A. Rule Against Fettering Discretion

Equity will not allow trustees – in this case, quasi-trustees – to fetter the exercise of their discretion at a future date. The rule may be excluded or restricted by an express power.Footnote ⁴¹ In the LGPS context, the rule is engaged by the adoption of divestment and exclusion policies, as these are intended to legislate as to the future exercise of discretion.

The statutory response is a requirement for a triennial review cycle for LGPS investment policies.Footnote ⁴² As such, the power to legislate for the future exercise of discretion is not open-ended, but subject to cyclical review. The triennial review cycle does not prohibit out-of-cycle reviews where circumstances require. The approach adopted by Nigel Giffin K.C. appears to be that a new ESG policy can be adopted out-of-cycle. However, he considers that while an administering authority should not fetter its discretion by determining absolutely that it will not review it out-of-cycle, there is no positive obligation to do so.Footnote ⁴³

Put in those terms, there is a risk of asymmetry: the administering authority willing to adopt a policy out-of-cycle based on exceptional circumstances but, in practice, unlikely to consider the possibility of a review in response to circumstances out-of-cycle. The fiduciary has an obligation to continue to keep an open mind when occasions for exercise of the discretion arise and it should not purport to bind itself to exercise the discretion in the future.Footnote ⁴⁴

Politically, it suits administering authorities adopting BDS policies outside of the triennial cycle to rely on the absence of a positive obligation to reassess those policies prior to the end of a triennial cycle. Led by BDS activists as architects of the exclusion policy, the LGPS pension fund is then effectively checked into Hotel California. The administering authority can, of course, check the fund out of the policy any time it likes but the reality is that the unrelenting BDS agenda means that it will never let the fund leave (at least not until the end of the three-year cycle). Rapidly changing opinions on defence stocks make that sector the paradigm example of how such an approach improperly surrenders discretion. Application of a pre-existing policy without considering it in changed circumstances fetters investment discretion, per Cowan v Scargill. Footnote ⁴⁵

B. Misconstruing the Fiduciary Power

Like any other fiduciary power, the power to adopt and implement an exclusion and divestment policy derived from non-financial factors exists within equity’s arena. Any purported exercise of the power beyond its scope will, in equity, be void ab initio. One example in the present context is the case involving a fiduciary who misconstrues the “Non-Financial Factors Test” upon which their power rests. Their power is contingent upon meeting, inter alia, the requirements of that test. Misconstruing the test may involve a lack of skill and care at common law. It is standard fare to observe that not all acts of a fiduciary are, in fact, fiduciary in nature.Footnote ⁴⁶ However, that is no answer to a charge of ultra vires. Professor Richard Nolan put it this way: “A fiduciary must not benefit from using the power unless allowed to do so.”Footnote ⁴⁷ It would certainly be an odd result if a fiduciary could unilaterally extend its power and do so by being negligent.

Divestment plans in the LGPS market have proceeded on the basis of a mistaken belief that the decision in R. (Palestine Solidarity Campaign) v Secretary of State provides the final piece of the jigsaw. It is interpreted as delivering a sense of security and legal certainty to local government lawyers that had otherwise been lacking. Insofar as it addressed the “Non-Financial Factors Test”, that is incorrect. On the contrary, the decision virtually guarantees that both the formulation of the test and the meaning of specific words in each limb remain open for consideration by the courts.Footnote ⁴⁸ Statements to the contrary in Butler-Sloss v Charity Commission that “both Lord Wilson and Lord Carnwath expressly approved […] the Law Commission’s [test]”Footnote ⁴⁹ must equally be open to doubt.

Nigel Giffin K.C. considers that “in the light of PSC, the Law Commission approach to non-financial considerations where investments are made by trustees and quasi-trustees can be regarded both as an authoritative statement of the general law”.Footnote ⁵⁰ With respect, that is a stretch. Consideration of the test itself was not part of the ratio. The decision was solely concerned with a question of ultra vires: whether the Secretary of State was empowered to issue certain “guidance” to LGPS administering authorities relating to defence and foreign policies.

Of the judges who even referenced the Law Commission tests, Lord Wilson did not extend his analysis to substantive consideration of the two criteria.Footnote ⁵¹ Nigel Giffin K.C. considers that His Lordship “certainly referred to the Law Commission approach without any doubt or criticism, and I think that what he said at [27] and at [30] amounts to agreement with it”.Footnote ⁵² This is plainly a mishandling of this part of His Lordship’s judgment. The absence of “doubt or criticism” cannot be read as tacit approval of the Law Commission test when the test was not at issue in the case.

