HM Treasury has launched a call for evidence on pension funds’ exemption from the clearing obligation, to help inform the government’s long-term approach.

In the UK, pension funds are currently exempt from the obligation 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 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.

The call for evidence is therefore seeking views from industry stakeholders on pension funds’ exemption from the clearing obligation to inform this governmental review.

As pension funds do not usually hold large cash reserves, they can face particular challenges when clearing contracts through a central counterparty (CCP), which typically require ‘variation margin’, collateral which covers price movements on contracts, to be provided in cash.

This is particularly the case for defined benefit schemes which need to generate sufficient returns to provide their scheme members with guaranteed retirement income.

To address these concerns, the exemption from the clearing obligation was introduced in the 2012 via the European Market Infrastructure Regulation (EMIR), which meant that pension scheme arrangements, and firms established to compensate scheme members, were exempt from clearing derivatives contracts used to hedge risks which directly relate to their financial solvency.

The exemption was initially meant to be temporary, until a solution was found which would enable pension funds to provide cash collateral to CCPs without having an adverse effect on the retirement benefits of pensioners.

However, it has since been extended several times by EU authorities and then maintained (and extended again to June 2023) when EMIR was incorporated into UK law.

The call for evidence includes specific queries in relation to the autumn 2022 liability-driven investment (LDI) crisis, including queries as to whether the events of the LDI crisis would have been any different if the clearing exemption had not existed.

HM Treasury also included queries specifically on how pension funds and their asset managers would be impacted if the exemption were to expire in June 2025.

However, the Treasury clarified that these questions do not pre-empt the policy direction, but instead seek to understand the impact this outcome could have so that the decision is fully informed.

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