On 13 April 2022, the PRA issued a statement providing an update on its approach on capital arbitrage transactions.
The PRA has issued the statement as it is aware that some PRA-regulated firms have conducted, or may be considering conducting, deficit reduction transactions with their defined benefit pension schemes that are structured to limit the regulatory capital impact that would otherwise result.
The PRA warns that firms should not be engaging in transactions that have the aim of offsetting regulatory adjustments as they pose a number of risks. They can also 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 PRA also states that entering into such transactions may not be compatible with a firm’s obligations under the PRA’s Fundamental Rules. The PRA draws firms’ attention to its approach to banking supervision document which states that the PRA ‘expect all capital to be capable of absorbing losses in the manner indicated by its place in the capital structure’ and that PRA policies should be followed ‘in line with their spirit and intended outcome, not managing the business only to the letter, or gaming the rules’.