There also appears to be a measure of confusion amongst local government lawyers as to the interpretation of Lord Carnwath’s judgment. That judgment also concerned the issue before the court: identifying whether power lay with the administering authorities or the minister. His Lordship similarly concluded that primary responsibility for investment decisions “rests with the administering authorities”.Footnote ⁵³ His Lordship also said that non-financially motivated policy choices made under Regulation 7(2)(e) “are judgements to be made by the administering authority, not the Secretary of State. The attempt of the Secretary of State to impose policy choices was objectionable […] because they were choices to be made by the authorities, not by central government”.Footnote ⁵⁴

These statements on the locus of the power precede Lord Carnwath’s discussion of the “Non-Financial Factors Test”. That discussion must therefore be understood as part of His Lordship’s analysis of the ultra vires question. While Lord Wilson’s line of enquiry took him to the statutory regime, for Lord Carnwath, the “Non-Financial Factors Test” was an alternative route. Simply put, for Lord Carnwath it appears to have been a case of “find the controls and you find the power”. As Richard Nolan put it in his discussion of fiduciary powers generally, controls “seek to curb the harm that the holder of power can inflict on those affected by it”.Footnote ⁵⁵ Thus, for Lord Carnwath, the application of the “Non-Financial Factors Test” marked the spot where the power to formulate investment policy power lay. After all, the test derives from the concern of equity to curb fiduciary power for the protection of those to whom the duty is owed.

His Lordship’s agreement was simply to acknowledge that he had taken judicial notice of the existence of the “Non-Financial Factors Test”. Where the consensus is that the test applies to administering authorities, a point which Lord Carnwath accepted, it must follow that it attaches because of the fiduciary power vested in them. His references to such eminent and authoritative sources as the Law Commission and extrajudicial commentary by Lord Nicholls allowed him to accept this without further enquiry. His words reflect this: “There appears now to be general acceptance that the criteria proposed by the Law Commission are lawful and appropriate. I agree.”Footnote ⁵⁶ His Lordship was indicating that he agreed there is general acceptance. His approval of the formulation of the test (albeit with some variation, intended or unintended) was solely for the purpose of articulating what he considered the generally accepted wording to be.

This leads Lord Carnwath to conclude that the criteria in the “Non-Financial Factors Test” “are judgments to be made by the administering authority, not the Secretary of State”.Footnote ⁵⁷ Again, it was simply about identifying the locus of the power to formulate policies. To argue that his reasoning is anything more than an analysis of where power lay is doubtful. The formulation of the test was not in issue and the point was not argued. Such acceptance was simply another way of confirming that duties and obligations regulating the exercise of a power attach to the administering authorities, where the power to make the investment policy lay.

Local authorities, as administrators of the LGPS, must of course apply the law as it stands, so understanding how the limbs of the test should be applied in practice is critical. On the “member support” limb, Nigel Giffin K.C. considers that “a very high proportion of members would either positively support the reliance placed upon the non-financial factor in question, or at any rate have no objection to it”.Footnote ⁵⁸ This echoes the Law Commission’s view from June 2014 that “we do not think that there needs to be 100% agreement. If a majority are opposed to an investment while the rest remain neutral, we think that would be enough”.Footnote ⁵⁹

In something of a feedback loop, the Law Commission echoed earlier advice from Nigel Giffin Q.C. (as he then was) in his 2014 opinion, in which he considered that the concern should be “widely shared”Footnote ⁶⁰ by members. To add to the mix, Freshfields Bruckhaus Deringer uses the term “sufficient consensus”.Footnote ⁶¹ To the extent these different expressions permit wiggle room for investment committees, it must surely be limited. Prudence demands that the bar is recognised as being very high.

In his 2025 opinion, Nigel Giffin K.C. considered that: “[o]n normal Wednesbury and Tameside principles, it is for the administering authority to judge (subject to rationality and consideration on a legally correct basis) whether it has enough information to reach a decision about member support and what weight to give to particular items of information.”Footnote ⁶² The Law Commission considered that the courts would focus on “whether trustees […] sought an answer in a reasonable way”.Footnote ⁶³

Broadly, there are two approaches to judging member support: either the judgment of the fiduciary, without consultation of members, or external consultation of some sort, such as a survey or poll.Footnote ⁶⁴ Clearly the first lacks external validation and must be reserved for only the clearest cases. In 2005, Freshfields Bruckhaus Deringer put it this way:

It can be reasonably observed that the spread of opinions on defence stocks is not only wide but widening. With the rise of ESG policies in recent years, defence stocks have been one of several sectors feeling bruised. They have a recent history of being actions boudées for many investment managers. However, the current unstable geopolitical climate has given pause for thought. It has been widely reported that such exclusions are being actively reappraised by the investment management industry.Footnote ⁶⁶

This is not only for financial reasons (e.g. the Goldman EU defence basket has consistently outperformed the STOXX Europe 600 since 2022) but for non-financial reasons. The geopolitical situation and the heightened risk of war in Europe have stress-tested this stalwart of ESG policies, exposing how they have failed to differentiate between a range of situations. At one end of the spectrum, there are those who still wish to exclude defence stocks on ESG grounds and, at the other end, there are those who are content to include them. In that bell curve is a very broad middle ground, encompassing numerous shades of grey, including distinctions made based on types of weapons, uses of weapons, end users and manufacturers and degree of supply chain linkage.

