Concern expressed about the potential impact of the Economic Activity of Public Bodies Bill on the LGPS

Currently in its Committee Stage in the House of Lords, the Economic Activity of Public Bodies (Overseas Matters) Bill is now approaching the final stages of its parliamentary process. However, the Local Government Association (LGA) has flagged “significant concerns” about the consequences of the Bill on the Local Government Pensions Scheme (LGPS). 

The Bill 

Below, we summarise the legal effect of the Bill and the pensions entities to which it applies. 

• Unable to consider political or moral disapproval when investing – section 1 provides that relevant public bodies “must not have regard to a territorial consideration in a way that would cause a reasonable observer of the decision-making process to conclude that the decision was influenced by political or moral disapproval of foreign state conduct”. 
• Applicable to local government schemes, but not pension schemes generally – section 12 explains that section 1 is applicable to local government pension schemes where they make “a decision about the acquisition, management, retention or disposal of an asset” (section 12). Although Para 3 of Part 1 clarifies that section 1 does not apply to pension schemes generally. 
• Several exceptions exist – Part 2 provides several exceptions to section 1, meaning that relevant bodies are able to, amongst other factors listed in Part 2, continue having regard to the following:
  • financial value of the asset (para 4),
  • national security of the UK (para 5),
  • “labour-related misconduct having taken place or taking place in the future” within the foreign state (para 8), and
  • “environmental misconduct having taken place or taking place in the future” within the foreign state (para 9). 

The LGA's response

In a briefing submitted to the House of Lords Committee last month, the LGA flagged “significant concerns about the effects the current drafting will have on the operation of the LGPS”. To summarise the LGA’s views, they: 

• Do not want the Bill to have “unintended, negative consequences on the ability of LGPS funds to pursue other legitimate responsible investment policies”. They cite that the LGPS handles “assets of over £360 billion” and yet has relatively few member complaints against it, as evidence that it already pursues legitimate and responsible investments that are in-line with its membership’s views. 
• Require further “clarification on who the decision maker is (specifically in the context of the LGPS)”. Whilst the LGA does not expand on this concern, we assume (and agree) that it would be useful to know who exactly could fall within section 1 – is it just the Administering Authority of the Fund, or could it capture the Board and even the related Council (i.e. in its capacity as local authority rather than as the Fund’s Administering Authority)? 
• Suggest that there should be “more effective exemptions for Environmental, Social and Governance concerns”, for example to capture “systemic human rights violations and genocide”. 
• Support an amendment to change section 1’s language from ‘influenced by’ to ‘materially influenced by’. Lord Palmer of Childs Hill had suggested this amendment and argued that this inclusion would mitigate the risk of investments being “prohibited for something very minor”, as the Bill should focus on “things of substance, not things that are minor”. The amendment was ultimately not passed, but the LGA hope that it will resurface at Committee Stage. 

Comment

The LGA briefing highlights that the LGPS has a strong track record for member satisfaction, with a relatively low number of its members complaining to its regulators. LGA suggests that it therefore can be implied from this, that its investment policies are (at least somewhat) successful and representative of its members’ views. As such, Parliament should seek to ensure that the LGPS does not have to move significantly away from its current approach to investments. 

Regarding the materiality amendment suggested by Lord Palmer and the LGA, it remains to be seen whether this will be revived. It may well be, though, that the Government deems such a materiality threshold as too restricting on the desired impact of  the Bill. Instead, an amendment such as “influenced to an extent which is more than minor” may be a suitable middle-ground, which addresses Lord Palmer’s concern that “something very minor” is prohibited by the Bill. 

the Local Government Association (LGA) has flagged “significant concerns” about the consequences of the Bill on the Local Government Pensions Scheme