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Economic Activity of Public Bodies (overseas matters) Bill, Second Reading, House of Lords, 20 February 2024

The Bill seeks to remove the possibility for public bodies, including councils, to campaign against, boycott, seek divestment from, or sanction a particular territory internationally, unless endorsed by the Government’s own foreign policy.


About the Local Government Association

  • The Local Government Association (LGA) is the national voice of local government. We are a politically led, cross party membership organisation, representing councils from England and Wales.
  • Our role is to support, promote and improve local government, and raise national awareness of the work of councils. Our ultimate ambition is to support councils to deliver local solutions to national problems.

Key messages

  • This submission will focus on the practical implication of the Bill’s current draft on local government pensions and procurement.
  • We do not expect this Bill to have any significant effects on local authority investment or procurement practices. However, we have significant concerns about the effects the current drafting will have on the operation of the Local Government Pensions Scheme (LGPS).
  • Local government would welcome discussions with government on potential impacts on councils of the Bill including:
    • clarification on who the decision maker is (specifically in the context of the LGPS)
    • streamlining the enforcement regime to remove the possibility of parallel enforcement activity and tighten access to Judicial Review
    • more effective exemptions for Environmental, Social and Governance concerns.

Procurement

The only point the LGA would make in relation to public procurement is on the relationship between this Bill (which continues to outlaw territorial considerations) and changes foreseen under the public procurement Bill which will in fact allow territorial considerations within the UK to be more readily taken into account by councils. This is welcome.[1] The two changes (which seemingly oppose each other) need to be clearly communicated to councils. The LGA is happy to help with this.

[1] Under the Procurement Bill, councils will be able to ring-fence ‘below-threshold’ contracts to ‘local’ suppliers e.g. UK level, county level, or London-borough level). This is something LGA advocated for.

Investments

As regards local government investments, treasury management investments by councils are made largely within the UK. Where there are investments internationally, the key considerations are return and risk (e.g. credit scores) rather than non-commercial considerations. Therefore, we do not believe the Bill will have any significant effect on councils’ treasury management decisions.

Pensions

The Local Government Pension Scheme is a well-funded and well-run scheme, with very few Pensions Regulator or Pensions Ombudsman cases for a scheme of its size: over six million members and assets of over £360 billion.

Investment decisions are taken in line with the fiduciary duty – requiring LGPS funds to make prudent investment decisions based on an assessment of the financial consequence of a number of matters, 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.

Administering authorities have statutory and fiduciary duties around the investment of pension funds and duties under the Equality Act to foster good relations between different communities and to eliminate discrimination.

The Local Government Association (LGA) receives funding from administering authorities on a statutory basis to provide the secretariat function for the Scheme Advisory Board. The Board was established by the Department for Levelling Up, Housing and Communities, which is responsible for legislation governing the England and Wales scheme. Administering authorities are able to use money from the pension fund to cover reasonable costs of running the scheme.

In the LGPS, the administering authority normally delegates responsibility for managing the investments of the fund to a pensions or investment committee, where councillors take collective decisions around asset allocation.

There are existing statutory controls, the LGPS Investment Regulations 2016, that ensure that LGPS funds hold diversified portfolios, explain their approach to non-financial considerations and take professional advice in relation to their investment decisions.

Examples given in the Bill’s Impact Assessment do not constitute active boycott decisions taken by the relevant pension committees. Instead, they are examples of standard commercial decisions made by asset/investment managers who are actively managing pension fund money under a high-level agreement with their LGPS client.

Clause 1: Disapproval of foreign state conduct prohibited

It is key, in the context of the LGPS, to know who the decision-maker is deemed to be and how they may be liable to enforcement action and potentially a monetary penalty. Clause 1(7) states that “references to the decision-maker include, in a case where the decision-maker is not an individual, the individuals who in fact make the decision for the decision-maker”. We would like greater clarity on how this applies to a pension committee (made up of local councillors) who make decisions as a collective rather than individuals, with advice from officers and professional advisers.

Any enforcement action taken (and any monetary penalty levied) should be against the administering authority not individual councillors.

While the majority of pension committee members are engaged with their role and the subject matter, pensions is a complex area, and it can already be daunting for non-specialist and non-technical councillors to be a member of a pensions committee. If councillors on the pensions committee were individually liable, then fewer would be willing to join. Individual liability could also fetter legitimate debate at pension committee meetings about financial risk factors that arise in relation to investments, based on environmental, social and governance concerns.