A general divestment and exclusion policy targeting defence stocks is therefore highly controversial, as encapsulated in the minutes of the Avon Pension Fund Committee meeting of 28 March 2025: “The Committee needs to decide if Option A [general aerospace and defence exclusion] is merited in order to convey important points of principle, set against points outlined elsewhere in this paper, e.g. incremental costs, armaments required for UK defence, local employment, etc.”Footnote ⁶⁷ Short of, perhaps, certain weapons that breach established norms (although that list is likely getting shorter following recent threats by Russia to use nuclear weapons), the sector simply does not lend itself to consensus. This is particularly the case when the membership base is as large as that of the LGPS. When set against the Israel-Hamas War, the topic is no less controversial. If anything, that only adds another layer of controversy. The conclusion must be that if ever there was a case in which a fiduciary could reasonably form an internal view that there is member support for a general divestment and exclusion policy, it is not on defence stocks. The public discourse only confirms that “defensive” is not universally considered to be “offensive”, in the sense used by Freshfields.

For this reason, campaigns are afoot with the objective of creating the impression for LGPS investment committees that there exists broad member support for divestment and exclusion of stocks of companies supplying the IDF. These have included the provision of pamphlets and online information to LGPS members, together with pro forma letters to be signed and sent to investment committees in support of divestment and exclusion. Such a strategy is as old as the hills. Cassius planned to manipulate Brutus by throwing several forged letters from “the public” through his window, each designed to encourage Brutus to assassinate Caesar. In the belief that the citizens of Rome were expressing their desires in this way, Shakespeare’s Brutus resolves to “speak, strike, redress”.Footnote ⁶⁸

Here, the letters may not be forgeries but are no less in doubt. In one example, UNISON, the UK’s largest union, attached pro forma letters to an information booklet aimed at those of its members also invested in LGPS pensions. The booklet was entitled: “Palestine: Is your Pension Fund Investing in the Occupation?”Footnote ⁶⁹ In circumstances where letters are the direct consequence of that document, it behoves administering authorities to probe whether the union has simply used members as vectors for the union’s own views.

An administering authority must act in good faith and exercise the care, skill and diligence a prudent person would exercise. To qualitatively assess the value to be placed on the resultant letters, an administering authority need look no further than the title page. The Principles for Responsible Investment (“PRI”), the world’s leading proponent of responsible investment, publishes standards and guides for best practice. On the issue of asking questions designed to exact preferences from investors, it recommends, quite categorically, that fiduciariesFootnote ⁷⁰ should “avoid questions that begin with a statement indicating a pre-existing position: this can bias the beneficiary’s response”.Footnote ⁷¹ Applying the PRI test, there must be serious doubts as to whether the letters truly represent views held by members.

For that class of cases where the decision maker is not entitled to reach an internal view on member support, as is most likely here, polls or surveys have been considered by some to be a reasonable method to gauge member support.Footnote ⁷² The survey design is critical if the administering authority is to discharge its duties. It must not act negligently in designing it but must design it on usual Wednesbury and Tameside principles, acting rationally. It must also do its “best to exercise fair and impartial judgment”Footnote ⁷³ in designing it. Thus, for example, a select group surveyed may not be representative of investors generally. In that case, it would render any determination of member support unsound.

Nigel Giffin K.C. considered that “the views of trade unions or other representatives of employee or member opinion about what the members think may well be relevant”.Footnote ⁷⁴ There is always a risk that by bypassing actual members of the scheme and treating unions as speaking for them, a well-known democratic deficit is relied upon. The UNISON booklet, for example, also includes pre-drafted motions for union branches to pass in support of LGPS divestment. The significance of such a motion is that it creates the impression of member support even though a 51 per cent. vote (of that proportion of members who turn up to a branch meeting) would not meet Nigel Giffin K.C.’s “high proportion” test. In such circumstances, a survey looking only as far as unions incorrectly and unreasonably assumes underlying broad member support.

