Advisory board of £275bn UK LGPS puts the brake on ESG investment guidance over fiduciary duty concerns

LGPS waits for key developments in the field of workplace pension funds

The advisory board of the Local Government Pension Scheme (LGPS) in England and Wales, the umbrella governing body for UK defined benefit plans with assets of £275bn, has postponed giving definitive guidance on responsible investment to the 8 investment pools that now run its assets because of fiduciary duty legal concerns. 

LGPS sought views on a RI Guidance consultation that closed on 11 January, in which some LGPS respondents raised their concerns. 

These included legal worries about “the role and responsibilities of elected members responsible for making investment decisions,” the board said.  

The board said there were two reasons for which “it would be imprudent at this stage to offer any definitive advice or guidance on how the fiduciary duty test applies to investment decision makers in the LGPS”.

First, the board referred to a piece of legislation on occupational pension funds, the Pension Schemes Bill, because it “could have a significant impact on the way in which investment strategy statements are prepared on issues like ESG and climate change.” 

As reported by RI, the UK Government has tabled amendments to legislation that would require large pension schemes to report in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD)

The proposals were debated favourably yesterday at the House of Lords.

Second, the LGPS advisory board referred to a pending decision in a Supreme Court case between the Palestine Solidarity Campaign (PSC) and the Department for Communities and Local Government (now Ministry of Housing, Communities & Local Government).

On 20 November 2019, the Supreme Court held an appeal hearing in which the PSC challenged guidance issued by the government that prohibits LGPS schemes from divesting companies that trade in the occupied Palestinian territories. 

According to the LGPS advisory board, such a case could also “shed some light on how the fiduciary duty test applies to investment decision makers in the LGPS.”

“This change of direction will not preclude the Board from addressing the issue of fiduciary duty as a separate issue once the Supreme Court judgement in the foreign boycott case has been handed down and when there is more certainty about the government’s proposals under the Pension Schemes Bill.”

Jaimie Potter, Partner in the Public Law and Human Rights team at Bindmans LLP, and solicitor for the PSC, told RI that the ruling of the Supreme Court should be released three to four months after the hearing. 

Industry sources approached by RI questioned to what extent LGPS’ investment decision makers need further advice on this subject.

Some of the LGPS funds are signatories to the UN-Supported Principles for Responsible Investment (PRI) on an individual basis. For example: the Environment Agency Pension Fund, the Merseyside Pension Fund, the West Midlands Pension Fund, the Kent County Council Superannuation Fund, the Greater Manchester Pension Fund, the Hampshire Pension Fund and the City of London Corporation. 

And when it comes to the eight entities created to pool and manage the LGPS funds, the following are also PRI signatories: Border to Coast Pensions Partnership Limited, Brunel Pension Partnership, LGPS Central, London CIV, and Local Pensions Partnership.

The latter recently selected Robeco, the Dutch asset manager with significant experience in responsible investment, to provide engagement services for its global equities and fixed income investment portfolios.

Previously, 89 local government pension funds ran the retirement money for local government civil servants via autonomous pension funds known collectively as the Local Government Pension Scheme (LGPS). 

The money was put into 8 giant pools to hire the investment managers to run those assets, or run some of the money in-house, depending on the asset class.

The pools are effectively self-owned asset managers, and the underlying pension funds take a pro rata portion of the mandate given to each manager/s hired for the various asset classes.