Palestine Solidarity Campaign Ltd & Anor, R (on the application of) v Secretary of State for Communities and Local Government, Court of Appeal - Civil Division, June 06, 2018, [2018] EWCA Civ 1284

Resolution Date:June 06, 2018
Issuing Organization:Civil Division
Actores:Palestine Solidarity Campaign Ltd & Anor, R (on the application of) v Secretary of State for Communities and Local Government
 
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Case No: C1/2017/1935

Neutral Citation Number: [2018] EWCA Civ 1284

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE

ADMINISTRATIVE COURT

Sir Ross Cranston

[2017] EWHC 1502 (Admin)

Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 06/06/2018

Before :

LORD JUSTICE DAVIS

LORD JUSTICE HICKINBOTTOM

and

SIR STEPHEN RICHARDS

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Between :

The Queen

on the application of

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Julian Milford (instructed by the Government Legal Department) for the Appellant

Nigel Giffin QC and Zac Sammour (instructed by Bindmans LLP) for the Respondents

Hearing date: 17 May 2018

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JudgmentSir Stephen Richards :

  1. This appeal concerns the lawfulness of passages in statutory guidance issued by the Secretary of State for Communities and Local Government in relation to the investment strategy of authorities administering the local government pension scheme. The relevant document, Guidance on Preparing and Maintaining an Investment Strategy Statement (``the Guidance''), included a summary requirement that administering authorities ``should not pursue policies that are contrary to UK foreign policy or UK defence policy'', with a fuller statement in the accompanying text that ``using pension policies to pursue boycotts, divestment and sanctions against foreign nations and UK defence industries are [sic] inappropriate, other than where formal legal sanctions, embargoes and restrictions have been put in place by the Government''. Sir Ross Cranston, sitting in the Administrative Court, held that the powers conferred by the legislation could be exercised only for ``pensions purposes'' and that the Secretary of State had not acted for a pensions purpose in including those passages in the Guidance. On that basis the judge granted a declaration that the passages were unlawful.

  2. The Secretary of State appeals against the judge's order, with permission granted by the judge himself. The respondents seek to uphold the judge's reasoning as to unauthorised purpose and, by a respondent's notice, they rely in the alternative on a ground rejected by the judge, namely that the relevant part of the Guidance was contrary to Article 18 of Directive 2003/41/EC on the activities and supervision of institutions for occupational retirement provision (``the IORP Directive''). Other grounds raised in the claim form or before the judge are not pursued.

  3. I shall deal with the position under domestic law before turning to consider the respondents' alternative case under EU law.

    The domestic legal framework

  4. The preamble to the Public Service Pensions Act 2013 (``the 2013 Act'') describes it as ``An Act to make provision for public service pension schemes, and for connected purposes''. Section 1 contains an enabling power for public service pension schemes to be established by regulations. Regulations made under that section are called ``scheme regulations''. By section 2 and Schedule 2, the Secretary of State is the ``responsible authority'' who may make scheme regulations for local government workers in England and Wales.

  5. Section 3 provides, so far as material:

    ``3(1) Scheme regulations may, subject to this Act, make such provision in relation to a scheme under section 1 as the responsible authority considers appropriate.

    (2) That includes in particular -

    (a) provision as to any of the matters specified in Schedule 3;

    (b) consequential, supplementary, incidental or transitional provisions in relation to the scheme or any provision of this Act.''

    The matters specified in Schedule 3 include:

    ``11. Pension funds (for schemes which have them)

    This includes the administration, management and winding-up of any pension funds.

  6. The administration and management of the scheme, including -

    (a) the giving of guidance or directions by the responsible authority to the scheme manager (where those persons are different) ....''

  7. By section 4(1) and (2), scheme regulations must provide for a person to be responsible for managing or administering the scheme. That person is called the ``scheme manager'' for the scheme. The scheme managers for local government pension schemes are the administering authorities listed in Part 1 of Schedule 3 to the Local Government Pension Scheme Regulations 2013 (which were made under the Superannuation Act 1972 but, by section 28 of the 2013 Act, have effect as if they were scheme regulations under the 2013 Act). They include county councils and London boroughs.