In addition, when a pro-BDS investment committee of an administering authority decides to consult a pro-BDS union in lieu of actual LGPS members, there is an obvious concern that the survey is nothing more than an echo chamber. The results would be open to challenge on the grounds of confirmation bias. Nigel Giffin K.C. suggests a prophylactic approach: “[I]t would probably make sense to remind the consultees that what is really being looked for is their knowledge or judgment of what members (including pensioner and deferred, as well as active members) would be likely to support, rather than the body’s own policy on fossil fuels, or boycotts against a particular state, or whatever the issue might be.”Footnote ⁷⁵

This may be wishful thinking. Many unions are active in promoting BDS, if not formally affiliated with the PSC. It has been convincingly argued that: “Most [union] members [lack] the knowledge or motivation to engage actively in the democratic processes of policy-making; officials [have] the skills and the personal interests to dominate the decision-making and electoral processes; creating a vicious circle […] The trend towards ‘mega-unions’ increases internal heterogeneity and the distance between leadership and rank-and-file.”Footnote ⁷⁶

Many members, of course, remain silent, more concerned with the challenges of daily life while their unions or LGPS pensions committees seek relevance in the international arena. The Law Commission’s view is that where a majority of members are opposed to an investment while the rest remain neutral, “we think that would be enough”.Footnote ⁷⁷ This has risk written all over it. The administering authority enthusiastically using this as a means of supplementing a small majority skates on thin ice. Nigel Giffin K.C. has attempted to steer administering authorities away from the edge of the pond, but only slightly: “Although I suggest here that it should not matter that a proportion of members would be simply indifferent to the investment policy in question, I think that there would need to be at any rate a substantial groundswell of positive support for it.”Footnote ⁷⁸

There are various reasons why even this approach is fraught with difficulty for the local government lawyer. Apart from the fact that it is not clear what “substantial groundswell” means, the effect of such a tempered approach is still to allow in the residual “indifferent” members to make up the numbers for the “high proportion” bar. Gauging the views of members must be a qualitative, as well as quantitative, assessment. Silence is not the same as indifference or neutrality. In the context of an LGPS scheme with tens of thousands of members, silence is more likely to reflect a rational belief amongst members that their stakes are so small that their views are not worth expressing. To fail to make this distinction shows a lack of skill and care on the part of the administering authority. The risk of a breach of duty is compounded by the lack of disclosure to members that no-votes could be treated as supporting votes.

The “financial detriment” limb is no closer to offering certainty to the market than the “member support” limb. Proceeding on the basis of Lord Carnwath’s approval is further complicated by His Lordship’s reformulation of the phrase from “risk of significant financial detriment” to “significant risk of financial detriment”.Footnote ⁷⁹ Nigel Giffin K.C. appears to regard the two formulations as intended to mean the same thing.Footnote ⁸⁰ It is difficult to make that leap. Linguistically, there is a difference in degree. A significant risk is not necessarily the same as a risk, because the former is something more than just a risk. Significant financial detriment is not necessarily the same as financial detriment because, again, it is something more than financial detriment. Despite the decision in R. (Palestine Solidarity Campaign) v Secretary of State being handed down by the UK’s highest court, it is reasonable to conclude that the financial detriment test itself is not settled.

It is striking that no mention is made by Nigel Giffin K.C. in his 2025 opinion of Michael Green J.’s comments on this point in his decision in Butler-Sloss v The Charity Commission. Footnote ⁸¹ Although a case involving charitable trusts, rather than pension funds, the judge’s comments as to the dangers of treating the test as being cast in stone are illuminating:

While the apparent difference in degree between “significant financial detriment” and “financial detriment” has been noted,Footnote ⁸³ it has not been judicially corrected or subsequently considered. Attempts to reconcile the two phrases by suggesting they were intended to mean the same thing offer little in the way of guidance in the absence of a view as to what that thing is.

Administering authorities bent on adopting a particular policy based on non-financial factors are incentivised to interpret the “financial detriment” and “member support” figures as favourably as possible. Put simply, their interests are served by a low number representing financial detriment and a high number representing member support for their proposed policy. In proposing a divestment and exclusion policy based on non-financial factors, an administering authority therefore automatically places itself in a position where its interest in producingFootnote ⁸⁴ self-serving numbers potentially conflicts with its duties. These duties include the duty to act in good faith and the duty not to act for its own benefit without the informed consent of its principal.Footnote ⁸⁵

The lack of certainty creates space for a range of interpretations of data. The scope for a self-serving interpretation of the data is also inadvertently encouraged by the Law Commission’s “seesaw” approach, where compelling values in one set can create tolerance in the other set, where the values are relatively weak:

The final scenario described by the Law Commission is the most likely here. Despite the Law Commission’s uncertainty on that, having allowed the genie out by introducing the idea that data relating to one limb can move the dial on the other, the imagination of local government lawyers has been captured. It is no wonder that administering authorities are at pains to show their financial detriment analyses. Like the diligent high school mathematics student, they believe extra marks are available if they show their workings.