Day to day decisions on implementation of the LGPS fund’s investment strategy are frequently made by that fund’s pool or by their asset/investment managers. It is standard practice for asset managers to regularly review the companies their funds are invested in, and to respond to a diverse range of dynamic risk factors when making decisions around investments. This is particularly true of investment products which are badged as being “sustainable” or tilted towards companies with strong ESG performance. If the asset owner (the LGPS fund) has not directed, or maybe even been made aware of, these decisions then the LGPS fund should not be liable for them.

Investment decisions require a complex balancing of diverse information to assess the relative risk, cost and potential reward of different investment options. It would be helpful if “reasonable observer” could be defined as someone familiar with the decision-making process of institutional investors.

The Bill is unclear as to how this reasonable observer will assess whether a decision maker has been “influenced by” a particular consideration. It is impossible to know which factors have influenced each person’s decisions or views beyond what is recorded in the record of the Committee meeting. The wording of clause 1(2) should be edited to require a decision to be substantially influenced by political or moral disapproval, specifically defined as being a decision reached that otherwise would not have been.

Clause 3: Exceptions

Administering authorities are ‘quasi-trustees’ of money that is held to discharge the “pensions promise” made to local government workers.

The Law Commission has set out guidance for pension fund trustees, which equally applies to councillors making decisions about LGPS investments, stating that considerations other than financial ones are relevant to decisions about investments. Their 2014 guidance states that non-financial factors can be taken into account when taking investment decisions as long as two conditions are met – “trustees should have good reason to think that scheme members would share the concern; and the decision should not involve a risk of significant financial detriment to the fund”.

This has become settled and accepted practice and allows pension fund trustees and councillors on LGPS pension committees to take into account broad considerations around environmental, social and governance factors when exercising their fiduciary duty.

In the event that the Bill interferes in this practice, the exemptions should be broadly drawn to cover the range of issues which funds may legitimately consider. Whilst it is helpful and welcome that the Bill sets out exceptions for factors relating to (amongst others) environmental and labour-related misconduct, we believe that the existing exceptions should be broadened to include systemic human rights violations and genocide. We also believe that any changes to the list of exceptions in the schedule should be limited so that future governments can only add similar kinds of consideration.

Clause 7: Information Notices

There are concerns about the far-reaching nature of these powers, particularly the inclusion of subsection (8) to Clause 7, which requires the disclosure of information that would otherwise be protected by legal privilege. This would give all enforcement authorities, including the Pensions Regulator for the LGPS, powers greater than those available in other legal proceedings.

On a practical level, the powers should be staged, so at the initial stage disclosure requirements would be as per the pre-action protocol for judicial review. This would mean that disclosure requirements are proportionate and limited to what is necessary for TPR to understand the basis of an administering authority’s decision and identify accurately the issues complained about. The administering authority would be obliged to comply with any request and the court could impose costs sanctions against them if they unreasonably fail to provide relevant disclosure.

Where TPR decides to carry out a full investigation then the powers could be stepped up to require disclosure of all information reasonably required to undertake that investigation.

Clause 8: Compliance notices

As mentioned earlier in relation to Clause 1, it is critical to identify in relation to the LGPS who the decision-maker is. Individual councillors cannot take decisions on behalf of the committee so we would strongly argue they should not be the subject of any enforcement action.

Clause 10: Monetary penalties: further provision

We would argue that the level of potential fines should be on the face of regulations, and therefore subject to Parliamentary scrutiny, and must be based upon existing statutory scales.

Regulations should also oblige the Secretary of State to set out the criteria used to establish the level of fine to be levied and paid. This would ensure transparency and fairness in relation to potentially significant financial penalties that can be levied on administering authorities, or, potentially on individual councillors.

It is not clear whether any penalty should be paid from the administering authority’s general budget (used to pay for local services such as child protection and social care) or from pension fund monies (used to pay for legitimate administrative expenses that arise from the running of the pension fund).

We would also argue that there should be a duty to issue guidance for enforcement authorities, to ensure Parliamentary scrutiny of bodies that could otherwise be said to be largely unaccountable.

Clause 11: Variation and revocation of enforcement notices

We would argue that all decisions taken by an enforcement authority (TPR for the LGPS) should be amenable to judicial review by the decision-maker, with the courts having the power to waive any enforcement action taken or proposed under the provisions in clauses 6 to 10. This would also then allow a Court to have regard to statements made during the passage of the Bill in the event of there being any legal uncertainty around how the Bill should be interpreted.
 

