Call for pension fund clearing exemption to be retained

Pension funds

Pension schemes in the UK are presently exempt from the obligations to clear certain derivative contracts after the government extended the exemption until 18 June 2025 earlier this year

The Association of Consulting Actuaries (ACA) and Society of Pension Professionals (SPP) have called for the exclusion of UK pension schemes from clearing to be maintained.

In response to the Treasury’s call for evidence on pension funds’ exclusion from the clearing obligation, the Association of Consulting Actuaries, which focused on derivatives used for liability hedging purposes only, said that it should not be permitted to expire and that “very careful consideration” would need to be made if the exemption was withdrawn.

Pension schemes in the UK are presently exempt from the obligations to clear certain derivative contracts after the government extended the exemption until 18 June 2025 earlier this year.

When making this extension, the government confirmed that it would conduct a review of the exemption prior to June 2025, and that this review would aim to consider and apply a longer-term policy approach that would not require further temporary extensions to be made.

If it was to expire then it is likely to create operational burdens and bottlenecks to implement and we believe on balance it will bring more costs than benefits, said ACA Investment Committee chair, Vanessa Hodge.

In particular, it is likely to lead on average to pension schemes needing to hold more instantly available cash, she said.

Hodge said: The consequence of which could be for some schemes heightened liability risk or a requirement to target lower returns, both of which could be negative for members and especially sponsors who will see the volatility of contributions increased and/or the pound amount of contributions increased.

The SPP stated that DB schemes in the UK were broadly in excellent health and the use of derivatives to increase the link between assets and liabilities had played a “significant role” in their progress.

The presence of these derivatives within portfolios allows schemes to prudently manage risk and to allocate to return-seeking assets, it said.

Trustees currently have a choice as to whether to centrally clear or use bilateral agreements, it added.

The SPP contended that this choice was beneficial and let schemes make their best choices for their own circumstances.

So, it believed the clearing exemption for pension schemes should be made permanent.

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