Judgment has been handed down (on 6 June 2018) in the case of Palestine Solidarity Campaign & ors v Secretary of State for Communities and Local Government.
The investment strategies of scheme managers for local government pension schemes (“administering authorities”) are governed by The Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016 (“the Regulations”).
Amongst other things, the Regulations require an authority to state in its published strategy its “policy on how social, environmental and corporate governance considerations are taken into account in the selection, non-selection, retention and realisation of investments”.
The Regulations provide that local authorities must formulate their investment strategy in line with guidance issued by the Secretary of State for the Communities and Local Government (“Secretary of State”) from time to time. Guidance on preparing and maintaining an investment strategy statement (“the Guidance”) was published in September 2016 by the Secretary of State. This statutory guidance provides, in summary, that administering authorities “should not pursue policies that are contrary to UK foreign policy or UK defence policy”. It goes on to give a fuller statement, that “using pension policies to pursue boycotts, divestment and sanctions against foreign nations and UK defence industries are [sic] inappropriate, other than where formal legal sanctions, embargoes and restrictions have been put in place by the Government”.
The claimants were a group who “object to the limiting effect of the guidance on their ability to campaign around the investment of local government pension funds affecting the Palestinian people and the Occupied Territories”, and an individual member of the LGPS.
Together they issued a judicial review challenging the Guidance, on the basis that the parts of the Guidance referenced above fell outside the proper scope of the Secretary of State’s statutory powers. The High Court agreed, finding that the powers conferred by the legislation could be exercised only for “pensions purposes”, and that the Secretary of State had not acted for a pensions purpose in including those passages in the Guidance. On that basis, the judge granted a declaration that the passages were unlawful.
Further arguments, including that the Guidance was contrary to Article 18 of the IORP Directive (Investment Rules), failed.
The Court of Appeal allowed the Secretary of State’s Appeal.
The Secretary of State argued that these foreign/defence affairs purposes were pension purposes, since non-financial purposes (not connected with prudential management) could be “pension purposes” provided there is no risk of significant financial detriment from taking investment decisions with such factors into account.
The Court agreed. It found that the legislation conferred a “broad discretion” upon the Secretary of State: “the power to make regulations and to give guidance must of course be exercised so as to promote the policy and objects of the legislation but the discretion conferred is nonetheless a wide one, and the range of considerations that may in principle be taken into account in its exercise is likewise wide… Since the Secretary of State is empowered to give guidance as to an authority’s investment strategy, it seems to me to be equally plainly within the scope of the legislation for the guidance to cover the extent to which such non-financial considerations may be taken into account by an authority… In particular, I can see nothing objectionable in his having regard to considerations of wider public interest, including foreign policy and defence policy, in formulating such guidance”.
The judge also found that Article 18 of the IORP Directive did not amount to a “prohibition on interference by Member States with the freedom of institutions to take into account non-financial considerations”, and rejected the respondents’ challenge on these points.
Following the original High Court judgment, the Guidance was reissued in an amended form which removed the wording that had been challenged. We wait to see if the Guidance is now further amended, or the elements that had been removed reinstated. If the language is reinstated, it will be for administering authorities (and the LGPS pooled funds) to consider how this aspect of the Guidance can be implemented in a way which is consistent with the authorities’ fiduciary duties. There may be considerable challenges in implementing this Guidance in practice.