C. Attaining and Exercising the Power

The scope of a power, as a fiduciary power, is not only determined by the terms of that power, but also how it is attained and how it is used. In the case of BDS policies, as with other policies based on non-financial factors, the power is not vested but is contingent upon meeting, inter alia, the high bar of the “Non-Financial Factors Test”. The administering authority which, for example, proposes a general aerospace and defence (“A&D”) policy to members, after shelving a BDS policy targeting defence stocks linked to Israel, may be acting in good faith or not. The change might reflect a legitimate concern over defence stocks generally and therefore a genuine change in policy or it might be to dress the BDS wolf up in sheep’s clothing. This might to be in order to attract stronger member support for the purposes of the test on the assumption that even defence, a perennially controversial sector, is seen as less controversial than a naked BDS policy. It could also be an attempt to improve the fact pattern should there be a challenge under the Public Sector Equality Duty.Footnote ⁸⁷ These are difficult questions. Each case will be evidence dependent. Similarly, where an administering authority uses unions as proxies for member support, this might be in good faith or could be a cynical ploy to overcome a likely lack of support if members were surveyed directly. Again, the evidence will be critical in that determination.

The distinction between acting in good faith or not in the preliminary steps prior to acquiring the power of divestment is important. It is trite law that a fiduciary must act in good faith.Footnote ⁸⁸ Where it fails to act in good faith, the resulting power, in the form of an adopted policy, will be tainted. Its adoption is likely to be adjudged void ab initio because “good faith goes to the scope of a power”.Footnote ⁸⁹

Related to this, but usually occurring after the adoption of the policy, is the purpose for which it is exercised. Even where an A&D or any other ESG policy is intra vires, a fiduciary cannot in equity exercise the power if its purpose is improper.Footnote ⁹⁰ Thus, where such an A&D policy is adopted and then used for the purpose of implementing the fiduciary’s own BDS agenda which, if that had been apparent, would not have been supported by a sufficient number of members, a court might consider it to be in breach of the proper purpose rule. In the Victorian case of Duke of Portland v Topham,Footnote ⁹¹ Lord Westbury considered that exercise of the power must be:

If the “bye object”, or purpose, in exercising the power under an A&D policy is to engage in BDS under the guise of a more general policy, a court might consider the power to have been exercised for improper purposes. In such a case, a court could treat the ostensible exercise of the power as void.Footnote ⁹³

A different approach to the re-constitution of a BDS policy as an A&D policy is to consider it as now applying to two sub-portfolios: the first comprising A&D stocks linked to Israel, the second to “other” A&D stocks. If the preference of the hypothetical LGPS administering authority is to divest of and exclude only stocks in the first category, and that stocks in the second are simply tag-along stocks for the purpose of allowing the BDS policy to be less focused on the State of Israel, those stocks are, in effect, collateral damage. In those circumstances, the question is not whether sales of stocks in the second category are sham transactions, because the answer is clear. They are real sales in exchange for cash. The question is instead whether expansion of the original BDS policy to include “other” stocks (and thereby relabel the policy as an A&D policy), and their subsequent sale, can be said to be decisions taken for a proper purpose.

The question arises, fairly and squarely, in circumstances where the administering authority’s interest in selling stocks in the first category is not because they are A&D stocks per se, but because they are stocks linked to Israel. Similarly, its interest in selling the “other” stocks in the second category is not because they are A&D stocks but because they are a price worth paying for weaponising their agenda. They serve to re-frame the BDS-motivated disposal of stocks in the first as being A&D disposals.

A court would properly take notice of the surrounding circumstances. These include the administering authority’s starting preference for a BDS policy and its switch to an A&D divestment and exclusion policy as a means of enveloping or subsuming a naked BDS strategy. The minutes of the Avon Pension Fund Committee meeting of 28 March 2025 record the Head of Pensions as saying that:

Such a policy was not adopted and so no view is expressed but, if it had been, this comment would likely have been relevant to the court’s analysis of the final policy. In Howard Smith Ltd. v Ampol Petroleum Ltd.,Footnote ⁹⁵ the Privy Council cited with approval the judgment of Viscount Finlay in Hindle v John Cotton Ltd.:Footnote ⁹⁶

If, alternatively, the A&D exclusion policy is both designed to envelop (and therefore de-emphasise or downplay) an anti-Israel BDS policy but also to more generally reduce risk of portfolio exposure to conflict zones, it has a dual purpose. Where there are multiple purposes, some proper and others not, should a court set aside the decision? The question has arisen both in a public law context and in the context of directors, with which there are some similarities to an LGPS administering authority.Footnote ⁹⁸

In R. (on the Application of FDA) v Secretary of State for Work and Pensions,Footnote ⁹⁹ a case in which Nigel Giffin K.C. also appeared, Lord Neuberger M.R. (as he then was) said that “where a decision-maker has taken a legally irrelevant factor into account when making his decision, the normal principle is that the decision is liable to be held to be invalid unless the factor played no significant part in the decision-making exercise”.Footnote ¹⁰⁰

If the decision maker’s own interest is in pursuing a BDS policy in circumstances where there has been no determination of member support for it per se, it is a legally irrelevant factor. An administering authority – as a fiduciary – cannot impose views of its own which would not be widely shared by members.Footnote ¹⁰¹ They must put the scheme and the interests of the members (and employers) first, to the exclusion of their own interests. Moreover, in circumstances where the A&D policy has its genesis in an intended BDS policy, it might be said that the pursuit of a BDS policy played a “significant part”.

