UK: Pension fund clearing exemption extended indefinitely

Why should I read this?

Following HMT’s January 2025 Pension fund clearing exemption - Call for evidence response, the UK Government has laid down draft regulations to indefinitely extend the exemption to the clearing obligation applicable to pension schemes under UK EMIR. Accordingly, pension scheme trustees and their investment managers will not need to prepare for cliff-edge compliance with the obligation to clear over-the-counter (OTC) derivatives contracts through a central counterparty (CCP).

While the UK Government has stated that it will keep the policy under review in coordination with UK regulatory authorities, for the long term, this exemption will be maintained. This follows HMT’s 2023 consultation on the future of the pension scheme clearing exemption, in which it found “clear evidence” of negative side effects flowing from the removal of the exemption.

The implications of the indefinite extension of the exception

Pension scheme trustees (and their investment managers) no longer need to consider and prepare for a cliff-edge scenario in which they need to put in place the necessary legal agreements to be able to clear their OTC derivatives transactions through CCPs.

This exemption had been scheduled to expire on 18 June 2025. The draft regulations remove the expiry date and any further time limits.

Pension scheme trustees and their investment managers’ responses to the consultation raised difficulties that would have arisen if the exemption had been allowed to lapse, including pension schemes having to increase their cash holdings to meet CCP cash collateral requirements, which would have led to a consequent reduction in their ability to invest in the higher growth assets the UK Government is urging pension funds to make.

What else do I need to know about the clearing exemption changes?

The consultation found that the majority of pension schemes and asset managers that use derivatives who would otherwise be subject to the clearing obligation, currently make use of the exemption. The permanent nature of this move should provide the market with long-term certainty on this issue.

This decision also means that UK pension schemes will be able to enter into uncleared OTC derivatives transactions with EU counterparties. EU EMIR 3.0 provides a permanent exemption from central clearing for certain OTC derivatives transactions entered into by EU counterparties with UK pension schemes that are authorised, supervised and recognised under national law and are exempted from central clearing under national law.

The UK approach to the pension scheme clearing exception is in marked contrast to that of the EU where the clearing exemption for EU pension schemes expired on 18 June 2023 and was not renewed. The European Commission, in an October 2022 report, commented that the ultimate aim of EU EMIR was to have pension schemes clear their OTC derivatives contracts as soon as possible and that liquidity conditions for pension schemes continue to improve with a variety of models having been created to allow pension schemes to access CCPs or transform collateral. This is a further example of divergence between UK and EU derivative regulation post Brexit.

How Eversheds Sutherland can help

We believe we have one of the UK’s strongest pensions investment practices. It includes members of the firm’s market-leading Financial Services team, together with specialists in pensions, tax and financial services disputes. We have leading advisers to both pension scheme trustees and product providers, giving us a unique insight into all sides of the market.

We are at the forefront of innovation in the investment industry, working closely with HM Treasury and HM Revenue & Customs to develop new products for use by pension schemes. This includes for example, the authorised contractual scheme (ACS) and the property authorised investment fund (PAIF).