LGPS Investment strategy guidance – Boycott wording dropped

Following a High Court ruling in June 2017, the Department for Communities and Local Government (DCLG) has dropped controversial wording

Following a High Court ruling in June 2017, the Department for Communities and Local Government (DCLG) has dropped controversial wording from its “Guidance on Preparing and Maintaining an Investment Strategy Statement” in respect of the Local Government Pension Scheme (LGPS). Although the guidance has been updated to remove the controversial wording, DCLG has confirmed that it intends to appeal the decision.   

The Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016 requires each LGPS administering authority to formulate an investment strategy which must be in accordance with guidance issued from time to time by the Secretary of State. The guidance, issued by DCLG in September 2016, prohibited the use of pension policies to pursue “boycotts, disinvestments and sanctions against foreign nationals and UK defence industries…other than where formal legal sanctions, embargoes and restrictions have been put in place by the Government”. The guidance also stated that funds “should not pursue policies that are contrary to UK foreign policy or defence policy”. These restrictions were to operate even if an investment strategy with an element of boycott, disinvestment and sanction would not involve significant financial risk to the scheme and irrespective of member support.

The Palestine Solidarity Campaign challenged this part of the guidance on the basis that DCLG had acted unlawfully, on the grounds that:

  • The guidance fell outside the proper scope of DCLG’s statutory powers, because it was issued for a non-pensions purpose;
  • It was unlawful because the reference to foreign/defence lacked the requisite standard of clarity and certainty; and
  • It was contrary to Article 18(4) of Directive 2003/41/EC on the Activities and Supervision of Institutions for Occupational Pension Provision, because the guidance imposes a form of prior governmental approval of the investment decisions of LGPS administering authorities.

The court granted the judicial review on the first ground, which is that the guidance fell outside the proper scope of DCLG’s powers.

The court found that parts of the guidance were not issued in the interests of the proper administration and management of the LGPS, but were 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. The guidance singled out certain types of non-financial factors, concerned with foreign nationals and UK defence industries, which could not be used as a basis for investment decisions, whereas other non-financial factors could be used such as public health, the environment or the treatment of the workforce. The court found this distinction to be unjustifiable in terms of a pensions’ purpose.    

Following the High Court ruling DCLG re-issued the guidance in July 2017 with the boycott wording removed. The guidance now simply states that, in terms of investment strategy, schemes can take purely non-financial considerations into account provided that doing so would not involve significant risk of financial detriment to the scheme and where they have good reason to think that scheme members would support their decision. However, DCLG has indicated that it is intending to appeal the decision as it considers that “It is an important principle that foreign policy matters are for the UK Government to decide”.

It will be interesting to see what approach the Court of Appeal will take in respect of public sector pensions, given that in the private sector there is a long established principle that ethical considerations can be taken into account when investing, providing that the primary concern to maximise financial gains has been satisfied.       

Jane Marshall (jane.marshall@weightmans.com) is a Partner in the Employment Pensions and Immigration team and is based in Manchester. If you have any questions, please get in touch with Jane or speak to your usual Weightmans advisor.

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