Young said before Dally next appears before the Parole Board further risk assessment should be undertaken "given the last risk assessments appear to have been some five years ago".
However, the decision said the 58-year-old had made "significant progress" working within Auckland Prison and was behaving well.
"He is a leading hand in the nursery."
A psychological report recommended he be moved to another prison where he would be able to be in a self-care unit.
"We suggest that that is most appropriately one of the two other Auckland prisons, either Auckland South or Spring Hill, which both have self-care units available," Young said.
After Dally dragged Karla to his house he repeatedly raped and tortured the 13-year-old for 22 hours.
Karla Cardno was murdered in 1989.
He later put her naked, bound and gagged in the boot of his car and buried her alive in a shallow grave at Pencarrow Head.
Dally confessed to police almost six weeks after the killing and led them to the desolate beach.
In 2001, the slain teenager's stepfather, Mark Middleton, was sentenced to nine months in prison over threats he made against Dally.
