The 99 sections of the Local Government Pension Scheme (LGPS) manage a vast portfolio of volatile assets to meet the shifting, though usually increasing, cost of paying for members’ pensions. This task is complicated enough, but councils are also subject to public or political pressure. Recent examples of this focus on investment in the public health implications of tobacco and Brent, Staffordshire and Tyne & Wear 1 councils are all reported to have reviewed, or to be in the process of reviewing, their policy on holdings in tobacco companies.

The issue is an important one. LGPS funds are some of the largest institutional investors in the UK. Even the smaller funds will have hundreds of millions of pounds invested at any one time. The broader social implications of share ownership on that scale are unavoidable. Yet at the same time (and to put the matter very simply) more modest returns on LGPS investments means a larger bill for the scheme, which could ultimately fall back on local rate payers. This briefing will not attempt to untangle the competing ethical or political considerations which might be at play. However, it is worth considering in a little more detail what the relevant legal constraints are.

The legislation governing LGPS investment is prescriptive in some respects, but there is no directly relevant legislation or case law to provide a clear framework as to how councils should approach ethical issues. By way of contrast, trustees of non-public sector pension schemes have been to court on the issue of ethical investing on a number of occasions.

The leading case in this area Cowan v Scargill was decided in 1984. This case concerned a dispute over the investments of the Mineworkers’ Pension Scheme. Arthur Scargill, the General Secretary of the National Union of Mineworkers (NUM), was a member of the trustee board in 1982. Following his appointment, he and the other union trustees declared that, because of a conflict with a policy decision of the NUM, they would not support any overseas investments or any investments which directly competed with coal (such as oil and gas).

The Cowan v Scargill judgement sets out the now classic formulation of the trustees’ investment duty as:

“The starting point is the duty of trustees to exercise their powers in the best interests of the present and future beneficiaries of the trust…When the purpose of the trust is to provide financial benefits for the beneficiaries, as is usually the case, the best interests of the beneficiaries are normally their best financial interests.”

The judge concluded that the proposed restrictions on investment did not meet the trustees’ investment duties. As the court had authority to resolve the deadlock in the trustee board the judge declared that the restriction proposed should not be implemented.

Cowan v Scargill can be used on both sides of the ethical investing debate. On the one hand, it makes clear that member’s interests are the “starting point”. Decision makers will need a reason before they take a decision that is not in the members’ best financial interests. On the other hand it is also clear that there is room for other considerations, a point that is drawn out in the later case law. There is an important distinction between the decision makers’ personal beliefs, which are irrelevant, and those beliefs which are relevant and pertinent to the beneficiaries of the trust, which are not.

For example, a pension scheme whose members were all vegetarians might reasonably decide not to invest in a hamburger restaurant, whereas a vegetarian trustee of a hamburger restaurant’s pension scheme should not bring his own preferences into a debate about the same investment decision.

Cowan v Scargill seems like a helpful decision for the LGPS because of the similarities between private, trust based schemes and the LGPS, but there are a number of reasons to approach this analogy with caution.

• A judge looking at the LGPS would be unlikely to regard themselves as bound by Cowan v Scargill because that scheme, unlike the LGPS, was a trust based arrangement. Councils maintain and invest the LGPS’s assets because they are required to do so by statute not because they have accepted the role of trustee.
• Councils clearly do owe obligations to their rate payers and voters. It is unclear to what extent they can treat those duties as secondary to their duty to the LGPS pensions members.
• There may be good reasons why Councils, as public bodies, should be held to a different standard than private trustees.

Even so, as a starting point Cowan v Scargill has much to recommend it.  Firstly, the decision makes clear that purely personal beliefs should disregarded.  It would be surprising if this did not apply to the LGPS as much as for trust based schemes.   Secondly, it focuses the debate on the reason for holding the assets in the first place, i.e. to pay for members’ benefits.  This probably does not take any specific ethical debate much further, but it does offer an intellectual starting point.

Ralph McClelland, associate, Sacker & Partners