While the attention of the world was firmly focused on all things Covid-related, the UK Supreme Court published an extremely interesting decision in R (on the application of Palestine Solidarity Campaign Ltd) v the Secretary of State for Housing, Communities and Local Government. The case concerned a claim for judicial review on behalf of the Palestinian Solidarity Campaign against the publication of guidance by the Secretary of State which limits the power of local government pension schemes to ‘pursue policies that are contrary to UK foreign policy or UK defence policy’.
By way of background, the local government pension scheme caters for about five million past and present local government employees, across 89 local authorities. A matter that proved to be of some importance is the fact that, unlike other public pension schemes, a local authority may be required to make increased contributions if the funds available were found to be insufficient to meet the obligations to its pensioners.
In terms of the legal infrastructure, the relevant statutory authority is the Public Service Pensions Act 2013 (the ‘2013 Act’), which authorises the Secretary of State to make regulations for the functioning of the scheme. And, indeed, the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016 (SI 2016/946) (the ‘2016 Regulations’), which are relevant to this case, replaced earlier regulations, which are not pertinent for present purposes. Pursuant to the 2016 Regulations, the Secretary of State published a guidance document entitled ‘Local Government Pension Scheme: Guidance on Preparing and Maintaining an Investment Strategy Statement’ (‘the Guidance’). The crucial part of the Guidance relates to the manner in which investment policy can take into account ‘social, environmental and corporate governance considerations … in the selection, non-selection, retention and realisation of investments’ (Regulation 7(2)(e) of the 2016 Regulations). The Guidance stated as follows:
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 … [S]chemes 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.
The third paragraph, which concerns the pension schemes’ power to pursue ‘non financial considerations’, and the conditions under which they may do so, is adopted, almost verbatim, from the Law Commission’s Report ‘Fiduciary Duties of Investment Intermediaries’ (No 350, 2014).
Finally, this section of the Guidance is followed by a Summary of Requirements, which states, inter alia, that
In formulating and maintaining their policy on social, environmental and corporate governance factors, an administering authority
- Should not pursue policies that are contrary to UK foreign policy or UK defence policy (emphasis added).
The passages highlighted in bold are those which were the subject of the challenge.
The claimants – the Palestine Solidarity Campaign (PSC) and Ms Jacqueline Wilson, a member of the PSC’s executive committee as well as an employee of a local authority and a member of its pension scheme – advanced a claim for judicial review. In the High Court ( EWHC 1502 (Admin)) Cranston J upheld the challenge, stating that while the Secretary of State is clearly empowered under the 2013 Act and the 2016 Regulations to issue guidance to pension authorities, this can be done, under the legislation, for pension purposes only. And while non-financial factors can be legitimate pension considerations, a guidance document that distinguishes different types of non-financial factors must be based on a ‘pension purpose’ . In particular, casting one type of non-financial factors (e.g. those impinging on foreign policy) as illegitimate while other non-financial factors (e.g. those concerning health or the environment) are deemed legitimate is unlawful, as this distinction was devised for an unauthorised purpose.
However, on appeal, the Court of Appeal concluded ( EWCA Civ 1284) that the Secretary of State was acting within the remit of the statutory purpose. According to Sir Stephen Richards, if it is accepted that the pension authority can take into account non-financial factors, and that the law confers on the Secretary of State broad discretion to issue guidance on investment strategy , then ‘it seems to me to be equally plainly within the scope of the legislation for the guidance to cover the extent to which such non-financial considerations may be taken into account by an authority’ . The Court of Appeal found the language of ‘pension purpose’ or ‘pension perspective’ to be unhelpful, and preferred to ask whether the legislation allowed for ‘wider considerations of public interest to be taken into account when formulating guidance’ , finding that there is no reason why this should not be the case.
The Supreme Court Judgment
In one of his final decisions prior to his well-earned retirement, Lord Wilson wrote for the majority, and allowed the appeal. In doing so, he relied on the Padfield principle (Padfield v Minister of Agriculture, Fisheries and Food  AC 997) which limits the discretion awarded to a minister to those actions which would ‘promote and not… defeat or frustrate the object of the legislation in question’ (as explained by Lord Bingham in R v Secretary of State for the Environment, Transport and the Regions, Ex p Spath Holme Ltd  2 AC 349, 381).
