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UK Public Sector Pensions Speedbrief: Court decision on LGPS investment strategy

  • United Kingdom
  • Pensions - Public sector

20-07-2017

Summary

In a ruling which may well require LGPS funds to revisit their recently-adopted investment strategy statements, the High Court has concluded that guidance issued by the Department for Communities and Local Government (DCLG) was unlawful to the extent that it purported to prohibit funds from using pension investment policies to “pursue boycotts, disinvestment and sanctions against foreign nations and UK defence industries” except where formal legal sanctions have been put in place by the Government.  Following the High Court decision, DCLG has updated its guidance to remove the offending material, but has also now confirmed that it intends to appeal the decision.

Background

The Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016 (the 2016 Regulations) set out the provisions governing the management and investment of pension funds held by administering authorities of the Local Government Pension Scheme (the LGPS).  Regulation 7(1) of the 2016 Regulations provides for the formulation by administering authorities of an investment strategy statement in accordance with DCLG’s guidance.

Pursuant to its powers under the 2016 Regulations, DCLG issued its statutory guidance, “Guidance on preparing and maintaining an investment strategy statement” on 15 September 2016.  Although the guidance permitted ethical and social objections to a particular investment to be taken into account, it prohibited the use of pension policies “to pursue boycotts, divestment and sanctions against foreign nations and UK defence industries…other than where formal legal sanctions, embargoes and restrictions have been put in place by the Government” and to “pursue policies that are contrary to UK foreign policy or UK defence policy”.  This restriction operated even if such investment strategy would not involve significant financial risk to the scheme and irrespective of member support.

The guidance was challenged by the Palestine Solidarity Campaign Limited and a member of the LGPS, Jacqueline Lewis (the Claimants) on three grounds:

  • first, the guidance fell outside the proper scope of DCLG’s statutory powers because it was issued not for pensions purposes but, to put it in broad terms, for foreign affairs and defence purposes;
  • second, it was unlawful simply because the reference to the foreign/defence part of the guidance lacked the requisite standard of clarity and certainty; and
  • third, the guidance imposed a form of prior governmental “approval” of the investment decisions administering authorities make, contrary to Article 18(4) of Directive 2003/41/EC on the Activities and Supervision of Institutions for Occupational Pension Provision (the IORP Directive).

Decision

The court granted judicial review on the first ground, on the basis that the court could not see any grounds upon which the guidance singling out non-financial factors largely concerned with foreign and defence matters could be deemed to be for a pensions purpose.  Rather, the focus on these factors appeared to reflect broader political considerations. Under the guidance, the relevant factors cannot be taken into account even if there is no significant risk of causing financial detriment to the LGPS fund and there is no good reason to think that LGPS members would object. In particular, the court found that this was paradoxical, with an equivalent investment decision being permissible under the guidance if other non-financial factors were taken into account, such as public health, the environment or treatment of the workforce. 

On the second ground, the court did not consider the guidance was so unclear as to be positively misleading or erroneous in law.

On the third ground, the court did not consider the guidance was contrary to the IORP Directive, as the guidance only provided a framework for the content of statements of investment policy which administering authorities must prepare, rather than requiring any kind of prior “approval” (which would be contrary to the IORP Directive).

Comment

Whilst this is a positive outcome for administering authorities as it reaffirms their power to determine their own policy (which can include a range of financial and non-financial factors), it raises the question of the extent to which administering authorities should positively be taking non-financial factors into account when making any investment decision.  Also, the very consideration of the IORP issue by the judge would seem to settle the persistent debate as to whether the IORP Directive applies to statutory public service pension schemes, like the LGPS.

Although DCLG has updated its guidance to remove the offending material following the ruling, it has also recently confirmed that it is intending to appeal the decision, as it considers the provisions in question are necessary to protect the Government’s policy approach. Given that DCLG’s stance amounts to a blanket ban on funds taking account of certain ethical considerations when investing, it is difficult to reconcile DCLG’s continued pressing of these arguments with the established legal position in the context of private sector pensions.  Most notably, in the key High Court cases of Cowan v Scargill [1984] and Harries (Bishop of Oxford) v Church Commissioners [1992], the courts confirmed that although dogmatic approaches and blanket bans are not permissible, ethical considerations can properly be taken into account when investing, provided that the primary concern to maximise financial returns has been satisfied.  This position has been confirmed by two separate Law Commission reports (in 2014 and most recently in June 2017).  It will be interesting to see whether the Court of Appeal will take a different approach in the public sector context and, if so, the basis upon which it will deviate from previous case law in this area.

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