Eclairs Group. v J.K.X. Oil & Gas, which arose in a company law context, provides an additional perspective on when courts will invalidate decisions taken for an improper purpose. Lord Sumption explained that “save perhaps in cases where the decision was influenced by dishonest considerations or by the personal interest of the decision-maker, the directors’ decision will be set aside only if the primary or dominant purpose for which it was made was improper”.Footnote ¹⁰² The question is whether the dominant purpose of the A&D policy is to reduce portfolio risk to conflict zones or to target Israel. Lord Sumption’s response, obiter, to the question of how to determine the “primary” or “dominant” purpose was to adopt a “but for” approach and “ask whether the decision would have been made if the directors had not been moved by it”.Footnote ¹⁰³ In the absence of argument from leading counsel on the point, the majority expressly withheld approval of that approach. It nevertheless provides an insight into how the rule might evolve.

If the genesis for an A&D policy is the desire to pursue BDS and the purpose of including “other” stocks is window-dressing and not for the purpose of reducing risk to conflict zones, both the weightiest purpose and the causative purpose might be understood as improper. The effect would be that the policy is at risk of being struck down by a court of equity.

The “improper purpose” rule is not limited to situations where a policy is adopted. Even where there is no adoption of a policy based on non-financial factors of any kind, the power to sell a stock in the portfolio is subject to the oversight of equity. If, for example, the fiduciary (through its investment manager) sells stock and describes it as a decision made on financial grounds, that description is open to being recharacterised. If the internal communications, trading patterns or previous course of dealing suggest that the sale was in fact made for non-financial purposes, a court will not hesitate to recharacterise the disposition as being ultra vires because it can properly take notice of the surrounding circumstances, per Hindle v John Cotton.Footnote ¹⁰⁴

A. The “Non-Financial Factors Test”

In its 2014 report, the Law Commission considered that “member support” need not meet the gold standard of unanimity applicable to trustees needing beneficiary consent. This was based on the view that a quasi-trustee operating within a statutory framework is different from a traditional trustee operating exclusively under the gaze of trust law: “courts have expressed concerns about lifting wholesale rules that have been developed in the context of traditional trusts and applying them to trusts of a different kind.”Footnote ¹⁰⁵ This may be a convenient response to the reality that an LGPS fund with tens of thousands of members does not lend itself to the remotest possibility of unanimity, but it owes little to principle.

At best, such an approach can point to the distinction made by Lord Browne-Wilkinson in Target Holdings Ltd. v Redferns,Footnote ¹⁰⁶ a case in which there had been an unauthorised application of trust monies, but where no harm was ultimately done as a result of that breach. His Lordship distinguished between a bare trust arising in a commercial context and a traditional trust settled in a family context. The logic of drawing such a distinction has been described as “disquieting”.Footnote ¹⁰⁷ So too here: there may not be a trust, but the administering authorities control assets which represent the money of employee members.Footnote ¹⁰⁸ When it comes up squarely for consideration by the courts, the current formulation of “member support”, and how it interacts with the “financial detriment” limb, may well attract a more rigorous analysis than occurred in R. (Palestine Solidarity Campaign) v Secretary of State.

With use of the qualifier “significant”, the “financial detriment” limb similarly shows signs of a distinction, where mere financial detriment is considered to be tolerable. Such an approach invites the question: where is that line drawn? It is tempting for local government lawyers to assume that so long as defined benefits are paid and future liabilities covered, it should not matter if the administering authority plays geopolitics with assets in the fund. That reasoning is flawed. Such an approach owes more to actuaries than equity lawyers. Sir Peter Millett, as he then was, explained the relevant principle:

Put another way, the duty is not confined to meeting liabilities but extends to the authorised application of assets; the remedy is not about compensating for loss but about restoring the fund. This leaves little room for tolerating financial detriment.

Indeed, in the absence of clarity, the financial detriment limb is ripe for interpretation by the courts. In this context at least, there is a strong argument that it means any financial detriment other than that which is de minimis. The ordinary meaning of “significant” is something that is not nil, minor, insignificant or trivial. Logically, therefore, any financial detriment that is not de minimis is significant.

