The Supreme Court held, by a majority, that the Secretary of State acted unlawfully when he told administrators of the local government pension scheme not to pursue investment policies contrary to UK foreign or defence policy. He could guide how they take non-financial considerations into account. He could not use that power to stop investment decisions because they conflicted with the Government’s own policies.
This case concerned the funded local government pension scheme in England and Wales. Both employees and employers contributed. Although public authorities managed the separate funds, members’ earned benefits and the purpose of the scheme mattered to the scope of ministerial guidance.
Law Teacher writing support
Writing a law essay?
We choose a writer who is an expert in your area of law and qualified to at least the academic level you select. Most of our writers hold a master’s degree or PhD, have teaching experience, or both.
Send us your question and, if you wish, any marking criteria. We’ll write an essay to your instructions.
The Public Service Pensions Act 2013 allows the Secretary of State to make regulations about such schemes, including their administration and management and the giving of guidance to scheme managers. Under the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016, each authority must, after taking proper advice, formulate an investment strategy in accordance with his guidance. That strategy must include the authority’s policy on how social, environmental and corporate governance considerations are taken into account when investments are chosen, rejected, kept or sold.
Guidance issued on 15 September 2016, and effective from 1 November 2016, addressed that policy. Much of it was not challenged. Drawing on a 2014 Law Commission report, it said that authorities should pursue a financial return as their predominant concern, but could take purely non-financial considerations into account if two conditions were met: doing so would not involve a significant risk of financial detriment to the scheme, and they had good reason to think that scheme members would support the decision. The Commission had treated administering authorities as similar, in practice, to trustees, acting in members’ best interests, even though the scheme is not technically a trust.
The two challenged passages
Two passages went further. The guidance said that the Government had made clear that using pension policies to pursue boycotts, divestment and sanctions against foreign nations and UK defence industries was inappropriate, except where the Government had imposed formal legal sanctions, embargoes and restrictions. A summary of requirements then said that an authority should not pursue policies contrary to UK foreign policy or UK defence policy. The Secretary of State had proposed essentially this approach in consultation. Most respondents objected, but the Government maintained it.
Palestine Solidarity Campaign Ltd, which campaigns in support of Palestinian rights and against racism, and Ms Jacqueline Lewis, a local-authority employee and scheme member, sought judicial review. Other objections to the guidance failed in the courts below. The remaining question was whether these passages were within the power conferred by Parliament.
The High Court declared the two passages unlawful. The Court of Appeal set aside that declaration.
Why purpose limits the power
The majority applied the principle in Padfield v Minister of Agriculture, Fisheries and Food: a statutory discretion, however broadly worded, may be used only to promote the policy and objects of the Act. Those objects are found by construing the power in context. Section 3 of the 2013 Act lets the Secretary of State make provision he considers appropriate, but that discretion is not unlimited. The Act particularly contemplates guidance about the administration and management of the scheme. The 2016 Regulations require a strategy stating how non-financial considerations are taken into account. The unchallenged guidance concerns preparing and maintaining that strategy, including the two tests for non-financial decisions.
Lord Wilson, with whom Lady Hale agreed, read those materials as concerned with the procedures and strategy administrators should adopt. The challenged passages did something else. They sought to enforce the Government’s foreign and defence policies, and to prohibit a decision even where both tests for a non-financial decision had been met, if the decision ran counter to those policies. A change in Government policy would, on that approach, change the prohibition.
The Secretary of State’s evidence said that foreign and defence policy are reserved to the UK Government and should not be undermined by local boycotts on purely non-pension grounds. The Court of Appeal treated scheme administrators as part of the machinery of the state, for whom wider public-interest considerations could be relevant, and counsel for the Secretary of State described the contributions as public money. Lord Wilson rejected that view. At a practical level the administrators are quasi-trustees, acting in members’ best interests. Employee contributions are deducted from pay, and employer contributions are part of the remuneration earned by work. The fund represents the members’ money, not public money.
Lord Carnwath’s reasons
Lord Carnwath agreed that the appeal should be allowed, while explaining the limits of that conclusion. The guidance is a public document and had to be read in its own terms. Its reference to what the Government had already made clear led back to a 2016 procurement note about boycotts in public contracts. He, like Lord Wilson, saw no relevance in that note to pension investment under a different statutory scheme. Nor was it clear whether the boycott wording covered only participation in political campaigns or also an independent ethical decision, supported by members, not to invest in defence companies.
Lord Carnwath found no basis in the statute for excluding one category of ethical considerations in advance merely because it concerned foreign or defence policy. The statutory responsibility for the investment strategy remained with the administering authority.
He did not treat the Secretary of State’s power as limited to purely procedural instructions. Guidance can address the investment strategy and the social and other matters that may be taken into account. It cannot, however, impose central government’s own policy preferences. The primary responsibility remains with the authorities. The two Law Commission tests, which the unchallenged guidance adopted, state judgements for the administering authority, not the Secretary of State. He was entitled to guide authorities on formulating policies consistently with their wider duties. He was not entitled to require them to prefer his policies to those they thought right in fulfilling those duties.
The dissenting view
Lady Arden and Lord Sales would have dismissed the appeal. They read the 2013 Act as concerned not only with establishing schemes but also with reflecting the public interest in their management, including the relationship between central government and the schemes. In their view, the guidance did not tell authorities which investments they must hold. It restricted the use of non-financial considerations in a narrow situation, where members’ financial interests were not materially affected, so that decisions expressing a political or social view would not be identified with the British state or cut across foreign and defence policy. They considered that both public and member interests coexist in the scheme, and that preventing this limited politicisation was within the Act’s objects. The majority did not accept that this role could be added to the statutory power to give guidance.
Verdict: By three votes to two the Supreme Court allowed the appeal and restored the High Court’s declaration. The two challenged passages were unlawful. The judgment concerned the limits of the Secretary of State’s statutory power and did not order a particular investment or divestment.