In particular, Lord Wilson (at ) took issue with the government’s position, according to which:
- Local government authorities are part of the ‘machinery of the state’.
- Pension schemes are ‘ultimately funded by the taxpayer’ and hence ‘public money’. Therefore:
- Decisions by pensions schemes may be seen as reflecting national policy.
- Since foreign and defence policy are reserved for the UK government, pension investment decisions should not undermine national policy through boycotts on non-pension grounds.
In particular, Lord Wilson explained that, as it so happens, central government pension schemes are unfunded, that is: not ring-fenced funds but underwritten by central government. In contrast, Local Government Pension Schemes are ‘funded’, which means that pensions are paid for by contributions from employers and employees. Therefore, and in a manner that applies to the local government pension scheme as well, he concluded (at ):
The contributions of the employees into the scheme are deducted from their income. The contributions of the employers are made in consideration of the work done by their employees and so represent another element of their overall remuneration. The fund represents their money. With respect to Mr Milford, it is not public money.
Agreeing with Lord Wilson, Lord Carnwath had additional concerns about the wording and effect of the Guidance. Thus, he explained, whilst the Guidance was clearly concerned with the Palestinian Boycott, Divestment and Sanctions (BDS) movement, would the Guidance not apply to an authority’s decision not to invest, on ethical grounds, in a defence company, an energy company that pollutes air and water, or a company that makes products harmful to health (e.g. tobacco, sugar or alcohol), where such actions may be contrary to UK foreign or defence policy? Whilst the government, in its response, clarified that they would not object to such decisions, it is not clear how the Guidance delineates these cases. Moreover, even if it did distinguish them, how would this distinction be guided by a pension purpose?
In dissent, Lady Arden and Lord Sales found that the language of both the 2013 Act and the 2016 Regulations are broad enough to cover the regulation of the type of non-financial factors that may be taken into account. Further, they found persuasive the argument that the role of the state in facilitating employer and employee contributions, as well as being a guarantor of the fund’s viability, could indeed lead people in Britain and abroad to identify pension schemes with the British state, in turn investing in the government and the taxpayer a legitimate interest in the way these schemes are regulated .
Analysis: Pensions as Political Mechanisms?
As mentioned, this case raises a number of distinct and interesting issues. The first, which seemed to be the axis of the disagreement between the majority and the minority opinions, is the extent to which the state’s involvement in the regulation and funding of pension schemes grants the government a position of authority in determining the manner in which those schemes are managed. A second issue concerns the uniqueness of the BDS movement, which seemed to be the target of the Guidance, with the government explaining that many other ‘social, environmental, and corporate governance’ non-financial aims could be pursued without government intervention.
Space limits prevent me from engaging too extensively in an analysis of these two issues here. I will thus touch on them only as a gateway to a third matter, on which I would like to focus. This issue, which was not addressed at all in the Supreme Court’s decision, concerns the uniqueness of the pension scheme as a vehicle which brings into effect labour’s voice, enriches democratic debate and balances the financial power of corporate interest.
But before that, as promised, a preliminary discussion is warranted. First, the focus on the extent of the regulatory and financial involvement of government in the management of the pension scheme is a curiously anachronistic one. Scholars have observed that, over the second half of the twentieth century, the welfare state has been transformed into the ‘regulatory state’, that is: the state has moved from providing services directly to a form of ‘regulatory capitalism’, which governs – in some cases, quite heavily – the way private entities do so. Moreover, the involvement of the state does not stop at the rule-setting, or even rule-enforcement, stage. In the aftermath of the financial crisis – in which governments bailed out banks, financial services companies, insurance companies, manufacturers (e.g. the auto industry), housing companies and so much more (all of which were also heavily regulated in various forms) – it is quite peculiar to point to such an involvement as an indication that actions by those companies could legitimately be viewed as representing the government, as the minority decision would have it. And, just to pre-empt: the argument that in one case the ‘bailout’ is agreed in advance, and in the second it is implemented during the course of the crisis, is a distinction without a difference. Thus, for example, after the banks, financial service companies and insurance companies have been bailed out, can we now say that their investment decisions can be taken to represent the British government and taxpayer?
