The UK government has officially removed the clearing obligation for pension schemes by enacting the Pension Fund Clearing Obligation Exemption (Amendment) Regulations 2025. This new law permanently exempts pension schemes from clearing certain over-the-counter (OTC) derivative contracts through central counterparties (CCPs). By eliminating the previous expiry date of 18 June, the government ensures the exemption remains in place indefinitely.
The exemption for pension funds had been extended multiple times, with the most recent extension set to expire on 18 June. In anticipation of this deadline, HM Treasury conducted a review, including a call for evidence from November 2023 to January 2024, to assess the potential impacts of requiring pension funds to clear derivatives through CCPs.
The review concluded that enforcing the clearing obligation could reduce pension funds’ ability to invest in productive assets and generate returns, as it would necessitate increased cash holdings. Additionally, concerns were raised about potential liquidity pressures under stressed market conditions, which could pose financial stability risks. Given the lack of a widely accepted solution for pension funds to provide collateral without negatively impacting future pensioners’ benefits, the government determined that maintaining the exemption indefinitely was the most prudent course of action.
Implications
By removing the expiry date and the need for periodic extensions, the UK government aims to provide long-term regulatory certainty for pension funds. This permanent exemption allows these funds to continue their investment strategies without the operational complexities associated with CCP clearing requirements. While the government acknowledges the financial stability benefits of central clearing, it has prioritised the unique operational characteristics of pension funds and their role in providing retirement incomes. The authorities will continue to monitor market developments and may reassess the policy if significant changes occur in market dynamics or the broader regulatory environment.
CCPs
Following the 2008 financial crisis, the G20 mandated that standardised OTC derivatives be cleared through CCPs to enhance market stability. This mandate was implemented in the EU through the European Market Infrastructure Regulation (EMIR), which was retained in UK law post-Brexit.
However, pension funds have faced challenges in meeting CCPs’ margin requirements, particularly the need to provide variation margin in cash. Given that pension funds typically invest in long-term assets like gilts and corporate bonds, maintaining large cash reserves for margin purposes could adversely affect investment returns for pension holders. Consequently, since EMIR’s inception in 2012, pension funds have been temporarily exempted from the clearing obligation.
