IFSWF Santiago Principles

Santiago Principles Self-Assessment

Intergenerational Trust Fund for the People of the Republic of Nauru

ITF 2019

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Institutional Framework and Governance Structure.
Principle 6

6. The governance framework for the SWF should be sound and establish a clear and effective division of roles and responsibilities in order to facilitate accountability and operational independence in the management of the SWF to pursue its objectives.

It should be noted that, in 2019, Nauru's Ministry of Finance reviewed the Santiago Principle self-assessment for the Intergenerational Trust Fund. The Ministry advised us of no changes from the previous self-assessment, which was written in 2017 as part of the fund's IFSWF membership application.

The governance framework is set out in the MOU with clear guidelines of the division of roles. Strict accountability and operational guides are in place via the MOU and strengthen by specific approval and other measures (Delegation Manual – to be formally approved in the AGM 2017) developed by the Executive Administrator under the direction of the Management Committee. Paragraph 12 of the MOU sets out the various specific roles in addition to the committee roles.

Descriptions of the roles are also included in the definitions section of the MOU. The current roles include in addition to the Committee Members – Executive Administrator (includes accounting services and quarterly/annual accounts preparation), Investment Manager, Auditor and a Review Consultant who has in-depth experience in the administration of other Pacific Island funds.

7. The owner should set the objectives of the SWF, appoint the members of its governing body(ies) in accordance with clearly defined procedures, and exercise oversight over the SWF’s operations.

The fund ‘owner’ in a traditional or formal sense ultimately are the people of Nauru with the Government of Nauru the beneficiary manager. The NTF was established by the contributing parties as an international organisation (under the IOPI Act) and is governed by the management committee. The ‘owner’ initially set the objectives of the NTF, as defined in the MOUs. These documents set out the appointment of the Committee, operational aspects of the Committee within the defined procedures including oversight.

8. The governing body(ies) should act in the best interests of the SWF, and have a clear mandate and adequate authority and competency to carry out its functions.

The NTF Management Committee (established under the MOU) are all highly credentialed and experienced executives/administrators in their own right with a strong awareness of their fiduciary responsibilities. The Committee has, by the MOU, a clear mandate to operate, which is specifically outlined in:

  • Paragraph 7 in regards to management and responsibilities and the operational aspects of the NTF, which are set out in Part V.
  • Paragraph 7.8 in specific regards to the following fiduciary responsibilities:
    • Committee members will have a Fiduciary Responsibility to the Fund. No Committee member will be responsible for any loss or depreciation in value of any assets held in the Fund, except by the reason of such member’s gross negligence or willful default. Every decision made by a member of the Committee will be determined to have been made with reasonable care and diligence unless the contrary is proved by affirmative evidence.

9. The operational management of the SWF should implement the SWF’s strategies in an independent manner and in accordance with clearly defined responsibilities.

A professional independent administrator (an international accounting firm) has been appointed (in July 2016 by a tender process) for the operational management of the Fund. They work closely with the Committee and owner representative (adviser) in all matters. An external review consultant (who currently administers other Pacific SWFs) has also been engaged to provide additional review and engagement functions on behalf of the Committee. The roles and responsibilities are set out in the MOU in Paragraph 7.

10. The accountability framework for the SWF’s operations should be clearly defined in the relevant legislation, charter, other constitutive documents, or management agreement.

The NTF registration documents include:

  • International Organisations (Privileges and Immunities) Act 1963
  • International Organisations (Privileges and Immunities — Nauru Trust Fund) Regulation 2015

As referenced in Section 1 of this self-assessment, the explanatory notes provide a clear legal structure and framework going forward under the relevant IOPI Act and Regulation.

The NTF registration document and Explanatory notes to the Regulations are linked to the MOUs (Paragraph 8) and have been publicly disclosed via www.naurugov.nr.

11. An annual report and accompanying financial statements on the SWF’s operations and performance should be prepared in a timely fashion and in accordance with recognized international or national accounting standards in a consistent manner.

The audited annual report (on the website) is to international standards by an independent auditor who was selected by a tender process. The accounts are prepared to the same international standard by our Executive Administrator who is part of an international accounting firm. The Audit is scheduled in a timely manner with the AGM committee meetings within two months after the end of the financial accounting year.

 

12. The SWF’s operations and financial statements should be audited annually in accordance with recognized international or national auditing standards in a consistent manner.

This is undertaken on a quarterly management and annual audited Statement basis. The audited annual report (on the website) is to international standards by an independent auditor. The accounts are prepared to the same standard by the NTF Executive Administrator, who also provide Australian and international accounting services

13. Professional and ethical standards should be clearly defined and made known to the members of the SWF’s governing body(ies), management, and staff.

All committee and support staff are of a professional level who clearly understand the ethical nature, fiduciary requirements and standards of their roles. The members of the Management Committee established by the MOU are also all highly credentialed and experienced executives in their own right with clear fiduciary responsibilities. The MOU gives the Committee a clear mandate to operate.

