PRA warns banks against ‘gaming’ pension transactions

On April 13, the PRA published a statement warning companies against conducting “deficit reduction transactions with their defined benefit pension schemes that are structured to limit the regulatory capital impact”. 

The announcement has been widely viewed as being partially directed towards Barclays, which has reportedly carried out these deals in order to support its capital level. Barclays has been contacted for comment.

The PRA cautioned banks against the risks associated with such transactions. “They can be complex, artificial, and opaque,” it said. 

“They can include legal risk and be untested in their ability to fully address the underlying rationale for the regulatory adjustment. 

“Furthermore, they can have the effect of overestimating eligible capital or reducing capital requirements, without commensurately reducing the risk in the financial system, thus undermining the calibration of minimum regulatory capital requirements.”

The regulator warned that these transactions may be incompatible with banks’ obligations towards its own rules, and that it would scrutinise these deals. 

It added that banks should be able to absorb losses appropriately and that the PRA’s policies should be followed "in line with their spirit and intended outcome, not managing the business only to the letter, or gaming the rules”.