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Should pension schemes consider helping the banks?

Pension schemes have an opportunity to take advantage of banks’ growing capital requirements.

The global financial crisis in the late 2000s led to the introduction of strict capital requirements for banks in an attempt to protect the financial system.

The Basel Committee on Banking Supervision published the first version of Basel III, which lays out these regulatory capital demands, in late 2009.

In a regulatory capital transaction, a scheme acts as an external counterparty and provides risk capital alongside banks for their loan books. In return, the scheme receives a coupon based on the amount it has put at risk.

There are few providers currently offering regulatory capital strategies to schemes, but mastertrust TPT Retirement Solutions has started investing in regulatory capital.

Regulatory capital is for larger schemes

Basel III requirements on banks will need to be fully adopted by 2019. Scott Edmunds, investment consultant at Quantum Advisory, thinks that demand for regulatory capital strategies could be sustained by the imminent roll-out of the legislation.

Edmunds identified regulatory capital as a more appropriate investment proposition for larger schemes.

“It does remain a niche area,” he said. “In terms of whether this trend will continue, it is always difficult to call.” However, with the Basel III rules coming in, the trend could continue as banks seek to improve capital adequacy ratios.

“Smaller schemes may struggle to warrant investing directly in these strategies, but might instead utilise unitised private debt funds in order to gain similar exposures,” he added.


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