The UK High Court has approved an application for judicial review brought by the Palestine Solidarity Campaign Limited against the Secretary of State for Communities and Local Government in a case which contains some fascinating principles of constitutional law.

The case has its origins in guidance issued by the Department for Communities and Local Government in September 2016 on how Local Government Pension Scheme funds should formulate their Investment Strategy Statement. Under the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016 it is a requirement for an authority’s ISS to state its policy on how social, environment and corporate governance considerations are taken into account in the selection, non-selection, retention and realisation of investments. What the September 2016 guidance purported to do was to state that this requirement should not be interpreted by authorities in such a way that was contrary to central government’s foreign policy or defence policies. The claimants objected to the guidance’s potential effect on supporting Palestinian causes by constraining LGPS investment policies.

The High Court has held it was unlawful for the government to use pensions related powers (deriving from the Public Service Pensions Act 2013 and the 2016 Investment Regulations) for the purpose of advancing UK foreign and defence policy. The government had therefore acted for an unauthorised purpose and the guidance was therefore in part unlawful.

The development of the law in relation to ethical investments was explored at length by the Law Commission in its 2014 paper “Fiduciary Duties of Investment Intermediaries”. Broadly, the Law Commission’s conclusions were that non-financial considerations can be taken into account in investment decision making, provided that doing so would not involve significant risk of financial detriment and where there is good reason to think that scheme members would support the decision. These principles were expressly included in the September 2016 guidance, so the High Court found no issue since they are directly referable to pension investment purposes. The Secretary of State’s fatal mistake was to single out foreign and defence matters by not drawing a distinction between those factors and other non-financial cases by reference to a pensions purpose.

Unsuccessful claims: uncertainty and the IORP Directive

The judgment contains some detailed commentary on two other grounds which were brought by the claimants against the government, both of which the Court dismissed. These were that:

  • the guidance was unlawful because it was unclear or ambiguous; and
  • what the government had attempted to do in purporting to prohibit investing in a way that was contrary to its foreign and defence interests was to contravene article 18(4) of IORP Directive 2003/41/EC, which prohibits EU member states from making investment powers by pension schemes subject to “any kind of prior approval or systematic notification requirements” by supervisory authorities (here the Secretary of State).

As far as the first of these grounds was concerned, the Court dismissed the argument that there was anything unclear or ambiguous about UK foreign or defence policy and made the distinction that statutory guidance, in order to be unlawful, must be positively misleading or wrong in law and not simply imprecise. Hence the guidance was not unlawful for uncertainty.

The argument in relation to the IORP Directive was similarly dismissed, on the grounds that the purported prohibition in the guidance did not fit procedurally with the IORP restrictions on prior approval and notifications to the relevant supervisory authorities (the DCLG). The attempted restrictions on decision-making set out a general framework for investment decisions (albeit flawed) and were therefore different from the type of restriction that the IORP Directive envisaged.

What is perhaps more interesting in the judgment is that there was no apparent argument about whether the IORP Directive applied to the LGPS at all. There has been an ongoing debate ever since the Directive came into force about its application to the LGPS but it seems that the government did not attempt to argue that the Directive had no application. Readers may think that, in the context of Brexit, this is merely an academic point but, as with every other aspect of European law that will now need to be assessed and either repealed or retained by Parliament as part of the Brexit process, the government will not be able to escape this question of the IORP Directive’s application to the LGPS indefinitely.

Conclusion

This is an interesting High Court judgment which will play out in the judicial review process in due course. It follows an earlier case, brought by Jewish Rights Watch, against three local authorities whose non-pensions related policies were criticised on the grounds that the councils’ views on an area of foreign policy that was similarly controversial were contrary to public sector equality duties. Although this Palestinian case concerned a narrow political point in relation to the LGPS, the administrative and constitutional principles about statutory and non-statutory guidance are of wider application. The Court’s findings may make central government politicians a little bit more nervous about interfering with local government investment decision making in the future.