This mandate is specifically outlined in Paragraph 7 of the MOU in regards to management and responsibilities and the operational aspects of the NTF, which are set out in Part V. These include as per section 8 of the self-assessment: Committee members will have a Fiduciary Responsibility to the Fund. No Committee member will be responsible for any loss or depreciation in value of any assets held in the Fund, except by reason of such member’s gross negligence or willful default. Every decision made by a member of the Committee will be determined to have been made with reasonable care and diligence unless the contrary is proved by affirmative evidence.

Fiduciary responsibilities are set out in Paragraph 7.8 under the following definition: “Fiduciary Responsibility” means a duty of utmost good faith, trust, confidence, and candour owed by a fiduciary (such as a lawyer or corporate officer) to the beneficiary (such as a lawyer’s client or a shareholder); a duty to act with the highest degree of honesty and loyalty toward another person and in the best interests of the other person (such as the duty that one partner owes to another.

14. Dealing with third parties for the purpose of the SWF’s operational management should be based on economic and financial grounds, and follow clear rules and procedures.

Further to Sections 8 and 13 all third-party transactions are undertaken with full transparency and tendered within defined limits or purposes with full agreement by the Committee. The Committee has by the MOU a clear mandate to operate to, which is specifically outlined in Paragraph 7 of the MOU in regards to management and responsibilities and the operational aspects of the NTF (which are set out in Part V). Fiduciary responsibilities are set out in Paragraph 7.8 as set out in Section 13 above.

This cover: “Fiduciary Responsibility” means a duty of utmost good faith, trust, confidence, and candor owed by a fiduciary to the beneficiary; a duty to act with the highest degree of honesty and loyalty toward another person and in the best interests of the other person (such as the duty that one partner owes to another.

15. SWF operations and activities in host countries should be conducted in compliance with all applicable regulatory and disclosure requirements of the countries in which they operate.

Establishment of the NTF as an international organization under the IOPI Act and Regulation was undertaken in Australia in November 2015. Operation of and contributions to the NTF also operate consistently with Nauru’s domestic legislation, National Sustainable Development Strategy and regulatory frameworks with disclosure internally and to both ‘partner’ countries.

All ‘member’ countries currently involved as ongoing contributors operate to and are covered by their various national government audit, regulator and disclosure policies requirements. Annual disclosure in the form of government tabled reports and annual audited accounts are the vehicle for compliance and transparency.

16. The governance framework and objectives, as well as the manner in which the SWF’s management is operationally independent from the owner, should be publicly disclosed.

This is disclosed on http://www.naurugov.nr/government/departments/department-of-finance/intergenerational-trust-fund-for-the-people-of-the-republic-of-nauru.aspx along with the core documents including its registration and MOU.

17. Relevant financial information regarding the SWF should be publicly disclosed to demonstrate its economic and financial orientation, so as to contribute to stability in international financial markets and enhance trust in recipient countries.

The public website http://www.naurugov.nr/government/departments/department-of-finance/intergenerational-trust-fund-for-the-people-of-the-republic-of-nauru.aspx includes details of the background/purpose, MOU requirements, registration entity documentation, fund performance, fund product disclosure statement (PDF) investment policy statement, committee meeting minutes and audited accounts. This public website provides the stakeholders and the general public with a clear summary of the financial and economic goals of the NTF.

Principle 18

18. The SWF’s investment policy should be clear and consistent with its defined objectives, risk tolerance, and investment strategy, as set by the owner or the governing body(ies), and be based on sound portfolio management principles.

18.1. The investment policy should guide the SWF’s financial risk exposures and the possible use of leverage.

18.2. The investment policy should address the extent to which internal and/or external investment managers are used, the range of their activities and authority, and the process by which they are selected and their performance monitored.

18.3. A description of the investment policy of the SWF should be publicly disclosed.

It should be noted that, in 2019, Nauru's Ministry of Finance reviewed the Santiago Principle self-assessment for the Intergenerational Trust Fund. The Ministry advised us of no changes from the previous self-assessment, which was written in 2017 as part of the fund's IFSWF membership application.

The NTF Investment policy and strategy (including the risk components) are key to the success of the fund. The Committee, in conjunction with advisers and the international investment manager (Mercer International), work closely with the NTF Committee to establish, continually review and manage a sound and robust investment portfolio within the Investment policy guidelines.

The NTF approved Investment Policy is on http://www.naurugov.nr/government/departments/department-of-finance/intergenerational-trust-fund-for-the-people-of-the-republic-of-nauru.aspx which covers risk (in Section 4) and options (in Section 6) for the NTF investment portfolio.

These Sections include: The Trust Fund Committee will seek to achieve the maximum long-term investment return for its defined tolerance for risk. It is acknowledged that the investments made by the Original Partners and other contributors are subject to risk and that in certain periods this can result in (realised or unrealised) losses. These investment risks include but may not be limited to:

  • Market risk, currency risk, interest rate risk, credit (default) risk and Illiquidity risk.
  • The Committee expects the Investment Fund to be invested consistent with best practice for sovereign wealth funds.
  • The portfolio will not be leveraged.
  • Investment risk will be limited by appropriate diversification between and within investment asset classes.