Moreover, the determination of whether the financial detriment is significant is often assumed to be a measure of financial detriment relative to the size and performance of the portfolio. This may have something to do with phrase “to the fund” appended by the Law Commission to the Vice-Chancellor’s “significant financial detriment” test in the Bishop of Oxford case.Footnote ¹¹⁰ As a “funded” scheme, the LGPS aims to achieve solvency, that is, scheme administrators are required to hold assets to cover the cost of the defined benefits (liabilities), rather than anything in excess of that. This is perceived as allowing for more leeway when it comes to assessing significant financial detriment, because it is measured against that metric.

However, the test of whether financial detriment is not de minimis, as a convenient means of determining whether financial detriment is instead significant, arguably looks at financial detriment in absolute terms. At the very least, in the absence of judicial pronouncements on the question, the possibility that the test is absolute cannot be discounted. After all, it is well established that the way the trustee (or quasi-trustee) reaches a decision is critical, per Martin v Edinburgh D.C.Footnote ¹¹¹ There is also a practical reason why an administering authority should adopt a more conservative approach in the absence of legal certainty. Where an administering authority’s breach of fiduciary duty results in unauthorised divestments and exclusions, equity acts in personam. In short, the fiduciary has a risk of personal liability.Footnote ¹¹²

B. Equity Acts In Personam

In the hypothetical cases discussed, putative policies are susceptible to being set aside in equity. It might be considered that dispositions made under them are less likely to be set aside on the assumption that the purchasers may well be bona fide purchasers for value without notice (of the equity). However, the assumption that those darlings of equity are able to claim good title to stock sold to them in the name of BDS may in fact be less available than might otherwise be thought. This is because the policies, their genesis and the accompanying analyses are typically published online. Notice need not be actual but can be implied or constructive.Footnote ¹¹³ The precise mechanics of the sales will be relevant to that analysis.

None of that matters when it is recalled that equity acts in personam. This requires administering authorities to adopt a prudent approach to the “Non-Financial Factors Test”. While the defined benefits of individual members might be still covered, such that they suffer no damage in their pockets, the stocks disposed of, as well as those passed over, are in consequence of the putative policy. In contrast to the common law approach, the concern is not about damage to individual members but the conduct of the administering authority as fiduciary. The term “equitable compensation” hardly encapsulates equity’s underlying objective. It is not compensatory in the common law damages sense, but restorative. This is because the defaulting fiduciary’s liability is strict. A claim for equitable compensation against a fiduciary is therefore not to make whole a loss suffered by a member but to be restitutionary or restorative to the fund.Footnote ¹¹⁴

On the basis that an LGPS fund’s investment portfolio is not static, the obvious question is what would have been the fund’s position but for the breach of fiduciary duty?Footnote ¹¹⁵ It is open to the administering authority to show that the investment portfolio would have suffered that loss had there been no breach of duty. However, in the case of a long-term holder of assets, as the LGPS is, it is highly likely that stocks divested would have continued to have been held. Divestments therefore likely include a loss of capital appreciation as a result of premature realisation,Footnote ¹¹⁶ a loss of dividend cash flows and loss of securities lending fees. For stocks excluded, a list of blacklisted stocks provides prima facie evidence. The losses connected to exclusions of stocks include those that deprive the scheme of all the capital appreciation, dividend and securities lending income on those shares which the scheme would otherwise have received. This is not to mention the overall legal costs involved or the administration costs in ring-fencing a portfolio from exposure to a pool with incompatible policies.Footnote ¹¹⁷

In such circumstances, an accounting – a preliminary step to an award of equitable compensation – would enable the scheme to falsify, namely disallow, the losses connected to divestment and surcharge the losses connected to exclusions. Allocating the effects of market risk to the point where the shares would have been sold or, if they would have continued to have been held, to the trial date, is the starting point. If they appreciate, the change is chargeable to the defaulting fiduciary. It reflects the replacement cost to the beneficiary after taking into account sale proceeds. It is not a perfect outcome,Footnote ¹¹⁸ but it is in keeping with the restorative objective of equity. It is for this reason that on the question of liability Sir Peter Millett once essayed: “There is no question of ‘stopping the clock’.”Footnote ¹¹⁹

Where, however, the divestment or exclusion is followed by intermeddling by the defaulting fiduciary in the value of the shares, the court will adjust the valuation point. Rather than letting the clock run where that misconduct causes a fall in value, the court will, in those circumstances, turn it back to their pre-intervention value, per Mitchell v Al Jaber.Footnote ¹²⁰ The case of the LGPS administering authority using its platform to “talk down” the shares having improperly divested or excluded them, perhaps by encouraging others to follow suit, is surely only a matter of time.

Whilst a member may see no impact to their defined benefits on the adoption and implementation of a divestment and exclusion policy in breach of the administering authority’s duties or powers, it does not mean to say that The Pensions Regulator would look the other way. Section 16(1) of the Pensions Act 2004 provides that:

The power is concerned with the assets of the scheme, rather than damage to the members. The rules on equitable compensation would naturally inform the court’s calculation.

