Local government pension scheme investment guidance was unlawful, High Court rules

Out-Law News | 28 Jun 2017 | 4:53 pm | 2 min. read

Government guidance preventing the local government pension scheme (LGPS) from pursuing boycotts as part of their investment strategies has been found unlawful by the High Court.

Responding to a legal challenge brought by the Palestinian Solidarity Campaign, the High Court ruled that the relevant parts of the guidance had no "pensions purpose", and so overstepped the statutory purpose to create guidance conferred on the secretary of state.

"The purposes for which the power to make guidance under [the relevant regulations] can be exercised can be no wider than those behind the making of the regulations themselves," said High Court judge Sir Ross Cranston in his judgment. "Thus it is a power which may only be exercised for pensions purposes."

"Yet it is clear from the secretary of state's own evidence that the parts of the guidance the claimants challenge were not issued in the interests of the proper administration and management of the local government pension scheme from a pensions perspective, but are a reflection of broader political considerations, including a desire to advance UK foreign and defence policy, to protect UK defence industries and to ensure community cohesion," he said.

The group had also challenged the guidance on the grounds that it not sufficiently clear and certain; and that it breached EU rules preventing prior approval of pension schemes' investment powers by supervisory authorities. The judge dismissed both of these arguments.

The challenge related to the Preparing and Maintaining an Investment Strategy Statement guidance, issued by the Department for Communities and Local Government (DCLG) in late 2016 under the Local Government Pension Scheme (Management and Investment of Funds) regulations. The regulations required all administering authorities enrolled in the LGPS to prepare an investment strategy consistent with the guidance by 1 April 2017.

The guidance permits ethical and social objections to particular investments to be taken into account. However, it explicitly prevents administering authorities from using pension policies to "pursue boycotts, divestment and sanctions against foreign nations and UK defence industries" or pursuing policies that are "contrary to UK foreign policy or UK defence policy".

The judge said that "pension purposes" could include non-financial factors, "so long as there is no risk of significant financial detriment from taking investment decisions with such factors into account". However, the issue here was that the guidance had "singled out certain types of non-financial factors" as ones on which administering authorities were prevented from basing investment decisions on.

"In doing this I cannot see how the secretary of state has acted for a pensions purpose," he said.

"Under the guidance, these factors cannot be taken into account even if there is no significant risk of causing financial detriment to the scheme and there is no good reason to think that scheme members would object," he said. "Yet the same decision would be permissible if the non-financial factors taken into account concerned other matters, for example, public health, the environment or treatment of the workforce."

"In my judgment the secretary of state has not justified the distinction drawn between these and other non-financial cases by reference to a pensions purpose. In issuing the challenged part of the guidance he has acted for an unauthorised purpose and therefore unlawfully," he said.

"Underlying this case is the debate over ethical and social investments which is not a new debate," said pensions expert Nick Stones of Pinsent Masons, the law firm behind Out-Law.com. "At no point in time was it argued that the government's policy restricted choice or may have had a detrimental impact on investment performance. However, the secretary of state failed to convince the court that the powers under the legislation were wide enough to cater for this policy."

"Had the policy been implemented together with evidence as to the negative impact that the adoption of such a policy would have had, the outcome may have been different. Instead, the government applied a blanket prohibition on certain non-financial factors which took it outside of the remit of finance. The bedrock of a pension scheme, for those running them, is the preservation of and prudent accumulation of value. This case re-confirms the point that, ultimately, it is the economic impact that is important and that forms the bedrock of the pension investment obligation," he said.