Local authority disinvestment decisions

The High Court recently heard a challenge to government guidance on the investment strategy for the local government pension scheme that sought to prevent boycotts, divestment and sanctions against foreign nations and UK defence industries. David Hart QC analyses the outcome.

Many people like to have a say over the investment policies of their pension funds. They may not want investment in fossil fuels, companies with questionable working practices, arms manufacturers, Israel or indeed any company which supports Israel’s occupation of the West Bank and Gaza Strip – to choose but a few of people’s current choices. And pension funds, left to their own devices, may wish to adopt one or more of these choices to reflect their pensioners’ views.

Hence the significance of the challenge in R (o.t.a. Palestine Solidarity Campaign Ltd and Jacqueline Lewis) v. Secretary of State for Communities and Local Government [2017] EWHC 1502 (Admin) to some statutory guidance which sought to ban some of those pension decisions but to permit others. The context was local government employees (5 million current or former employees). It arose on that ceaseless battleground of government’s direction/intermeddling in local government affairs.

The key bit of the impugned guidance was that those running local authority pensions must not use their policies to

pursue boycotts, divestment and sanctions…against foreign nations and UK defence industries…other than where formal legal sanctions, embargoes and restrictions have been put in place by the Government.”;

or

“pursue policies that are contrary to UK foreign policy or UK defence policy”.

The main issue in this challenge was whether these prohibitions went beyond the SoS’s powers under the relevant pension provisions.

No prizes for guessing why the Palestine Solidarity Campaign (in conjunction with War on Want and the Quakers) supported this challenge. The fact that the domestic arms trade got a special unbannability status would provoke many to go to law.

There is a statutory regime applicable to local authority pensions. Part of it is the snappily titled Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016.  Reg. 7(1) tells authorities that they must formulate an investment strategy which is in accordance with guidance from the SoS. The strategy (reg. 7(2)) must contain things like a requirement to invest funds widely, the fund’s approach to risk, and

(e) The authority’s policy on how social, environmental and corporate governance considerations are taken into account in the selection, non-selection, retention and realisation of investments.

Very sensible. The authority must articulate in its strategy what it will or will not invest in, so that all involved know where they stand. It cannot just project its own political and social views on its pensioners without standing up and being counted on them.

Ground 1

The Claimants’ central argument was the prohibitions on boycotts etc fell outside the SoS’s statutory powers because they were issued not for pensions purposes, but for foreign affairs and defence purposes. This general contention is a very familiar public law ground of challenge, associated with the Padfield  [1968] AC 997 decision in the late 1960s. The question involves an examination of the policies found in the statutory regime to see whether the particular exercise of power (the ban on such bans) fell within it.

The curiosity, which both sides relied upon, is that the authorities are specifically told by reg.7(2) that they should devise a policy on social, environmental and corporate governance considerations, but then the guidance tells them what they must not say in that policy.

The SoS says that this exposed a conflict in the claim. If the SoS can make rules about these wider investment considerations, why can’t he ban specific ones that may affect his other policies. Read in this way, all such directions and bans are capable of being made for “pension purposes.”

The judge disagreed. As he observed, the SoS’s submissions failed to distinguish between his general power to give guidance on the one hand and whether in doing so he exercised the power for a purpose for which it was conferred. The substantive provisions in the Act are included for pensions purposes. Therefore, absent anything to the contrary, the regulation-making powers conferred by the legislation can only be exercised for pensions purposes, and the power to make guidance under the Regulations can be no wider than those behind the making of the regulations themselves.

Thus it is a power which may only be exercised for pensions purposes.

But the SoS’s evidence made it clear that the controversial bits of the guidance 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 SoS argued that such foreign/defence affairs purposes are pension purposes – just as non-financial purposes, not connected with prudential management, can be pension purposes.

The judge was unpersuaded.

But the flaw in the Secretary of State’s approach is that the guidance has singled out certain types of non-financial factors, concerned with foreign/defence and the other matters to which reference has been made, and stated that administering authorities cannot base investment decisions upon them. In doing this I cannot see how the Secretary of State has acted for a pensions’ purpose.

These factors cannot be taken into account even if there is no significant risk of causing financial detriment and there is no good reason to think that scheme members would object. Yet the same decision would be permissible if the factors concerned other matters, for example, public health, the environment, or treatment of the workforce.

So the SoS

has not justified the distinction drawn between these and other non-financial cases by reference to a pensions’ purpose. In issuing the challenged part of the guidance he has acted for an unauthorised purpose and therefore unlawfully.

And the challenge succeeded on this ground.

Ground 2

This raised the legal issue of whether there is a principle of law that guidance may be held to be unlawful simply because it is materially unclear or ambiguous, or silent as to important circumstances.

The Claimants said that the foreign/defence part of the guidance lacks the requisite standard of clarity and certainty and is therefore unlawful.

The judge disagreed:

there is no binding principle that ministerial guidance or policy is unlawful because it is materially unclear or ambiguous, or silent as to important circumstances. For the courts to adopt such a principle would be too great an intrusion into the responsibilities of the executive government.

It was not enough that guidance might be more specific or better expressed, or that difficult judgments will be needed in its application to particular situations; these would not render it unlawful. To be unlawful, it must

be positively misleading or erroneous in law, not simply imprecise, lacking in specificity or requiring the exercise of judgment to apply it to a particular situation. The threshold for review is high.

And on the facts, the judge was unimpressed by the ambiguities and imprecisions in the guidance.

Ground 3

The third ground sought to rely on a provision in Directive 2003/41/EC on Occupational Pensions. Art.18 says that member states shall not subject local investment decisions to “any kind of prior approval or systematic notification requirements.” The Claimants said, rather ambitiously that the prohibition amounted to a system of prior approval.

The judge disagreed. The requirement for prior approval involved individual scrutiny of investment decisions. That is not what this ban is about.

55. More generally, the Directive is concerned to ensure the smooth functioning of the single market, in particular, the free movement of capital, and the manner in which Member States can legitimately govern the prudential investment decisions of occupational pension providers. These purposes are unaffected by the guidance addressing the non-financial decisions of providers.

Another Euro-point occurred to me, though the Claimants would have not been able to make it. The only arms manufacturers who were not to be banned from authority pension investment were UK defence industries. So UK pension funds were at liberty to ban investment in Dassault (the French makers of Mirage jets) but not their UK rivals. Sounds mildly discriminatory to me.

Conclusion

The narrow point, upon which the Claimants won, is the statutory regime was not drafted in such a way to allow the SoS to intrude his views on arms and Israel/Palestine into local authority pensions. The wider point is whether the SoS should be allowed to do anyway, in a context which is designed to replicate the combination of local authority pensioners and their authorities. Local authorities have not always danced to the tune of central government, and why should they on controversial issues which are designed to reflect pensioners’ opinions?

David Hart QC is a barrister at 1 Crown Office Row. This article first appeared on the set's UK Human Rights Blog. David can be contacted This email address is being protected from spambots. You need JavaScript enabled to view it..