We are 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.
In line with the Basel Committee on Banking Standards statement of 2 June 2016,footnote  firms should not engage in transactions that have the aim of offsetting regulatory adjustments. As that statement makes clear, these types of transactions pose a number of risks. They can be complex, artificial, and opaque. They can include legal risk and be untested in their ability to fully address the underlying rationale for the regulatory adjustment. Furthermore, they can 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.
Entering into such transactions may not be compatible with a firm’s obligations under the PRA’s Fundamental Rules. We also draw firms’ attention to the PRA’s approach to banking supervision,footnote  which states that ‘we expect all capital to be capable of absorbing losses in the manner indicated by its place in the capital structure’ and that our policies should be followed ‘in line with their spirit and intended outcome, not managing the business only to the letter, or gaming the rules’.
We will carefully scrutinise transactions in light of the principles, rules and expectations summarised above, including any transactions that would allow firms to avoid regulatory capital deductions under Article 36(1) Capital Requirements Regulation (as transposed into PRA rules).footnote  Where any existing transactions are to be unwound, we will look to agree with firms a reasonable timeline to achieve this.