In our monthly update for July 2017, we reported on the case of R (Palestine Solidarity Campaign Ltd and another) v Secretary of State for Communities and Local Government . In this case, the High Court upheld a challenge relating to the statutory guidance governing the investment strategy for the Local Government Pension Scheme (LGPS), and agreed with the claimants that the guidance was outside the minister’s statutory powers in stating that administering authorities under the LGPS must not:
- use pension policies to pursue boycotts, divestment and sanctions against foreign nations and UK defence industries except where the Government has put in place formal legal sanctions, embargoes and restrictions; nor must they
- pursue policies that are contrary to UK foreign policy or UK defence policy.
The Secretary of State appealed to the Court of Appeal (CA).
The claimants in the High Court, the Palestine Solidarity Campaign (a pressure group lobbying local and central government to support its campaign for an end to Israel's occupation of the West Bank and Gaza and advocating boycott, divestment and sanctions against Israel) and one of its pension scheme members challenged the statutory guidance by way of judicial review on the following grounds:
- the prohibition on boycotts, divestments and sanctions was outside the minister's statutory powers (ground one);
- the foreign/defence part of the guidance lacked clarity and certainty and was therefore unlawful (ground two); and
- the guidance breached EU law which prohibits local investment decisions being subject to “any kind of prior approval or systematic notification requirements” (ground three).
The High Court decision
The Court ruled in favour of the claimants on the first ground and accepted that this paragraph of the guidance (and the summary of requirements) fell outside the proper scope of the Secretary of State's statutory powers. The Court held that the requirements were issued not in the interests of the proper administration and management of the LGPS from a pensions perspective 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 other two grounds of challenge were rejected.
Pending appeal, revised guidance was issued, with the removal of the paragraph stating: “…the Government has made clear 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 Court of Appeal decision
The CA decision was unanimous, with Sir Stephen Richards giving the lead judgment. The CA held that it was plainly within the scope of the relevant legislation for an authority’s investment strategy to make provision for non-financial considerations to be taken into account in making investment decisions, including the authority’s policy on how social, environmental and corporate government considerations are taken into account in the selection, non-selection, retention and realisation of investments.
The Secretary of State (the CA said) was empowered to give guidance as to an authority’s investment strategy, and it was 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. There was nothing objectionable in the Secretary of State having regard to considerations of wider public interest, including foreign policy and defence policy, in formulating such guidance, and this in no way ran counter to the policy and objects of the legislation.
With due respect to the High Court judge, the CA found that his analysis in terms of the “purpose” for which the relevant part of the Guidance was included was unduly narrow, and the CA did not accept that the relevant part of the guidance had been issued for an improper purpose.
The CA considered various decisions of the European Court of Justice which, although they related principally to insurance law, were useful in that they adopted an approach which distinguished between national rules which restricted basic freedoms (and in so doing were an infringement) and rules that laid down a technical framework (which were not). In applying that approach to the LGPS case, the CA held that the guidance was closer in character to the technical framework than to a set of rules prescribing the authority’s investment strategy. As such, the although the guidance could have an indirect effect on individual investment decisions, the authority was left with the freedom to take those decisions and was not required to invest (or not invest) in any particular financial product.
The guidance therefore did not infringe the prohibition on subjecting an institution’s investment decisions to any kind of prior approval or systematic notification requirements in the IORP (pensions) Directive.
Presumably, this decision will result in an “as you were” approach in relation to the strategy guidance for local authorities under which they make decisions before investing LGPS funds. The judgment was handed down on June 6, 2018, and the expected result is that the paragraph which was removed from the guidance pending appeal will be reinstated.
Local authorities will need to continue to ensure that their investments are made taking into account appropriate factors, both financial and non-financial. There is both legal precedent and DB investment guidance from TPR recognising that trustees may take non-financial considerations into account when making investment decisions.