The second preliminary issue concerns the particular issue at stake, namely: the boycott, divestment and sanction (BDS) campaign against Israeli government and companies in which the pension fund decided to take part. The government, in its response, made it clear that this was its main concern, and that other ethical, non-financial decisions would not lead the government to object. However, the majority questioned how the Guidance’s broad wording allows for such distinctions. Environmental issues seem, at the moment, quite uncontroversial, and even appear in the Guidance itself as legitimate concerns. However, one can imagine a scenario in which the UK seeks to strengthen ties with a foreign, oil producing, nation, while a pension fund decides to divest from the oil companies owned by that foreign nation. This would be surely a source of serious inconvenience for the UK government. But would it be enough to instruct the pension fund to retract its decision? If not, why not? Why is BDS such a lightning rod, receiving unique treatment, on both sides of the debate?
Unfortunately, I must leave that question unanswered at this stage, but I will refer to it, tangentially, below. Instead, I turn now to focus on a central issue that did not appear in the decision at all: the particular identity of pension funds as the expression of workers’ voice and power. In this discussion, I rely on David Webber’s recently published The Rise of the Working-Class Shareholder: Labor’s Last Best Weapon (Harvard University Press, 2018).
In the book, Webber follows the path paved by others, such as Stewart Schwab and Randall Thomas, and suggests that it is against the dire background of decreased union power in the United States that ‘shareholder activism’ has found a way to leverage pools of massive capital – about US$4 trillion, or 10 per cent of the US stock market – to buttress labour’s interests for a variety of purposes, and in a variety of ways. With the decline of collective bargaining, union-led pension fund activism offers a crucial, perhaps even sole, vehicle for progressive interests. He explains how, over the past decade, pension funds have: enhanced corporate governance by leading to rules being changed to remedy serious conflicts of interest by company board members; limited CEO pay; pushed companies to refrain from questionable practices to avoid paying taxes; increased the powers of shareholders vis-à-vis corporate boards; and led to divestment from hedge funds and private equity funds in general, and from those involved in privatisation efforts that undercut worker pay and jobs in particular (he cites the horribly ironic case of public school janitors in Massachusetts whose retirement funds were invested by a state-wide trust in Aramark, a private company that then underbid the union for the school custodial contract and offered workers the chance to keep their jobs if they accepted a 56 percent pay cut).
Webber’s focus is on pension fund managers’ ability to operate in a manner that extends beyond the narrow interest of the ‘fund’, a position that seems to be adopted in the US as an extension of the managers’ fiduciary duty, i.e. that pension funds must maximise financial returns, as directed by Section 404 of the Employee Retirement Income and Security Act 1974 (ERISA), which was understood to direct managers to invest primarily with an eye to financial returns (but cf Webber’s discussion with McCarthy here). This interpretation was given added force by a US Department of Labor bulletin from 2015, according to which non-financial factors (such as environmental, social, or governance ones, or ‘ESG’) can be taken into account only ‘as tie breakers when choosing between investments that are otherwise equal with respect to return and rise over the appropriate time horizon’.
Webber rejects this narrow interpretation, and, as he argues in an earlier paper, suggests that the proper interpretation of the fiduciary duty would be ‘member focused’, rather than ‘fund focused’. This would mean, then, that pension funds should act in a manner that benefits workers (one may add – ‘as a class’). Presumably, this would mean – in the interest of workers, as long as it is not to the long-term detriment of the fund (after all, the pensioners who benefit from the fund are also workers), even where there are some negative, short-term, financial costs. This principle goes perhaps slightly further than the line adopted by the Law Commission and the Guidance. However, this may not always be straightforward, as the two may be in tension. Webber himself offers the example of several public employee retirement funds that invested over US$900 million in Wal-Mart, a company that not only actively discourages unionisation itself, but also drives a race to the bottom in the sector as a whole, which includes retailers that include strong unions (i.e. unions whose workers have retirement funds that invest in Wal-Mart…). The reverse is also true, as noted by his discussion of two cases – Brock v Walton (11th Cir) and Bandt v San Diego County (Cal. App.) – in which the courts ruled that trustees did not violate fiduciary duties when they pursued the economic interests of workers beyond investment returns.
