The UK Government has issued new guidance on the investment of Local Government Pension Scheme (LGPS) funds. The drafting of the guidance has been greatly improved from a draft circulated confidentially last December, which had been criticised by UK Lawyers for Israel (UKLFI) as ambiguous and self-contradictory.

Government guidance on preparing and maintaining an investment strategy statement plays an important role in the regulation of LGPS. Administering authorities (AAs) are required by regulations to prepare investment strategy statements in accordance with this guidance, and investment managers are required to manage the funds in accordance with these statements.

The previous guidance had stated

“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.”

That formulation was based on the Law Commission’s Report on Fiduciary Duties of Investment Intermediaries (particularly para 6.34) and was endorsed in the UK Supreme Court in R (Palestine Solidarity Campaign) v Secretary of State.

The Pension Schemes Act 2026 requires consolidation of the management of LGPSs (in itself, an eminently reasonable policy) and this necessitated some adjustment of the guidance on investment strategy statements.

However, draft new guidance circulated in December 2025 contained substantial additional changes that would have undermined the restrictions on taking into account non-financial considerations.

In particular, the draft would have allowed and encouraged divestments and exclusions targeting Israel even where this involved a significant risk of financial detriment and/or was not supported by scheme members generally, contrary to the conditions specified by the Law Commission.

The draft was circulated to AAs last December and published by Islington Council as one of the annexes to papers for its Pension Committee’s meeting in March this year, where it was spotted by UKLFI staff.

Key paragraphs of the draft said:

“5.5 As set out in Chapter 2, in setting their investment strategy AAs should consider all factors, including ESG factors, that are financially material to performance of their investments and the impact of their investments.  AAs may also take non-financial considerations into account provided that doing so would not involve risk of significant financial detriment to the fund, and where they have good reason to think that scheme members would support their decision.

5.6 In setting out their approach to responsible investment, AAs may include a preference for investments which have a positive impact as well as an acceptable financial return. AAs may also choose to indicate that a lower return on a limited proportion of their portfolio is acceptable in order to achieve ESG-related goals.

5.7 AAs should take account of the views of employer and member representatives on their approach to responsible investment, including through their local pension board. AAs should exercise caution against undue influence from campaign groups whose positions may not reflect the views of members or align with the fund’s fiduciary responsibilities. The primary obligation remains to act in the best financial interests of the fund, ensuring that any consideration of member sentiment is balanced with long-term risk management and regulatory compliance.

5.8 As set out in Chapter 3, the role of the AA is to set the ISS, including the high-level objectives, but not to specify the individual holdings, managers or geographic zones of investment. The RI approach should not set exclusions for investments in individual countries, investment styles or companies.”

UKLFI wrote to Ministers at the Ministry of Housing, Communities and Local Government (MHCLG) expressing concerns that paragraph 5.6 of the draft, in particular, would allow AAs to prefer investments that did not comply with the two conditions identified by the Law Commission.

Paragraph 5.7 also incorrectly implied that AAs should take account views of employer and member representatives (usually union representatives) as opposed to views of employers and of members as a whole.

Referring to research on the effect of divestment of top targets of anti-Israel campaigns on a diversified US equity fund over the course 10 years, UKLFI warned that divestments permitted by the draft guidance could diminish the LGPS funds by £200 billion after 10 years.

The problems of the draft came to the attention of Baroness Altmann, who asked written questions and then an oral question in the House of Lords. The Government Minister, Baroness Taylor, agreed to meet Baroness Altmann to discuss the concerns.

Answering the questions, Government Ministers insisted that they intended to retain the Law Commission ‘s tests in the guidance.

The key paragraphs of the guidance as adopted now read:

“5.5. The administering authority’s primary obligation is to act in the best financial interests of the fund. As set out in Chapter 2, in setting their investment strategy administering authorities should consider all factors, including ESG factors, that are financially material to the performance of their investments. Administering authorities may also take non-financial considerations into account provided that doing so would not involve risk of significant financial detriment to the fund and that they have good reason to think that scheme members would support their decision.

5.6. In setting out their approach to responsible investment, administering authorities may include a preference for investments which have a positive non-financial impact as well as an acceptable financial return. Authorities may indicate that a different approach to return to achieve a positive non-financial impact is acceptable provided that this meets the 2 criteria for consideration of non-financial factors as outlined in paragraph 5.5 above.

5.7. Administering authorities should take account of the views of employers and members on their approach to responsible investment, including through their local pension board and the stated approach in the Governance Strategy. Where member and employer engagement is done via representative groups, administering authorities should consider whether those groups are able to adequately reflect the views of the scheme membership or employers as a whole, and should remind consultees that they are being asked for their understanding of what member or employer views are, not the views of their own organisation.

5.8. Administering authorities should exercise caution against undue influence from campaign groups whose positions may not reflect the views of members or align with the fund’s fiduciary responsibilities. Administering authorities should ensure that any consideration of member sentiment takes place with due account given to long-term risk management and regulatory compliance.

5.9. As set out in Chapter 3, the role of the administering authority is to set the ISS, including the high-level objectives, but not to specify the individual holdings, managers or geographic zones of investment. The responsible investment approach should not set exclusions for investments in individual countries, investment styles or companies.”

Jonathan Turner, UKLFI’s Chief Executive, said: “We are very pleased and relieved that the guidance as now adopted retains and emphasises the existing criteria which must be met for non-financial factors to be taken into account. If the draft guidance had been adopted, this could have been damaging to both Israel and Britain”.