Clause 12: LGPS – Application of prohibitions

We would argue that clause 12(2) [“fund investment decision” means a decision about the acquisition, management, retention or disposal of an asset of a pension fund”] should be amended to be clear that it does not extend to decisions made by custodians, agents, LGPS pools or in relation to passive holdings unless there is a specific instruction by the decision-maker in relation to the holding of that asset that would contravene the law.

It is unclear what “management” of the asset means in this context. If it is intended to apply to the stewardship role of funds, for example where they use the voting rights associated with asset holdings at AGMs, then it is unclear what the expectation is and how it would be assessed.

In clause 12(6) “scheme manager” is defined as per the definition in the Public Service Pensions Act 2013 – which states that this is “the person responsible for managing or administering the scheme”. In the LGPS, this is the administering authority. This strengthens our view that the decision-maker is the corporate body and not individual pension committee members.

Pension committees are supported and advised by local government officers. Statutory officers, like the section 151 officer (usually the Director of Resources or Finance Director) and the monitoring officer, have legal duties to ensure lawful decision making by an administering authority. It should be clarified as to whether or not they could be deemed to be decision makers, along with committee members. Again, the decision-maker should be defined as the legal person of the administering authority, rather than the natural persons of committee members or officers.

Clause 13: LGPS – Enforcement Powers

TPR has had an enforcement role in relation to the LGPS since the passage of the Public Service Pensions Act 2013, however that power relates to the administration and governance of the scheme, not the investments that the scheme makes.

It is important that TPR respects the restricted role that the powers in the Bill grant it in relation to the LGPS, and that it does not stray beyond those powers in relation to decisions around investments.

TPR is not an experienced regulator of LGPS investment decisions and so it is crucially important that TPR is appropriately resourced, and staff trained to undertake the type of investigations that would be required in relation to the powers in the Bill. These are unlike other investigations that TPR would expect to be involved in in its role as a regulator of UK pension schemes. With this in mind TPR should be required to publish a strategy for dealing with complaints that arise as a result of this legislation, the review must include an impact assessment on the capacity and resourcing of the enforcement authority.

TPR must clearly communicate to interested parties how they should raise concerns since this is how TPR would become aware of decisions. TPR will also need a mechanism to identify repeat or vexatious complaints.

There should also be a common test of whether a party “has sufficient interest in the subject matter of the proposed application” between the courts and TPR.

Schedule “Exceptions” – Part 2 – Exceptions for Certain Types of Consideration

The LGA welcomes the exemption for environmental misconduct in paragraph 10 which allows a decision to be taken in order to avoid what “amounts to an offence, whether under the law of a part of the United Kingdom or any other country or territory”. However, this would appear to mean that anything which is against the law anywhere in the world could be exempted – which seems extremely broad, and it isn’t always easy to test whether something is illegal in another country, especially in those countries without properly functioning, independent legal systems.

It appears that the labour-related misconduct exception in paragraph 8 is limited to things that could be an offence in the UK, and there is a specific list in paragraph 4 of offences under UK legislation that count as a “relevant labour offence”. Although there are powers to amend the Schedule via secondary legislation, meaning that further primary legislation wouldn’t be needed to add to the list, it does seem quite narrow – and for example, doesn’t cover systemic breaches of the majority of employment law protections (around Trade Union membership, anti-discrimination provisions or protection from unfair dismissal).

Existing exceptions should be broadened to include any systemic human rights violations (including the non-discrimination provisions in Article 14 of the European Convention on Human Rights) and genocide.

We also think it would be helpful to consider including the word “risk” in the drafting of paragraph 4, so that it reads “Section 1 does not prevent regard to a consideration so far as the decision-maker reasonably considers it relevant to the financial risk, value or practical utility of—…”. This might be considered to be implicit, but we believe adding it would reflect the importance of risk as a factor when considering value. The Law Commission recognises that a trustee’s primary investment duty is to balance returns against risks and is something that must be taken into account. It would also mean that some of the sound considerations that would otherwise struggle to be covered in one of the other exceptions (e.g. reputational risks, systemic risks) could be covered here. This could also make practical implementation of the Bill more aligned with good stewardship standards as set out in the Financial Reporting Council’s 2020 Stewardship Code, and as generally understood for institutional investors.

Contact

Elliot Gregory, Public Affairs and Campaigns Advisor

Email: [email protected]