  8. By section 21, before making scheme regulations the responsible authority must consult such persons (or representatives of such persons) as appear to the authority likely to be affected by them. By section 24, scheme regulations have to be laid before Parliament under the negative procedure.

  9. The Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016 (``the 2016 Regulations'') were made by the Secretary of State in exercise of the powers conferred by the 2013 Act. They were laid before Parliament on 23 September 2016 and came into force on 1 November 2016.

  10. Regulation 7 deals with an administering authority's investment strategy:

    ``Investment strategy statement

    (1) An authority must, after taking proper advice, formulate an investment strategy which must be in accordance with guidance issued from time to time by the Secretary of State.

    (2) The authority's investment strategy must include -

    (a) a requirement to invest fund money in a wide variety of investments;

    (b) the authority's assessment of the suitability of particular investments and types of investments;

    (c) the authority's approach to risk, including the ways in which risks are to be assessed and managed;

    (d) the authority's approach to pooling investments, including the use of collective investment vehicles and shared services;

    (e) the authority's policy on how social, environmental and corporate governance considerations are taken into account in the selection, non-selection, retention and realisation of investments; and

    (f) the authority's policy on the exercise of the rights (including voting rights) attaching to investments.

    ...

    (5) The authority must consult such persons as it considers appropriate as to the proposed contents of its investment strategy.

    (6) The authority must publish a statement of its investment strategy formulated under paragraph (1) ....''

  11. Regulation 8 empowers the Secretary of State to give directions where he is satisfied that an administering authority is failing to act in accordance with guidance issued under regulation 7(1).

    The Guidance

  12. The Guidance was published on 15 September 2016 and came into force on 1 November 2016, the same date as the 2016 Regulations came into force. We were told that the Guidance and the 2016 Regulations were treated as parts of a single package and were consulted on together.

  13. Part 1 of the Guidance stated that it had been prepared to assist administering authorities in the formulation, publication and maintenance of their investment strategy statement required by regulation 7 of the 2016 Regulations. Part 2 dealt in turn with each aspect of regulation 7(2). The relevant section concerned regulation 7(2)(e). I have italicised the passages that were the subject of the judge's declaration of unlawfulness:

    ``Regulation 7(2)(e) - How social, environmental or corporate governance considerations are taken into account in the selection, non-selection, retention and realisation of investments

    When making investment decisions, administering authorities must take proper advice and act prudently. In the context of the local government pension scheme, a prudent approach to investment can be described as a duty to discharge statutory responsibilities with care, skill, prudence and diligence. This approach is the standard that those responsible for making investment decisions must operate.

    Although administering authorities are not subject to trust law, those responsible for making investment decisions must comply with general legal principles governing the administration of scheme investments. They must also act in accordance with ordinary public law principles, in particular, the ordinary public law of reasonableness. They risk challenge if a decision they make is so unreasonable that no person acting reasonably could have made it.

    The law is generally clear that schemes should consider any factors that are financially material to the performance of their investments, including social, environmental and corporate governance factors, and over the long term, dependent on the time horizon over which their liabilities arise.

    However, the Government has made clear that using pension policies to pursue boycotts, divestment and sanctions against foreign nations and UK defence industries are [sic] inappropriate, other than where formal legal sanctions, embargoes and restrictions have been put in place by the Government.

    Although schemes should make the pursuit of a financial return their predominant concern, they may also take purely non-financial considerations into account provided that doing so would not involve significant risk of financial detriment to the scheme and where they have good reason to think that scheme members would support their decision.

    ...

    Summary of requirements

    In formulating and maintaining their policy on social, environmental and corporate governance factors, an administering authority:-

    · Must take proper advice

    · Should explain the extent to which the views of their local pension board and other interested parties who they consider may have an interest will be taken into account when making an investment decision based on non-financial factors

    · Must explain the extent to which non-financial factors will be taken into account in the selection, retention and realisation of investments

    · Should not...

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