“We believe there are insights and lessons from the Pacific Islands experience that will be of interest to other small economies considering the role of Sovereign Funds (for example in the Caribbean), and the wider Sovereign Funds research community. Despite this, research attention on Pacific Island Sovereign Funds has been limited, and published cross-country studies tend to be dated and focussed upon Sovereign Trust Funds.
“Our research provides an updated and comprehensive review of the role of the Pacific Island Sovereign Funds, including Sovereign Provident (Pension) Funds which are often very significant investors in the Pacific Islands.
“Pacific Island Funds are amongst the longest established Sovereign Funds in the World (e.g. Kiribati’s RERF was established in 1956), and Pacific Island Sovereign Funds tend to have much more dispersed and innovative funding sources than Funds established by larger nations. While most Pacific Islands Funds tend to be very small in terms of AUM compared to funds in more populous nations, they can be very large relative to gross national incomes.
“We find that many Pacific Island funds serve multiple economic purposes (e.g. to provide short-term macro stabilisation and a source of inter-generational wealth) in practice if not in legislation. For example, we document that Pension Reserve Funds play an important role in domestic development and investment, even though it is not their primary purpose. In theory, this is not ideal given there is potential for these purposes to contradict each other, and in relation, the ‘optimal’ asset allocation to meet their economic purpose. But in practice factors such as the very small scale, limited resources, lack of domestic financial markets, and huge distances to markets in many Island nations mean that the establishment of multiple funds may not be feasible.”
“Our high level review of current Funds against what economic purposes might be most beneficial for the Islands given their different economic circumstances suggests that more attention should be given to developing macro stabilisation and explicit economic development objectives than is currently the case.
“These findings highlight the importance of having clear alignment between legislation and a funds purpose, good governance and a good investment process. These are issues we will consider in follow up research, where we develop an assessment framework which is used to review several key SFs in the Pacific.”
Assessment Framework for Sovereign Funds in Pacific Island Nations
“In this report we develop an assessment framework we believe respects the circumstances and constraints of Pacific Island Funds. The aim of this framework is to provide Pacific Island Fund staff and their stakeholders with a useful and practical guide that can be used to examine a fund’s governance, its investment process, and its integration within the broader government budgeting process and policy objectives. It is not intended as a “scorecard” to be applied from afar, and the key objective is to help funds improve over time to deliver higher living standards for their populations.
“In Section 2 of this report we provide a helicopter, stylised view of what best practice looks like for SFs management, drawing upon the substantial literature on fund governance and investment management.
“In Section 3 we describe our assessment framework and approach to applying the framework. The starting-point for our framework is the work that the International Monetary Fund and SFs themselves have done to develop the “Santiago Principles” for SFs (see Appendix A). This outlines a set of high level principles and practices around the legal establishment of a fund and its objectives; its governance structure; investment and risk management; and a fund’s coordination with broader macroeconomic policies.
“We use these principles as a guideline to develop a set of questions that can be used to assess how close a fund is to best practice standards.”