Labour’s Capital: The Politics of Pension Divestment

While the attention of the world was firmly focused on all things Covid-related, the UK Supreme Court published an interesting decision in R (on the application of Palestine Solidarity Campaign Ltd) v the Secretary of State for Housing, Communities and Local Government. The case concerned a claim for judicial review on behalf of the Palestine Solidarity Campaign against the publication of guidance by the Secretary of State which limits the power of the local government pension scheme to “pursue policies that are contrary to UK foreign policy or UK defence policy.”

The local government pension scheme caters for about 5 million past and present local government employees across 89 local authorities. Unlike other public pension schemes, a local authority may be required to make increased contributions if the funds available are found to be insufficient to meet the obligations to its pensioners.

Legal infrastructure of the pension scheme

The relevant statutory authority for the scheme is the Public Service Pensions Act 2013, which authorises the Secretary of State to make regulations for its functioning, like the 2016 Local Government Pension Scheme regulations. Pursuant to the 2016 regulations, the Secretary of State published guidance relating to the manner investment policy takes into account “social, environmental and corporate governance considerations … in the selection, non-selection, retention and realisation of investments”. The Guidance states that:

…the Government has made clear that using pension policies to pursue boycotts, divestment and sanctions against foreign nations and UK defence industries are inappropriate, other than where formal legal sanctions, embargoes and restrictions have been put in place by the Government. …

Although schemes should make the pursuit of a financial return their predominant concern, they may also take purely non-financial considerations into account provided that doing so would not involve significant risk of financial detriment to the scheme and where they have good reason to think that scheme members would support their decision.

This section of the Guidance is followed by a Summary of Requirements, which states, inter alia, that

In formulating and maintaining their policy on social, environmental and corporate governance factors, an administering authority…should not pursue policies that are contrary to UK foreign policy or UK defence policy.

The Judgment

In one of his final decisions prior to his well-earned retirement, Lord Wilson accepted the Palestine Solidarity Campaign’s appeal against the 2016 regulations. In particular, he took issue with the government’s position, according to which local government authorities are part of the ‘machinery of the state’, pension schemes are ‘ultimately funded by the taxpayer’ and hence ‘public money’, and therefore decisions by pensions schemes may be seen as reflecting national policy. Since foreign and defence policy are reserved for the UK government, pension investment decisions should not undermine national policy through boycotts on non-pension grounds.

In particular, Lord Wilson explained that central government pension schemes are actually unfunded. He also added that contributions from “employees into the scheme are deducted from their income. The contributions of the employers are made in consideration of the work done by their employees and so represent another element of their overall remuneration. The fund represents their money.” It is not therefore, ‘public money’ as the Government claimed.

Agreeing with Wilson, Lord Carnwath had additional concerns that the Guidance could be applied to an authority’s decision not to invest, on ethical grounds, in a defence company, an energy company that pollutes air and water, or a company that makes products harmful to health (such as tobacco, sugar or alcohol) where such actions may be contrary to UK foreign or defence policy.

The concern here, as voiced by Lord Carnwath, is that the political standpoints of Government could impact upon pension investments created by workers, for workers. Yet one area of analysis which remained unexplored within the case law was the uniqueness of the pension scheme as a vehicle which brings into effect labour’s voice, enriches democratic debate and balances the financial power of corporate interest.

Workers Voice and Power

In David Webber’s recent book, he suggests that it is against the dire background of decreased union power in the United States that ‘shareholder activism’ has found a way to leverage pools of massive capital to buttress labour’s interests. With the decline of collective bargaining, union-led pension fund activism offers a crucial, perhaps even sole, vehicle for progressive interests. Webber explains how, over the past decade, pension funds enhanced corporate governance by leading to rules being changed to remedy serious conflicts of interest by company board members. He cites the horribly ironic case of public school janitors in Massachusetts whose retirement funds were invested by a statewide trust in Aramark, a private company that then underbid the union for the school custodial contract and offered workers the chance to keep their jobs if they accepted a 56% pay cut.

Webber’s focus is on pension fund managers’ ability to operate in a manner that extends beyond the narrow interest of the ‘fund’, a position that seems to be adopted in the US as an extension of the managers’ fiduciary duty, i.e. that pension funds must maximize financial returns. This interpretation was given added force by a US Department of Labor bulletin from 2015, according to which non-financial factors (such as environmental, social, or governance factors) can be taken into account only “as tie breakers when choosing between investments that are otherwise equal with respect to return and rise over the appropriate time horizon.”

Webber rejects this narrow interpretation, and suggests that the proper interpretation of the fiduciary duty would be ‘member focused’, rather than ‘fund focused’. This would mean, then, that pension funds should act in a manner that benefits workers as a class. Presumably, this would mean, as long as it is not to the long-term detriment of the fund, workers interests would be promoted. In Webber’s argument, there is a close alignment between worker interest (pay, job security) and means (workers’ pension schemes). Now, assuming that it is possible to conclude that divesting, or not investing in certain companies would not financially damage the pension schemes in question, would this mean that pension funds should embrace other concerns such as health or the environment? However, a wider agenda is only coherent if one believes that workers’ interests neatly align with ‘progressive’ range of causes including the viability of a strong public sector, alongside racial and gender equality, human rights, localism and environmental causes. But, politically, we know well that those causes do not always align, as in the case of ‘Lexit’, a vision of a left-wing Brexit uniting nationalism with support for workers rights. Moreover, as Webber notes, for every left-wing divestment decision from oil and gun companies, there may be a right-wing divestment policy that targets companies that produce abortion pills or engage in stem cell research.

Webber seems less enthusiastic about these types of divestment decisions, and he seems to make a persuasive case in doing so. Broadening the fiduciary duty to allow investment decisions that strengthen worker voice and power would be an appropriate, and far from trivial, extension that could have significant consequences for workers interests. Yet broadening it to include political factors that have very little, or even nothing, to do with workers’ interests and needs may achieve short term satisfaction for some, but at a cost of sowing division and even far less appealing investment decisions, in the future.


Amir Paz Fuchs is Professor of Law and Social Justice at the University of Sussex, UK.

Image credit: Nick Efford via Flickr (CC BY-SA 2.0)