The UK government has lost a Supreme Court case over its right to ban local authority pension funds from divesting or boycotting companies.

The UK Supreme Court ruled 3-2 in favour of the Palestine Solidarity Campaign (PSC) and Jacqueline Lewis, a member of the Local Government Pension Scheme (LGPS). The PSC first brought the case to court in 2017.

The campaign group argued that rules introduced in 2016 to limit the way funds within the £291bn LGPS system invested were introduced with the specific intention to stop divestment campaigns against Israeli and international companies operating in Palestine.

The High Court upheld the PSC’s complaint in 2017 but the government appealed successfully in the Court of Appeal in 2018. The PSC brought the case to the Supreme Court, which ruled in its favour late last month.

Law firm 11KBW – whose lawyers represented both the campaign group and the government – said in a summary document that the Supreme Court had deemed the government to have overreached in its attempt to introduce the rules.

“[A]lthough the guidance may have fallen within the literal wording of the Public Service Pensions Act 2013 and the regulations made under it, it was nonetheless made for a purpose falling outside those purposes for which the relevant powers could properly be exercised,” the law firm stated.

The Department for Communities and Local Government – now known as the Ministry of Housing, Communities & Local Government – introduced rules in 2016 to require LGPS schemes to publish a responsible investment policy. However, the rules also included requirements not to enact any divestment policy that ran counter to central government foreign or defence policy – it was this element that was the subject of the court case.

Supreme Court judge Lord Wilson said the government’s guidance had been made “for entirely extraneous reasons”. Fellow judge Lord Carnwath said it must respect local authorities as the effective trustees of the pension funds, meaning the government was “not entitled… to make authorities give effect to [its] own policies in preference to those which they themselves thought it right to adopt in fulfilment of their fiduciary duties”.

The LGPS Scheme Advisory Board welcomed the judgement in a statement issued this week.

“In seeking to restrict the outcome as well as the considerations taken account of by an LGPS administering authority when developing its responsible investment policy, the government has been judged to have overstepped its powers,” the board said.

“It is the board’s view that responsible investment policy decisions belong at the local level reflecting: the need to pay pensions both now and in the future; local democratic accountability and the views of scheme members; and that outcomes of policy developments should not be subject to restrictions based on unrelated matters.”

In a statement, the PSC said the victory should be a “shot across the bows” for the government. The campaign group claimed UK politicians were planning further measures against efforts to boycott or divest from companies operating in Palestine.

Lawyers had previously warned that, if successful in its appeal, the government could gain extensive control over LGPS assets, which exist to pay the pensions of local authority workers. This could affect efforts by several public sector schemes to employ responsible investment policies, as well as work by LGPS asset pooling companies to enact these policies.

The LGPS in England and Wales consists of 87 funds managing £291bn in assets on behalf of nearly 6m members.