A person is “involved”, and therefore liable, if they are knowingly concerned in the misuse or misappropriation of the assets. External investment managers utilised by an administering authority bring a BDS policy to life. Market execution capability, thereby turning a written divestment policy into a real sale, can only mean that they are “concerned in” the breach. On the question of knowledge, the LGPS is unusual in the sense that unlike most other asset owners who simply issue an instruction, in the case of administering authorities, the history of the policy is typically online and that history may contain red flags. In the case of a BDS policy, it will prompt the obvious questions: Was member support achieved, particularly on such a controversial topic? If so, how? How was “no significant financial detriment” determined considering the stocks comprise one of the hottest sectors in the market?Footnote ¹²¹

A separate question concerns whether the value restored ought to recognise value from any secondary transaction. It is, of course, a truism that disposals are for value, such that cash received can be deployed into other investments and that cash not used to buy an excluded stock can be deployed elsewhere. The question, then, is whether the administering authority can offset losses by any gains from these second order transactions. The scope for the administering authority to argue that the fund’s loss should be netted down to account for gains is limited in equity.

In Bartlett v Barclays Bank Trust Co. Ltd.,Footnote ¹²² Brightwell J. (as he then was) allowed set-off in equity on an exceptional basis. There had been two transactions. The first made a small profit, part of which was invested into a second transaction, which made a large loss. The transactions were connected in the sense that they were born from the same investment policy.

The decision was, for many years, interpreted as a “same transaction” exception to the general rule. However, in Stevens v Hotel Portfolio II UK, the Supreme Court considered the essence of the exception:

The decision in Bartlett v Barclays Bank was therefore explained on the basis that any other outcome would have been inequitable, namely contrary to the principles of equity.Footnote ¹²⁴ Adopting this reasoning, it is likely that the approach of the courts to the scenarios discussed here would be very different. This is because in Bartlett v Barclays Bank the conduct of the fiduciary was characterised as nonfeasance, rather than misfeasance.Footnote ¹²⁵ The Bank, qua shareholder, was simply negligent in failing to stop the transactions from proceeding.

The examples explored in this article present very differently. The transactions are not linked, directly or indirectly, to an investment policy intended to make money. They are linked to a divestment policy. The difference is not semantics. There is no intention whatsoever to make money for the LGPS fund. Nor is there any calculation to use the second order transactions to ameliorate loss, which was the case in the Victorian case of Fletcher v Green.Footnote ¹²⁶ Where the breach of fiduciary duty involves an absence of good faith, the conduct is closer to misfeasance than nonfeasance.

On the question of whether set-off would be “inequitable”, two maxims of equity are engaged. First, where there is an absence of good faith, the administering authority cannot be said to come with clean hands in seeking set-off. Second, equity will not allow a wrongdoer to profit by a wrong. While this is not a case where the administering authority makes a profit in a financial sense, any other outcome would enable it to profit politically by weaponising its political agenda, paid for by means of set-off in equity. Lord Briggs’s use of Brontë-esque imagery to describe the exercise of the court’s equitable discretion as like “tempering the wind to the shorn lamb” is apt.Footnote ¹²⁷ It is difficult to conceive of an LGPS fiduciary, intentionally sailing close to the wind, being able to call for the wind to then be tamed. The result is that a court would likely order payment of the loss, calculated on a gross basis.

With respect to equitable compensation, the courts will, at best, overlook losses which are de minimis. Cherney v Neuman Footnote ¹²⁸ involved, inter alia, a claim for breach of trust against a firm of solicitors for an unauthorised payment from a client account. Having concluded that a large amount was paid out of a client account in breach of trust, the judge, Henderson J. (as he then was), quantified the net loss to the client. As the amount transferred out had been matched by a simultaneous (or virtually simultaneous) payment in, the net financial impact to the client consisted of bank charges of £7. His Lordship considered this to be trivial and applied the maxim de minimis non curat lex (more commonly known as the de minimis principle). He therefore declined to enquire as to what defences might be available to the defendant and even whether the loss of £7 remained uncompensated.

In Glenn v Watson,Footnote ¹²⁹ the judge, Nugee J. (as he then was), took a similar approach to a claim involving, inter alia, an unauthorised borrowing of £7,045. His Lordship considered that this was a breach of trust but duly noted that restoration took place after just four days. While restoration should have included four days’ worth of accrued interest on that relatively small amount, the judge took the view that the interest was de minimis. In the circumstances, the judge considered that it “is not obvious that even the strict rules of equity require any more”.Footnote ¹³⁰ Faced with the risk of paying equitable compensation, the prudent administering authority will consider whether the potential outcome could be anything other than a de minimis loss.