In this case comment, Jana Blahova and Imtiyaz Chowdhury, both trainee solicitors with CMS, comment on the decision handed down by the UK Supreme Court in the matter of?R (on the application of Palestine Solidarity Campaign Ltd and another) v Secretary of State for Housing, Communities and Local Government [2020] UKSC 16, which concerned whether parts of the Secretary of State’s guidance on the investment of Local Government Pensions Schemes relating to UK foreign and defence policy were for an unauthorised purpose.

On 29 April 2020, the UK Supreme Court ruled in R (on the application of Palestine Solidarity Campaign Ltd & Anor) v Secretary of State for Communities and Local Government [2020] UKSC 16 that the Secretary of State’s guidance prohibiting the local authorities who administer the local government pension scheme from making investments contrary to UK foreign or UK defence policy was unlawful as it did not fall within the power conferred by Parliament on the Secretary of State. This decision highlights that fiduciary duties of local authorities arising from their roles as administrators of the pension scheme will prevail even in circumstances where their investment decisions conflict with the policies of central government.

Background

This appeal concerned the guidance issued by the Secretary of State on 15 September 2016, entitled “Local Government Pension Scheme: Guidance on Preparing and Maintaining an Investment Strategy Statement” (the “Guidance”). The aim of the Guidance was the formulation, publication and maintenance by administering authorities of their investment strategy in relation to the pension scheme. Included in the guidance were two passages according to which the authorities administering the pension scheme should not pursue policies contrary to UK foreign or UK defence policy.

The claim for judicial review of the two passages in the Guidance was launched by two claimants. The first is Palestine Solidarity Campaign Ltd: a company dedicated to support of the rights of the Palestinian people and opposing racism. The second is Ms Jacqueline Lewis, a member of the company’s executive committee and an employee of a local authority who is also a member of the pension scheme.

On 22 June 2017, the Administrative Court of the High Court of England and Wales declared the two passages in the guidance under challenge to be unlawful. However, on 6 June 2018, the Court of Appeal reversed the decision, upholding the Secretary of State’s appeal and dismissing the claim. The Court of Appeal’s judgment was then appealed to the Supreme Court.

Decision

?The Supreme Court allowed the appeal, by a majority decision. The court’s judgment can be summarised as follows:

  • In considering whether the two relevant passages contained in the Guidance were lawful, it was noted by the court that the scope of power conferred by Parliament on the Secretary of State had to be analysed. The court referred to the decision in the earlier case of Padfield v Minister of Agriculture, Fisheries and Food [1968] UKHL 1, which held that when considering Parliament’s intention as to the power to be conferred, the intention “must be determined by construing the [relevant] Act as a whole…”.
  • Accordingly, the court considered the relevant provisions in the Public Service Pensions Act 2013, s 3, and the Public Service Pensions Act 2013 (the “2013 Act”), Sch 3, which identified the matters which Parliament had in mind when conferring the power, such as the “administration and management of the scheme”. It was also noted by the court that the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016 (the “2016 Regulations”), reg 7, required the investment strategy adopted by the relevant local authority in relation to the management of the pension scheme to include the authority’s policy on how non-financial considerations are taken into account. In addition, the Guidance required two tests to be met when considering non-financial considerations as part of the investment strategy: 1) does the proposed step involve significant risk of financial detriment to the pension scheme?; and 2) is there good reason to think that members would support taking it?
  • The court held that the relevant wording in the 2013 Act, the 2016 Regulations and the Guidance (as set out above) indicated that the 2013 Act only intended to identify the procedures and strategy by which the local authorities should administer the pension scheme. The local authorities who administered the pension scheme did not discharge conventional local government functions – they have duties which are similar to that of trustees. It was therefore held that the inclusion by the Secretary of State of the relevant passages in the Guidance, which effectively sought to enforce the government’s foreign and defence policies, exceeded his powers, as he could not direct what investments the local authorities made, only how they should approach their decision-making by reference to non-financial factors. Although Lord Carnwath (in line with the dissenting opinions of Lord Sales and Lady Arden) disagreed with Lord Wilson’s view that the scope of the Guidance is limited to “purely procedural or operational matters”, he stated that this did not open the door to “the delineation of the functions of central government in relation to the fund”.
  • The 2013 Act and the 2016 Regulations required any guidance issued regarding the administration of the pensions scheme to respect the primary responsibility of the local authorities as quasi-trustees of the pension scheme, and so the Secretary of State could not make the local authorities give effect to his own policies, which were matters for the government to deal with.

Practical considerations

The decision in this case highlights that government ministers must consider the extent of any powers conferred on them by Parliament, by reviewing the language of the relevant Act of Parliament as a whole, to ensure compliance when making decisions or issuing guidance. Otherwise, those decisions or guidance may be challenged in court.

In addition, government ministers need to bear in mind that although local authorities are a part of government, in relation to certain matters such as the administration of the local authority pension scheme, local authorities have fiduciary duties which, when exercised, may conflict with the policies of central government.