The Court of Appeal recently ruled that central government has the power to direct how LGPS assets are used. Judith Donnelly explores the implications for administering authorities.
A controversial ruling from the Court of Appeal has upheld the power of the secretary of state to issue guidance to local authorities prohibiting the use of LGPS (Local Government Pension Scheme) assets to promote policies contrary to those of the UK government.
The court decisions
In September 2016, the secretary of state published guidance concerning the investment of LGPS funds. The guidance stated that administering authorities of LGPS funds “should not pursue policies that are contrary to UK foreign policy or UK defence policy”.
It went on to say 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 applicants, including the Palestine Solidarity Campaign, brought an action for judicial review of the guidance, alleging that the secretary of state acted for an unauthorised purpose when issuing the challenged section of the guidance.
The applicants argued that the secretary of state was only empowered to act for a pensions purpose when formulating the guidance, since the relevant legislation (the Public Service Pensions Act 2013) was established to provide pensions for members of the LGPS. This argument was successful in the lower courts.
However, the Court of Appeal disagreed. In a judgement published last month that surprised many commentators, the court found that the secretary of state had a broad discretion when issuing the guidance.
Although the power to issue guidance must be used to promote the policy of the 2013 Act as a whole, the court held that having regard to the wider interests of the UK did not run counter to the policy of providing public sector pension schemes.
Legal framework
Whilst “guidance” often refers to documents that contain non-binding advice, this is not the case with the guidance on the investment of LGPS funds.
Under the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016, the administering authorities of LGPS funds must prepare an investment strategy in line with the guidance issued by the secretary of state. The decision, therefore, has major implications for the investment of LGPS assets.
Comment
It would arguably have been possible for the Court of Appeal to uphold the guidance in a relatively narrow judgement, by finding that the challenged section was consistent with the secretary of state acting for a pensions purpose.
The principles set out in the guidance — broadly, that pension scheme assets should be invested to provide returns for members rather than to pursue political agendas and boycott countries or industries — are principles that many pensions experts would agree are appropriate for inclusion in guidance to pension schemes.
However, the Court of Appeal tackled the central issue head on — namely, whether the government could direct pension scheme assets to be used in a manner consistent with government policy — and found that the government can do this.
The court’s view was that the secretary of state’s action in issuing the guidance could only be challenged on the grounds of what in legal parlance is termed “Wednesbury unreasonableness”, meaning that no reasonable person would have acted in this way. This judgement therefore opens the door to the publication of guidance that goes further than the disputed 2016 guidance.
Although the disputed part of the guidance is largely prohibitive and sets out what administering authorities should not do, the government may now consider whether to issue guidance directing the investment of LGPS assets into investments that the government considers appropriate.
The government has been keen to promote the investment of LGPS assets in the UK, in particular in UK infrastructure, and it remains to be seen whether the it will seek to do so under the principles set out in this decision.
Judith Donnelly is a barrister at law firm Squire Patton Boggs.
Case: Palestine Solidarity Campaign Ltd & Anor, R (on the application of) v Secretary of State for Communities and Local Government [2018] EWCA Civ 1284
