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Derivatives – A guide for pension trustees. Introduction to derivatives – Lexology


A large and growing part of our practice is advising DB pension scheme trustees on investment matters. Trustees are under increasing pressure to de-risk, especially with the requirement (in the Pension Schemes Act 2021) for trustees to set a long-term funding and investment strategy. But it’s one thing to know that risks must be managed; it’s quite another to understand how to go about this.

There are different categories of risks and many different ways of de-risking, each with its own advantages and disadvantages (including new risks) and variations. One popular method is to invest in derivatives. Talk of derivatives must fill thousands of hours at investment committee and board meetings across the DB pension scheme landscape each year. But this can be a challenging topic for lay and professional trustees alike (as well as for some advisers).

For this reason, we are releasing a series of bite-size guides to derivatives, directed at trustees alone. We will cover what derivatives are, how they are used, the agreements used to document them, why they feature in investment management agreements, and the impact of EMIR and UK EMIR on the legal and operational framework of ‘over-the-counter’ (OTC) derivatives contracts. After reading our guides, we hope trustees will be confident in their understanding of the key issues and practicalities of derivatives and feel better able to engage with them, without getting bogged down in jargon or technicalities. Derivatives are tools and, as with all tools, the important thing is not that they look sophisticated, impressive or expensive, but that they help to get a job done. We aim to show trustees how to master these tools and make sure they work for every scheme and its members.

Look out for the following articles to be published over the next few weeks:

  • What are derivatives?
  • Derivatives – the documents
  • Derivatives and the Investment Management Agreement
  • Derivatives: pension schemes, EMIR, UK EMIR and Brexit

As a taster, click here for a short derivatives-related jargon-buster.