Interestingly, however, it is not clear how Webber would have regarded the normative appeal of this particular case. This is because, in Webber’s argument, there is a close alignment between worker interest (pay, job security) and means (workers’ pension schemes). Now, assuming that it is possible to conclude that divesting, or not investing in the relevant companies would indeed not be financially detrimental to workers, would this mean that pension funds should embrace other concerns, such as those casually mentioned in the Supreme Court decision, such as health or the environment? Webber cites the example of the decision taken by the California State Teachers Retirement fund to divest from gun companies following the Newtown school massacre, but also notes that the scheme justified its decision for the (probably inauthentic) reason of foreseeable extensive regulation that is expected, rather than the moral approbation that, one would assume, guided it.
In closing, and returning to the case at hand, we find a far-wider agenda, which is only coherent if one believes in what is often perceived a ‘progressive’ range of causes which aligns workers’ interests with the viability of a strong public sector, alongside racial and gender equality, human rights, localism, environmental causes, and so forth. But, politically, we know well that those causes do not always align – witness the ‘Lexit’ (Left Brexit) argument which, at least for some, brought together a nationalist strain with worker rights. Similarly, Israeli trade unions supported, for over two years, a boycott of Turkey following its support for the aid flotilla to the Gaza strip. They did so by leveraging a different financial power – that of organised vacations for major, unionised corporations, which host tens of thousands of workers.
As Webber rightly notes, for every left-wing divestment decision from oil and gun companies, there may be a right-wing divestment policy that targets companies that produce abortion pills or engage in stem cell research. While the former would probably be attractive for most readers of this blog (alongside previous divestments from South Africa over Apartheid), being part of a pension scheme that divests from women’s health clinics would probably raise some concern. It may well be the case, then, that if one would wish to avoid one controversial divestment decision done in her name, with her money, she may well need to refrain from supporting another, which sits more comfortably with her political agenda. Following through with the metaphor (‘in her name’), another American lesson here is that these investment decisions may be framed in the future in the context of free speech and, in particular, forced speech. This would imply, then, that an employee may raise the claim that her pension is used to advance a cause (e.g. BDS) that she does not support. As Webber describes in a later article, which analyses the American Supreme Court case of Janus, such a challenge risks endangering not only the collective nature of public pension schemes, but unions as a whole.
But what of divestment from soft drink companies, or from notorious energy companies? Is there a way to thread the needle and allow pension schemes to take into account some non-financial factors, such as those in ‘consensus’, but not others? Perhaps one idea would be to revert to the proposal to view workers as a class, whose interests reach beyond their role qua workers. In a society governed by a varied degree of risk, members of the working class are far more exposed to health and environmental risks, as well as the risk of being a victim of gun violence, for example. Taking account of such factors, then, advances the well-being of members of the working class, and thus should be permitted.
Webber seems less enthusiastic about the type of divestment decisions which was at the heart of this case, and I would argue that he makes a persuasive case in doing so. The middle ground, in this case, is not a sad compromise. The Supreme Court was, with due respect, right on the law. As Judge Cranston explained early on, in the High Court, the distinctions that the Secretary of State made, between different types of non-financial factors, could not be sustained without necessary legislative backing. Such explicit powers, pace the Court of Appeal, do not exist in the text of the 2013 Act or the 2016 Regulations, and therefore the default position is that the administrative authority may exercise its powers only with regards to the purpose of the legislation, i.e. the pension purposes.
But lurking behind the question of what is legal, is the question of what is right. Broadening the fiduciary duty to allow investment decisions that strengthen worker voice and power (even beyond the slightly-fictitious ‘tie breaking’ scenario) and advance working class interest would be an appropriate, and far from trivial, extension that could have significant consequences. Broadening it to include political factors that have very little, or even nothing, to do with workers’ interests and needs may achieve short term satisfaction for some, but at a cost of sowing division, perhaps at great cost, in the future.
About the author:
Amir Paz-Fuchs is Professor of Law and Social Justice at the University of Sussex, where he teaches Employment Law and is Director of Sussex Clinical Legal Education.
(Suggested citation: ‘A Paz-Fuchs, ‘Labour’s Capital and the BDS Movement,’ UK Labour Law Blog, 11 June 2020, available at https://uklabourlawblog.com).