Ever since the government overhauled the Local Government Pension Scheme (LGPS) investment regulations in 2016, there have been concerns it is overstepping its powers and remained in breach of its EU treaty obligations to implement the EU Directive 41/2003 Institutions for Occupational Retirement Provision.
UNISON led a campaign through the Parliamentary petition system that yielded two debates in the House of Commons both proofed unsuccessful in persuading the government to change course.
One area of contention is statutory guidance issued in September 2016, which states that administering authorities must not pursue boycotts or divestment contrary to UK foreign and defence policy. In essence it means that the LGPS funds must invest in the interests of UK foreign and defence policy.
This section in the guidance was challenged by the Palestine Solidarity Campaign and LGPS member and UNISON activist Jacqueline Lewis in a High Court case where the judge ruled on 22 June that secretary of state for communities and local government, Sajid Javid, had acted for an unauthorised purpose and therefore unlawfully, in a major blow to the government.
The judge Sir Ross Cranston agreed with the claimants' first argument that the guidance falls outside the proper scope of the secretary of state's statutory powers because it was issued for non-pensions purposes. The judgment said although he had power to issue guidance under the 2016 regulations, the section telling funds to invest in line with foreign and defence policy was not issued in the interests of proper administration and management of the scheme but were "a reflection of broader political considerations".
The argument that the guidance was framed to pursue a different purpose is classic administrative law, and the case is around exercising power for the wrong purpose.
A lot of investment case law is about exactly that point. The government thought it could get away with the purpose of pursuing a policy to do with defending the defence industry and promoting UK foreign policy through the back door, it didn’t have anything to do with the ability to pay pensions through investment returns.
The judgment certainly raises a lot of interesting questions about the government's powers over the LGPS, and how it produces regulation through guidance outside parliamentary scrutiny. Now with a weakened government, this may pave the way for other parts of the guidance to be challenged, and could make it difficult to use its intervention powers.
What next for the government? They can either appeal the case or issue new guidance for consultation opening the possibility of further legal challenge.
Implications of the judgment Attached to this briefing is a legal view provided by Ivan Walker, who has consistently assisted us with LGPS legal work, on the case itself and its consequences. Here are the key issues in summary. The case has reignited the debate over whether the Institutions for Occupational Pension Provision (IORP) directive apply to the LGPS.
- The Public Services Pension Act did not give the government the power to introduce the guidance as it was not for the purpose of delivering pensions
- Any decision about how to invest LGPS assets must be driven by the need to run the LGPS efficiently and effectively, not wider Government policy, which means all investment decisions must be scrutinised for efficiency.
- Environmental, Social Governance considerations - The judge was clear that non-financial considerations can be taken into account when making investment decisions.
- He set two limiting factors on the use of ESG considerations however: 1. they must not involve significant risk of financial detriment; and 2. there must be good reason to think that the scheme members would support the decision.
- Article 18.4 was considered by the Judge – therefore the Article 18 (and by default Article 8) apply to the LGPS
- Article 8 requires the legal separation of the pension institution from the employer, in this case the administering authorities. Article 18 is the investment regulations that require the funds to invest in the best interests of scheme members and resolve any potential conflicts of interest in the favour, (e.g. investment in PFI projects)
- The current LGPS regulations are silent on whose interests the funds invest in and the investment process is embedded in the administering authorities.
Our view is that two key issues now arise in the LGPS
- The Directive must be applied – there is now talk of a significant transition deal in the Brexit talks, furthermore all legislation from the EU must be implemented via the ‘great reform bill’
- The Investment Strategy Statements need to be put before the scheme members in a consultation exercise as there was no requirement to consult them specifically
- All investments since the 2013 Public Services Pension Scheme Act come under the spotlight of efficient and effective.
We now await the government's response.
Colin Meech, National Officer