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In response to the European Securities and Markets Authority (ESMA) consultation paper on the draft technical standards for the regulation on OTC derivatives, CCPs and trade repositories, pension funds and experts have raised concerns that costs related to the EMIR's central clearing requirements could adversely affect their hedging strategies designed to reduce pension plan risk.Donnelly warns the costs of the clearing requirements connected to the draft technical standards could increase the costs associated with pension funds' hedging strategies. “Pension funds may have to find further liquidity in order to collateralise derivatives transactions. This is not an inability to de-risk, but it will make de-risking more expensive. As plan sponsors are ultimately liable for any shortfall in the pension fund, any additional costs will fall on plan sponsors. “If a pension fund does take the view that de-risking is too expensive, then the ultimate risks lie with the plan sponsor. Plan sponsors should seek to engage with trustees on this issue, and may have to provide additional funding in the short term to enable the pension funds to continue hedging against longer term risks. “Plan sponsors with high liabilities cannot simply apply to enter their scheme into the Pension Protection Fund. The only way in which a scheme can enter the PPF is where all of the sponsoring employers are insolvent - so, short of putting themselves into insolvent liquidation, it is not open to companies to ditch liabilities in the PPF. In addition, the Pensions Regulator has wide powers to impose liabilities on group companies where a corporate restructuring is used as a means of avoiding liability to the pension fund.”
In response to the European Securities and Markets Authority (ESMA) consultation paper on the draft technical standards for the regulation on OTC derivatives, CCPs and trade repositories, pension funds and experts have raised concerns that costs related to the EMIR's central clearing requirements could adversely affect their hedging strategies designed to reduce pension plan risk.Donnelly warns the costs of the clearing requirements connected to the draft technical standards could increase the costs associated with pension funds' hedging strategies.
“Pension funds may have to find further liquidity in order to collateralise derivatives transactions. This is not an inability to de-risk, but it will make de-risking more expensive. As plan sponsors are ultimately liable for any shortfall in the pension fund, any additional costs will fall on plan sponsors. “If a pension fund does take the view that de-risking is too expensive, then the ultimate risks lie with the plan sponsor. Plan sponsors should seek to engage with trustees on this issue, and may have to provide additional funding in the short term to enable the pension funds to continue hedging against longer term risks. “Plan sponsors with high liabilities cannot simply apply to enter their scheme into the Pension Protection Fund. The only way in which a scheme can enter the PPF is where all of the sponsoring employers are insolvent - so, short of putting themselves into insolvent liquidation, it is not open to companies to ditch liabilities in the PPF. In addition, the Pensions Regulator has wide powers to impose liabilities on group companies where a corporate restructuring is used as a means of avoiding liability to the pension fund.”
PLANSPONSOREurope Staff editors@plansponsoreurope.com