Financial News

Pension schemes and the clearing obligation – A critical perspective

The recent calls by the Association of Consulting Actuaries (ACA) and the Society of Pension Professionals (SPP) to retain the exemption of UK pension schemes from clearing obligation resonate deeply with our philosophy of prudent financial management and risk avoidance.

The importance of the exemption

Currently, pension schemes are exempt from the obligations to clear certain derivative contracts, a relief extended until 18 June 2025.

This exemption supports the stability and health of pension schemes.

The ACA rightly points out that removing this exemption requires very careful consideration, given its potential impact on the operational and financial aspects of pension schemes.

Operational and financial implications

If the exemption were to expire, pension schemes would likely face operational burdens and increased costs which could lead to pension schemes needing to hold more instantly available cash.

The implications are significant: increased liability risk, the necessity to target lower returns, and heightened volatility in contributions.

These are real challenges that could affect the financial well-being of members and sponsors alike.

The health of defined benefit schemes

The SPP’s observation that defined benefit schemes are broadly in excellent health is noteworthy.

The use of derivatives to align assets and liabilities has been instrumental in this success.

These financial instruments allow schemes to manage risk prudently while allocating to return-seeking assets.

The current flexibility that trustees have in choosing between central clearing or bilateral agreements is a testament to the sophisticated risk management strategies employed by pension schemes.

The case for making the exemption permanent

Given these considerations, the argument for making the clearing exemption for pension schemes permanent is compelling.

Mandating clearing for all transactions would introduce unnecessary costs and risks, not only for pension schemes but for financial stability.

The absence of clear benefits from such a mandate further strengthens this position.

Looking ahead

As we approach the Government’s review of this exemption ahead of June 2025, we should maintain a dialogue that recognises the unique nature of pension schemes and their role in the broader financial ecosystem.

The decision should not merely be about regulatory compliance but about ensuring the continued health and stability of pension schemes.

We believe in making informed, strategic decisions that safeguard the interests of our clients.

The exemption from the clearing obligation is a necessary measure to protect the interests of pension scheme members and sponsors.

As we move forward, we will continue to advocate for policies that support the stability and growth of pension schemes, ensuring they continue to serve their members effectively and efficiently.

Whether you are a trustee, a sponsor, or an individual planning for retirement, our team of experienced professionals is here to guide you through the ever-changing pension regulation.

Contact us today to discuss how we can assist you in securing a stable and prosperous financial future.

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