The government has confirmed that it will maintain pension funds’ exemption from the clearing obligation for the longer-term, after industry feedback revealed "clear evidence" that removing the exemption would reduce schemes' ability to invest in productive assets.

In the UK, pension schemes are currently exempt from the obligation to clear certain derivative contracts, after the government extended the exemption until 18 June 2025 last year.

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

In line with this, HM Treasury previously launched a call for evidence on pension funds’ exemption from the clearing obligation, seeking views from industry stakeholders on pension funds’ exemption from the clearing obligation to inform this governmental review.

In its response to the call for evidence, the government revealed that most respondents thought that mandatory clearing for pension funds would place more pressure on their liquidity management, particularly during market stress.

In particular, respondents warned that the need to post cash as variation margin would require them to have cash readily available, otherwise they would have to raise cash quickly to meet increased variation margin calls.

In addition to this, it found that the majority of pension schemes and asset managers that use derivatives that would otherwise be subject to the clearing obligation make use of the exemption.

Given this, almost all respondents supported the exemption being maintained, and most advocated for the exemption to be made permanent.

Indeed, out of the 26 responses received to the call for evidence, 17 advocated for a permanent exemption to be put in place, while four supported a continuation of the exemption without necessarily advocating for a permanent exemption.

Just three were either neutral or did not give a view, while two advocated for the exemption to expire.

The main reasons in support of a permanent exemption were the lack of progress in addressing the difficulties pension schemes face in meeting central counterparty (CCP) cash margin requirements, the increase in cash holdings and reduced investment returns that would likely result from an expiry of the exemption and the increased liquidity pressures that would be placed on schemes.

Several respondents also argued that a permanent exemption would provide long-term certainty on this issue.

Having analysed this feedback, and worked closely with the UK regulatory authorities on the issue, the government confirmed that it has decided that the exemption should be maintained for the longer-term.

"Overall, the government concluded that there was clear evidence that removing the exemption would reduce pension schemes' ability to invest in productive assets, whilst the extent to which this would be of material benefit to financial stability was more difficult to evaluate," the response stated.

"On this basis, the government will now take forward secondary legislation to ensure that the exemption does not expire on 18 June 2025 as currently scheduled and to remove any further time limit on the exemption."

However, the government confirmed that it will keep this policy under review in coordination with the applicable UK regulatory authorities and, if there are changes to market dynamics or structure or wider government reforms that have a material impact on the value of mandatory central clearing for pension schemes, the government may reassess this issue.

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