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Using LGPS funds to "level up"

Is "levelling up" using LGPS funds just a romantic notion? Martin McFall looks at the Government’s proposals.

When I first heard the phrase "levelling up" in the Government's White Paper, I was initially reminded of the poet William Blake. Like Blake's poetry, the words "levelling up" can appear deceptively simple, but the imagery and meaning can be complex, requiring deeper analysis to penetrate and unravel the manifold meaning.

So it is with the levelling up White Paper and its laudable aims. From a public sector pensions lawyer's perspective, the intrigue in the White Paper is tucked away in pages 162 and 163. In order to unlock the investment needed to support the panacea of infrastructure and housing projects, the Government recognises the important role that Local Government Pension Scheme (LGPS) funds can play. Indeed, the White Paper notes:

"If all LGPS funds were to allocate 5% to local investing, this would unlock £16 billion in new investment." 

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Such a proposal would at first glance appear aligned with the key investment responsibilities of LGPS administering authorities. This is because the LGPS (Management and Investment of Funds) Regulations 2016 not only specifically oblige those bodies to prepare investment strategies on such matters and factor this into the selection of their investments but oblige those administering authorities to follow Secretary of State guidance when setting those strategies.

But herein lies the rub. In 2016, guidance was issued on the foundation of ESG policies and what policies could or could not be pursued. Guidance that administering authorities should not pursue ESG policies that were contrary to UK foreign policy was challenged in Court. The issues ended up in the Supreme Court. In R (on the application of Palestine Solidarity Campaign Ltd) v Secretary of State for Housing (Palestine), the Court held that the LGPS was not a part of the machinery of the State and that the administering authorities had to regard themselves as "quasi trustees who should act in the best interests of their members".

In a finely balanced majority decision, the judges in Palestine concluded that in the context of the lawfulness of the guidance, the powers issued to the Secretary of State under specific pensions legislation did not allow it to direct what administering authorities should do in preference to polices which those authorities themselves thought right to adopt when fulfilling their fiduciary duties.

A number of important questions in Palestine remained unresolved, including the extent to which administering authorities can take into account non-financial factors when exercising their own powers of investment.

What is clear under the White Paper is the Government's determination to promote the wider public interest under the levelling up agenda. Following Palestine, it will likely need supplementary primary legislation to require administering authorities to invest in infrastructure and housing projects (to the extent that they are not doing so already) in order to achieve its aim of releasing LGPS funding support of £16 billion. But even then, administering authorities remain subject to their overriding fiduciary duties as quasi-trustees, and the delicate balancing act will be structuring new legislation to promote the public interest whilst continuing to recognise administering authorities' obligations to act the interests of LGPS fund members.

All of which brings me back to William Blake and my parting thought; being that if we are to build Jerusalem, then the Government will first need to navigate Palestine.

Martin McFall is a partner at Trowers & Hamlins.

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