April 29th, 2020 by James Goudie KC

Important powers of authorities for themselves and their employees and the authorities of others relate to the Local Government Pension Scheme (the LGPS), for which some authorities are “administering authorities” (AAs). AAs make investments. What are their powers as to what investments they make in that capacity?

The LGPS is a statutory occupational pension scheme. It was established by Regulations made under the Superannuation Act 1972. It now has effect as if it were made under the Public Service Pensions Act 2013 (the 2013 Act).

Pursuant to the LGPS, AAs administer 89 distinct funds. These are kept separate from other local authority resources.

The funds are funded by employer and employee contributions. In the former case they represent another element in overall remuneration. In the latter case they are deducted from income. They are not a bounty conferred by the taxpayer.

As Lord Wilson put it, at para 30 in R (Palestine Solidarity Campaign) v SoS for MHCLG (2020) UKSC 16, LGPS AAs “ have duties which at a practical level are similar to those of trustees”, and they consider themselves to be “ quasi-trustees” who should “act in the best interests of their members”. The quasi- trusteeship element is a “ crucial dimension of their role”.

AAs may however take non-financial considerations into account. This is providing that doing so would not involve significant risk of financial detriment to the LGPS and where there is good reason to believe that members would support their decision. See Lord Carnwath at paras 42/43.

These are judgments to be made by AAs. Indeed generally responsibility for investment decisions rests with the AAs.

The appeal in this case concerned the type of investments which LGPS AAs are permitted to make, or continue to hold. More particularly, it concerned the breadth of the “ethical investments” which they are permitted to make or to continue to hold.

Ethical investments mean investments made, or not entirely, for commercial reasons. They are investments made, or avoided, in the belief that social, moral, environmental or political considerations make them appropriate.

AAs have to act in accordance with so-called Guidance from the SoS. This has to fall within the purpose and scope of power conferred by Parliament on the SoS in the 2013 Act.

The issue in the case arose out of two passages in Guidance that the SoS had issued. The Guidance prohibited the use of pension investment policies to pursue boycotts and similar activities against nations against whom the UK Government does not currently impose sanctions or take similar steps.

The challenge to the Guidance succeeded by a 3-2 majority. The Supreme Court overruled the unanimous decision of the Court of Appeal : (2018) EWCA Civ 1284, this Bulletin on 7 June 2018. Lady Arden and Lord Sales dissented.

Lord Wilson, with whom Lady Hale agreed, said that the power of the SoS to direct HOW  AAs Should approach the making of investment decisions by reference to non-financial considerations does not include power to direct WHAT investments they should not make. Lord Carnwath endorsed the submission of Nigel Giffin QC that, whilst the SoS was entitled to give Guidance about how AAs should formulate investment policies consistently with their “fiduciary duty”, he was not entitled to make authorities give effect to his own policies in preference to those policies which the AAs themselves thought it right to adopt, in fulfilment of their fiduciary duties.

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