Councils express concern at unintended impact of Economic Activity of Public Bodies Bill on LGPS

The Economic Activity of Public Bodies Bill gives “significant concerns about the effects the current drafting will have on the operation of the Local Government Pensions Scheme (LGPS)”, the Local Government Association (LGA) has warned.

In a briefing for peers on amendments to the Bill, which is at the committee stage, the LGA said it did not expect any significant affects on local authority investment or procurement practices, but wanted to avoid “unintended, negative consequences on the ability of LGPS funds to pursue other legitimate responsible investment policies”.

The Bill would remove the ability of public bodies, to campaign against, boycott, seek divestment from, or sanction a particular territory internationally, unless endorsed by Government policy.

Concerns raised by the LGA included clarity over who the ‘decision maker’ is in the context of the LGPS, access to judicial review and more effective exemptions for environmental, social and governance (ESG) issues.

It said the LGPS is a fund with more than 6m members and assets of £360bn and had “very few Pensions Regulator or Pensions Ombudsman cases for a scheme of its size”.

LGPS investment decisions were taken in line with the fiduciary duty including those relating to ESG factors.

“Where an LGPS fund decides to divest from particular investments, and those decisions are based on non-financial factors, LGPS funds follow the Law Commission’s direction that any financial impact on the fund should not be significant and that the decision would likely be supported by scheme members,” the LGA said.

It said the Bill was “unclear as to how a reasonable observer will assess whether a decision maker has been ‘influenced by’ a particular consideration”, and supported an amendment to change this to ‘materially influenced’ by political or moral disapproval.

The Bill provides exceptions for environmental and labour-related misconduct, but should “be broadened to include systemic human rights violations and genocide”, the LGA said. it also said the Bill should cover breaches of environmental law or actions that cause significant harm to the environment, including the life and health of plants and animals.

Nothing should stifle appropriate discussion at pension committee meetings about concerns relating to risk factors around investment, including geopolitical and territorial factors.

Russia provided an obvious example, it said, as at the time of its invasion of Ukraine only around 3.0% of LGPS assets were invested in Russia because of the clear concerns emerging and the increasing risk of stranded assets.

An earlier change by the Government had made clear that councillors were not prohibited from expressing support for - or voting in favour of - a motion supporting a boycott or divestment policy.

But the LGA noted: “This is only covered in the explanatory notes but not addressed on the face of the Bill itself.”

An amendment to require other means of enforcement to be exhausted before decisions before applications for judicial review should be supported by peers, the LGA said.

This was because pressures on the court system and the lack of clarity around who or what may be deemed a sufficiently interested party meant “it is possible that there may be applications that waste pressured resources in the court system and within local authorities”.

Mark Smulian