Pension fund

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A counterparty fraught with all sorts of complexity, fear, loathing etc, because it is looking after the retirement funds of grandmas and grandads around the world. This means that pension funds, and in particular their regulators, have the power to terrify counterparties at the mere crinkling of a brow.

• In the UK, the Pension Protection Fund can induce minor infarctions, and there is even a PPF Event Additional Termination Event to cater for it.
• In the US, the ERISA legislation is the key source of agitation, and there are screeds and screed of ERISA reps of all different shapes and sizes. Even say the word “ERISA” and you will induce hyperventilation in the more nervous kind of attorney. When an English lawyer speaks cavalierly about ERISA, her American colleagues are apt to cry “YOU HAVE NO IDEA WHAT YOU HAVE JUST DONE”.

Net asset value and “pension liabilities”

Pension funds will usually describe their net asset value calculations as excluding pension liabilities. This is a bit baffling at first, but from a broker’s perspective — especially in the context of a NAV trigger Additional Termination Event — we think it’s okay.

In an ordinary fund, the investor is a shareholder, languishing with all that lovely alpha in the sludge at the bottom of the capital structure. They are equity participants and the fund’s obligations to them are not even “liabilities” as such — a liability implies a debt, and equity-holders are owners, not creditors, and their ownership interest is defined to be the value of the assets after accounting for all liabilities (being those owed to counterparties, brokers and so on).

In a pension fund, one talks of the fund’s liabilities to pension-holders. Now those liabilities can only be satisfied out of that equity holding, and is either an equity interest itself, or it is a subordinated liability, ranking behind secured and unsecured creditors (like swap counterparties), or being limited in recourse to the net value of the fund’s assets after all its senior debt liabilities are satisfied, so you get to the same place.

In any case in the context of a NAV trigger, getting this definition wrong (and including pension liabilities) might mean you spend your life waiving technical, but actually unimportant, breaches of the NAV trigger.

As an ISDA netting category

Pension fund is one of ISDA’s vaunted netting categories.

Pension Fund: A legal entity or an arrangement without legal personality (for example, a common law trust) established to provide pension benefits to a specific class of beneficiaries, normally sponsored by an employer or group of employers. It is typically administered by one or more persons (who may be private individuals and/or corporate entities) who have various rights and obligations governed by pensions legislation. Where the arrangement does not have separate legal personality, one or more representatives of the Pension Fund (for example, a trustee of a pension scheme in the form of a common law trust) contract on behalf of the Pension Fund and are owed the rights and owe the obligations provided for in the contract and are entitled to be indemnified out of the assets comprised in the arrangement.

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See also

• ERISA netting
• ISDA netting categories
• close-out netting
• ISDA Anatomy