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

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

Pension schemes in the UK are currently 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 ahead of June 2025, and that this review would aim to consider and implement 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,” commented 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.

“The consequence of which could be for some schemes increased liability risk or a requirement to target lower returns, both of which could be negative for members and in particular sponsors who will see the volatility of contributions increased and/or the pound amount of contributions increased.”

The SPP stated that defined benefit 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,” the society added.

“Trustees currently have a choice as to whether to centrally clear or use bilateral agreements.”

The SPP argued that this choice was beneficial and allowed schemes to make their best choices for their own circumstances.

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

“Mandating clearing for all transactions would introduce significant costs and risks for pension schemes and financial stability as a whole with no clear benefits,” the SPP concluded.

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