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The Local Government Pension Scheme Advisory Board has taken legal advice on fiduciary duty which suggests investing for economic growth should be treated as non-financial in nature.
The government aims to boost the UK’s economic growth through greater scale in the LGPS. It also proposes that pension funds must have "regard to local growth plans and priorities”, in proposals for which a consultation closed last week.
Given this renewed attempt to harness LGPS assets for central government policy aims, the Scheme Advisory Board of the LGPS has sought a legal opinion from Nigel Giffin KC about fiduciary duty.
Giffin argues that investments made because of their potential to generate economic growth are not just motivated by financial considerations.
He writes: “I think that a policy of investing so as to boost the local or national economy will normally represent taking account of non-financial factors.”
As such, these investments would need to satisfy the Law Commission’s 2014 criteria for making investments based on non-financial factors, he says – that they should not cause financial detriment to the fund, and that the scheme thinks its members support the investment.
This is also the conclusion in the 2020 Supreme Court case about boycotts and divestment, says Giffin, which he says effectively conferred a fiduciary duty on LGPS funds vis-a-vis their members. Giffin also believes they have a fiduciary duty to the employer.
Following the 2020 case, LGPS investment guidance had to be amended, having previously stipulated that LGPS funds’ policies must not go against central government policy, although the government then amended 2022 legislation that would make it possible, in theory, to reissue the contested investment guidance.
The government’s proposals for the LGPS have ruffled feathers. While some pools, particularly those that already have the proposed FCA-authorised format, are supportive of the government agenda, others are not. The proposals have been criticised by several local authority funds and consultants, mainly for potentially requiring funds to take their principal investment advice from their pool. Concerns were raised about a lack of competition and conflicts from pools reporting on their own investment performance in the proposed adviser role.
