performance exceeded their benchmark outcomes.

The Funds MER’s are listed below.  

MER table_Central Agencies_November 2017

MER is an industry recognised ratio used to measure the cost of investment managers. It is calculated as a percentage of the fund’s investment management expenses over funds under management. Costs included in this ratio are manager fees, performance fees, custody fees, consulting fees and an administration fee component.

Insurance and compensation

Mixed investment performance by Workers Compensation Insurance Fund and NSW Self Insurance Corporation

The Nominal Insurer’s Workers Compensation Insurance Fund (WCIF) cash and investment returns declined over the past five years from 9.2 per cent in 2012–13 to 2.6 per cent in 2016–17. Over a 10 year cycle the WCIF has made a weighted average return of 5.4 per cent per annum, while NSW Self Insurance Corporation has made a weighted average return of 7.3 per cent per annum. The NSW Self Insurance Corporation’s investment return calculation includes cash and investments of the Treasury Managed Fund, Home Building Compensation Fund and other smaller administered managed fund schemes.

The variability in cash and investment returns between the WCIF and NSW Self Insurance Corporation is because of their different investment strategies. The graph below shows the investment returns of the WCIF and NSW Self Insurance Corporation over the past ten years.

investment returns graph_Central Agencies_November 2017

It is important for WCIF to monitor their investment performance to reduce the impact on premiums required to maintain an adequate funding ratio.

NSW Treasury Corporation

Five year investment returns exceeded the set benchmark for Core Funds

All of the Core Funds performance exceeded their five year benchmark return. NSW Treasury Corporation (TCorp) uses industry benchmarks based on the Core Funds strategic asset allocation to measure investment performance.

The total balance of the four Core Funds at 30 June 2017 was $4.9 billion.

Tcorp investment core fund performance graph_Central Agencies_November 2017

Investors in the TCorp Investment Core Funds include NSW public sector agencies, local councils and public bodies, such as not for profit organisations.