The Committee understands that the Investment Fund has a long-term investment horizon and a high exposure to growth assets is appropriate to generate strong real investment returns. The investment strategy for the Investment Fund will be undertaken in stages outlined in Section 4 of the Investment Policy document and will take into consideration relevant memoranda of understanding, funds under management and market conditions.

The investment policy (in conjunction with the MOU and administrative approval limits) addresses the activities of managers both internal and external to the fund (primarily within Section 3 of the document):

In making decisions on investment strategy, the Committee will have regard to the overall circumstances of the Republic of Nauru and will comply with all applicable legislative requirements.

With respect to asset management, the oversight responsibility of the Trust Fund rests with the Committee composed of individuals whose responsibilities encompass the following:

  • Establishing overall objectives and the setting of investment policy;
  • Monitoring the management of the Investment Fund’s assets;
  • Reviewing the asset allocation mix on a regular basis to ascertain not only that the existing portfolio conforms to the desired targets and ranges, but also that the targets and ranges remain suitable and represent the prudent asset allocation mix for the Investment Fund;
  • Monitoring performance to determine whether or not the rate of return objectives is being met and that Policy and guidelines are being followed; and
  • Taking appropriate action if objectives are not met or if the policy and guidelines are not followed.

19. The SWF’s investment decisions should aim to maximize risk-adjusted financial returns in a manner consistent with its investment policy, and based on economic and financial grounds.

19.1. If investment decisions are subject to other than economic and financial considerations, these should be clearly set out in the investment policy and be publicly disclosed.

19.2. The management of an SWF’s assets should be consistent with what is generally accepted as sound asset management principles.

The investment policy guides the NTF’s investment manager in making the investment decisions. Decisions are based on purely economic and financial risk to returns basis. Fund investment along with the PDS are included on the website.

Investment decisions are based only on economic and financial consideration within the risk parameters agreed on in the Investment Policy document and in consultation with the investment manager. The management committee is committed to best-practice asset management principles in relation to NTF contributions within the investment portfolio.

The MOU and Investment Policy documents ensure consistency and operations to a high standard of best practice management with high and recognised fiduciary requirements.

20. The SWF should not seek or take advantage of privileged information or inappropriate influence by the broader government in competing with private entities.

As per Sections 8 and 13 of this self-assessment, the NTF Management Committee are fully aware of the professional ethics required of their roles. Under the MOU, Committee members have a Fiduciary Responsibility to the Fund and required to make decisions with reasonable care and diligence, unless the contrary is proved by affirmative evidence. Any conflict of interest is required to be fully disclosed to and by the Committee, with disputes covered under Paragraph 21 of the MOU as:

  • Disputes between the Government of Australia and the Government of the Republic of Nauru arising under or relating to this MOU, whether during the life of the Fund or on termination of its operations, that cannot be resolved by the Committee will be resolved only by consultation between the two governments and will not be referred to an individual, to a national court, to an international tribunal or to any other person or entity for settlement.
  • Disputes involving other Original Partners or Subsequent Contributors will be handled as mutually determined by the Original Partners and Subsequent Contributors.

21. SWFs view shareholder ownership rights as a fundamental element of their equity investments’ value. If an SWF chooses to exercise its ownership rights, it should do so in a manner that is consistent with its investment policy and protects the financial value of its investments. The SWF should publicly disclose its general approach to voting securities of listed entities, including the key factors guiding its exercise of ownership rights.

This is acknowledged and, as per Section 20 of this document, the Management Committee would be aware of this approach should it occur in the future.

The ownership rights of the contributing parties, including contributions, responsibilities of the committee, the capacity to withdraw and termination arrangements, are clearly set out in the MOU in paragraphs 5, 7, 10 18 and 19.

As a recently established sovereign wealth fund with a current single managed fund investment portfolio, voting rights for contributing parties have not yet been established or specifically addressed in the policy statement. Updates to the policy (available at http://www.naurugov.nr/government/departments/department-of-finance/intergenerational-trust-fund-for-the-people-of-the-republic-of-nauru.aspx) will be considered at such a time in the future when Committee decides to move away from a consolidated investment approach for the Fund’s assets.

22. The SWF should have a framework that identifies, assesses, and manages the risks of its operations.

22.1. The risk management framework should include reliable information and timely reporting systems, which should enable the adequate monitoring and management of relevant risks within acceptable parameters and levels, control and incentive mechanisms, codes of conduct, business continuity planning, and an independent audit function.

22.2. The general approach to the SWF’s risk management framework should be publicly disclosed.

23. The assets and investment performance (absolute and relative to benchmarks, if any) of the SWF should be measured and reported to the owner according to clearly defined principles or standards.

Mercer International, the investment manager, benchmarks the fund on quarterly performance. This is reported to the Committee and annually reported to the owner or more frequently if any substantial issues arise. The benchmarking supplies the committee with references to and comparison with other fund/investment performance.

24. A process of regular review of the implementation of the GAPP should be engaged in by or on behalf of the SWF.

At the February 2017 board meeting the Committee agreed that ongoing compliance of the NTF with the Santiago Principles was an important benchmark to establish. Review and updates (as required) of this self-assessment will be considered as part of the AGM agenda. The committee is committed to the values of the Santiago Principles.