The trustees of local authority pension schemes have gained more control over how their assets are invested after the Supreme Court ruled that guidance set by the government in 2016 is unlawful.
The judgement was on a directive that forbid local government pension schemes from boycotting counties and defence companies if it went against government policy.
The guidance stated that while pension schemes for government workers could divest from harmful products, such as tobacco, they should not pursue policies that are contrary to the UK’s foreign or defence policies.
Divestment, therefore, should only be implemented if there was a change in policy by central government.
The decision could potentially have far reaching implications for local authority pension pools’ ESG strategies.
The case against the guidance, which was set by the Department of Housing, Communities & Local Government, was brought by various parties, which included by the Palestine Solidarity Campaign (PSC) and local government employee Jacqueline Lewis.
The appeal was also supported by several other charities, including the Quakers, Campaign Against Arms Trade and War on Want. It was also backed by trade unions Unison and GMB.
The plaintiffs argued that the government’s guidance constituted an infringement on democracy and that local government pension schemes should be able to formulate their ESG policies independently of central government policies.
The Supreme Court ruled against the government by a majority of three to two. In its ruling, it stressed that LGPS are not trusts but take on a role as “quasi trustees” of scheme members money.
The court also challenged the secretary of state’s view that local authority pension scheme administrators were part of the “machinery of the state” and that pension scheme contributions were “public money” and “ultimately funded by the taxpayer”.
The judges said that since scheme contributions were deducted from employees’ income, they should be considered part of their income and not public money. At the same time, the ruling acknowledged that as a funded scheme, there was an element of public interest in the management of pension scheme assets.
Ultimately, the judges decided that the secretary of state had the authority to direct how LGPS administrators made their investment decisions, but that government could not impose what investments they would make.
At the time of writing, no local authority pension scheme or pool has announced if they will boycott a country or company following the ruling. In line with 2016’s Local Government Pension Scheme Management Regulations, the authorities must ensure that such a decision was in the best interest of its members and that there was “good reason to believe scheme members shared the concern”.
Several pools have been approached by portfolio institutional following the ruling, but have been unable to comment.