The Supreme Court judgement in the Palestine Solidarity case has important implications for the Local Government Pension Scheme (LGPS) and may have a wider application than the case originally envisaged.
The Palestine Solidarity Campaign (PSC) had claimed that guidance published by the Secretary of State for Housing, Communities and Local Government (SoS) was unlawful as it exceeded the SoS's powers to direct LGPS funds in the exercise of their investment powers.
The Supreme Court - by majority decision - found that the SoS had exceeded its powers and that there was a distinction between:
1) a power to direct how LGPS funds should approach the making of investment decisions by reference to non-financial considerations; and
2) a power to direct the investments that an LGPS fund should or shouldn't make.
The SoS had the power in 1) but not 2). This case primarily related to how social, environmental and corporate governance (ESG) factors should be taken into account in investment decisions, but the case has wider application in the LGPS because the current legal framework is, in my view, not compatible with the Government's desire to be able to direct investment decisions.
As the case demonstrates, administering authorities for LGPS funds act in a quasi-trustee, or fiduciary, manner which means that they are investing on behalf of the employers (not all of whom are public sector bodies) and the members. LGPS funds therefore must make investment decisions based on which investments are right for the benefit of the fund (having taken into account a range of factors, including ESG).
Separately, the Government wishes to require more asset pooling, and more infrastructure investment. These objectives may be appropriate, but if the Government wishes to mandate investment decisions and require all funds to be pooled, invest in infrastructure, and bar certain investments, then it needs to change the law.
The Government has indicated that it will - but it is key that any proposed change provides an appropriate structure with checks and balances, and it remains clear who ultimately makes the investment decision. With over £200bn invested, this is very important for the LGPS and the UK economy.
Power to direct how administrators should approach the making of investment decisions by reference to non-financial considerations does not include power to direct what investments they should not make