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The Local Government Pension Scheme (LGPS) is a public service pension scheme. It is a defined benefit (DB) scheme which means it provides benefits based on salary and length of service. Unlike the other main public service pension schemes which operate on a pay-as-you-go basis (meaning that contributions are paid to the sponsoring government department which meets the costs of pensions in payment) it is funded (meaning that contributions are paid to a fund which is invested and from which benefits are paid at retirement).

The LGPS (E&W) is the largest DB scheme in England and Wales. It is made up of 88 LGPS funds with 6.2m members and assets of £276 billion at end March 2020.  LGPS Scotland is made up of 11 funds. At end March 2020, it had 606,312 members, and £46 billion.

The rules of the LGPS are set nationally under the Public Service Pensions Act 2013 by the Secretary of State for Levelling-Up, Housing and Communities in the case of LGPS in England and Wales (E&W), and the Scottish Government for LGPS Scotland.

Decisions on the investment of LGPS funds are made locally by administering authorities, in accordance with general legal principles (fiduciary duties and public law principles) and LGPS legislation. There has been considerable debate in recent years about how administering authorities and can and should take account of environmental, social and governance factors in investment decisions.

Legal advice on fiduciary duties produced for the Local Government Association in 2014 explained that LGPS administering authorities have a fiduciary duty to act in the best interests of scheme members. Investment powers must be directed to achieving what is the best for the financial position of the fund. Provided this remains true, the precise choice of investment may be influenced by ESG (environmental, social and governance) factors, so long as that does not risk material financial detriment to the fund. In taking account of wider ESG considerations, the administering authority may not prefer its own interests to those of scheme employers and should not seek to impose its views where those would not be widely shared by scheme employers and members.

In 2016, the Department for Communities and Local Government (CLG) made changes to the investment regulations applying to LGPS (E&W). The reformed ‘investment regulations’ required administering authorities to publish an investment strategy – including their approach to pooling investments and how they take ESG factors. The strategy must be in accordance with guidance issued by the Secretary of State, who had power to intervene if satisfied that any authority had failed to act in accordance with statutory obligations or guidance.

Regarding ESG considerations, the guidance issued under the regulations says schemes should consider any factor financially material to the performance of their investments, including ESG factors. Although pursuit of a financial return should be their predominant concern, they may 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.

Boycotts, divestments and sanctions

The initial guidance issued in September 2016 in conjunction with the investment regulations, included two passages which were subject to successful legal challenge by the Palestine Solidarity Campaign, which was concerned that it sought to curtail divestment campaigns. The Supreme Court press summary of April 2020 explained:

The first passage states that “the Government has made clear that using pension policies to pursue boycotts, divestment and sanctions against foreign nations and UK defence industries are inappropriate, other than where formal legal sanctions, embargoes and restrictions have been put in place by the Government”. The second passage states that authorities “[s]hould not pursue policies that are contrary to UK foreign policy or UK defence policy.”

In the High Court the claim was upheld, and the two passages ruled unlawful, on the basis that the issue of them by the Secretary of State exceeded his powers. The Court of Appeal upheld the Secretary of State’s appeal. The appellants now appeal to the Supreme Court. By a majority, the Supreme Court allows the appeal and restores the High Court’s order.

The Government removed the two passages from the guidance in response to the court judgements.

Investment pooling and infrastructure

One of the aims of the investment regulations was to encourage LGPS administering authorities to pool assets as a way of improving economies of scale and increasing their capacity to invest in infrastructure.

In the investment strategy statement they are required to produce under the 2016 investment regulations, administering authorities must include their approach to pooling investments. Guidance published in September 2016 required administering authorities to commit to a suitable investment pool to achieve benefits of scale. They also had to confirm that their chosen investment pool met the investment reform and criteria published in November 2015, or to the extent that it does not, that the Government was content for it to continue. The regulations give the Secretary of State the power to intervene in the investment function of an administering authority if satisfied that it is failing to act in accordance with the regulations and guidance.

In January 2019, the Ministry for Housing, Communities and Local Government launched an informal consultation on new statutory guidance on asset pooling. It said eight pools were now operational and had forecast savings of up to £2bn by 2033. Although this was a “considerable achievement in itself,” the time was “now right for new guidance to support further progress.” Administering authorities expressed some concerns. The Government has not yet said how it intends to proceed.

Climate change

In November 2021, the UK and Italy will host the international UN climate change conference (COP26) in Glasgow. Key aims of this conference include agreeing a way to take forward the 2016 Paris Agreement on climate change, and all countries committing to reaching net zero emissions as soon as possible. One of its goals is to mobilise finance – “unleashing the trillions in private and public sector finance required to secure global net zero.”

For schemes in the private sector, the Government has introduced “world leading regulations.” The Climate Change Governance and Reporting Regulations 2021 require larger schemes to set climate-related targets from October 2021. Trustees will be required to undertake governance activities relating to each of the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) and report annually. The requirements are to be extended to small schemes in stages.

These rules do not cover the LGPS. The Department for Levelling Up, Housing and Communities (DLUHC), as the responsible department, is expected to launch consultation on TCFD requirements in advance of COP26.

 In a February 2021 report, Friends of the Earth and Platform estimated that UK LGPS funds held £9.7 billion of investments in fossil fuel companies in 2019/20, roughly three per cent of total Scheme value. They argue for divestment from fossil fuels, as a powerful way of sending a signal to companies and the Government about where public priorities should lie. The UK Government’s approach is to encourage stewardship, on the basis that engagement with high carbon firms to encourage them to “set a plan for the transition can have a greater impact on climate change than simply selling assets to others who might not hold investee firms to account.”

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