The rise of the CIF: common investment funds for pension schemes go into the derivatives arena

Chris Jackson

As regular readers of Pensions Talk may remember, I spend a good deal of my time advising banks and pension scheme trustees on entering into ISDA derivative contracts.  Over the last couple of months a new topic has come onto my agenda, namely common investment funds set up by pension schemes which are entering into derivative contracts. 

Up until now I have mostly been involved in assisting on banking opinions, dealing with the thorny topic of schemes entering the PPF and negotiating the actual ISDA contracts but now I am seeing far more common investment funds (CIFs) getting involved with ISDAs.

Whilst the experience of one pensions lawyer wouldn’t make for a very reliable GALLUP survey, it’s certainly interesting to me that I’ve gone from a total of zero queries to about 15 on CIFs in the last couple of months.  I’m also aware that my colleagues in the Derivatives team at Allen & Overy are getting more questions on this.

It wouldn’t be right to assume that CIFs are just getting started in the derivatives arena but it’s possible that we are getting a spike of activity for some reason.  At the moment all of my queries have been for banks.  The main focus, as always, has been on capacity to enter into derivative instruments. 

A more basic focus, however, is on whether the CIF is a legal entity and if so what kind of legal entity it is, and its interaction with the world of pension scheme legislation.  This is particularly relevant as these are landing on the desks of the same people at the banks who negotiate pension scheme ISDAs so they are very aware of all of the issues on contracting with pension scheme trustees. 

A CIF is unlikely to be an occupational pension scheme as it is likely to be set up for the purpose of holding and investing assets, rather than to provide pension benefits.  That knocks a number of issues on the head but not all of them.  Other pensions-related questions that remain are whether an ISDA could ever get ‘sucked back’ into a pension scheme on the collapse of a CIF and could the PPF ever disapply onerous terms, due to the peculiar wording of the legislation, even whilst the ISDA is held by the CIF?  As these investment funds continue to become more common (in my workload at least) we’ll see what other new issues come up as well. 

Chris Jackson is a senior associate at Allen & Overy LLP.

Comments published on Pensions Talk do not necessarily reflect the views of Allen & Overy or its clients.

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