Warnings sounded over EIOPA stress tests for pension funds

The European Insurance and Occupational Pensions Authority (EIOPA) has revealed the results of its first stress test for occupational pension schemes. Critics say that there is a danger that EIOPA’s approach to testing pension scheme robustness will lead to more scheme closures, by exaggerating the scale of pension scheme deficits.

The aim of the test was to produce a clear picture of the European pensions landscape and to test the resilience of defined benefit, defined contribution and hybrid schemes to adverse market scenarios and increased life expectancy. Seventeen countries with combined pension assets of more than €500 million took part in the stress test exercise. The stress tests found that DB and hybrid schemes are relatively resilient to a permanent decrease of 20% in mortality rates, but are more sensitive to adverse moves in interest and inflation rates, or a severe asset price fall. EIOPA chairman, Gabriel Bernardino, said: “This was the first exercise of this kind conducted at European Union level. It has deepened the supervisors’ understanding of the impact that different future stress scenarios can have on pension plans’ resilience.”

One aspect of the stress test has displeased the UK’s pension fund trade body, the Pensions and Lifetime Savings Association (PLSA), which is the use of a common methodology, previously called the Holistic Balance Sheet concept. PLSA chief executive, Joanne Segars, commented: “It is very disappointing to see EIOPA still pressing ahead with its Holistic Balance Sheet concept, now renamed the ‘Common Methodology’ for the purposes of these stress tests. EIOPA admits that the Holistic Balance Sheet is still no more than a work in progress, so there can be no justification for using it as the basis of this exercise. The report reveals − once again − the damage that the Holistic Balance Sheet would do to pension provision by inflating deficits to far higher levels than under current methods of measurement. The result would surely be many more scheme closures.”

Barnett Waddinghham partner, Andrew Vaughan, also criticised the use of a single approach for pension funds in different countries across Europe. He said: “Pension schemes would come under pressure from the extreme scenarios tested by EIOPA. But while they are vulnerable to a variety of risks, the flexibility in the UK framework allows employers and trustees to act to address those risks without dangerous knee-jerk reactions. Allowing appropriate recovery plans is key and we would hope EIOPA recognise this in any future advice to the European Commission.”