EIOPA has launched its first stress test for Institutions for Occupational Retirement Provision (IORPs), and a quantitative assessment of further work on solvency of IORPs.
The stress test will assess the resilience of IORPs and their pension schemes to adverse market scenarios and a longevity scenario. The exercise will be conducted in seventeen European countries with material IORP sectors covering at least 50% of their national market.
The stress test covers both defined benefit (DB) schemes and defined contribution (DC) plans. IORPs providing DB schemes have to calculate the impact of adverse scenarios on a common, holistic balance sheet and their national balance sheet. A dedicated satellite module for DC IORPs analyses the effects of a variety of shocks on future retirement income of three representative plan members, which start to receive pension benefits respectively 5, 20 and 35 years from now.
The stress test will provide insight and raise awareness of the occupational pensions' sector risks and vulnerabilities, while potential transmission mechanisms of IORPs to the rest of the financial sector and the real economy will also be evaluated.
Quantitative assessment on solvency
The quantitative assessment will gather data of IORPs on potential uses of the holistic balance sheet within an EU-wide supervisory framework. The outcomes will support EIOPA in further developing its Advice to the European Commission on EU solvency rules for IORPs.
The quantitative assessment follows last year's consultation paper on further work on solvency of IORPs. In it EIOPA put forward proposals to simplify the valuation of technical provisions and sponsor support using a principles-based approach. The consultation paper also discussed possible uses of the holistic balance sheet, such as an instrument to set funding requirements or a risk management tool to assess the long-term sustainability of pension funds. Today, the feedback of stakeholders to the consultation paper has also been published on EIOPA's website.
EIOPA expects to deliver its Advice to the European Commission in March 2016.
Cooperation with national supervisors
The selection of the IORPs which will be finally involved in every jurisdiction will be made by national supervisors. They will keep as well the prerogative of the direct contact with IORPs for the data submission, during the quality assurance phase to deal with any validation issue, and during the Questions & Answers (Q&A) process, which EIOPA will have in place during the exercise with weekly updates on its website.
The stress test and the quantitative assessment will be conducted in parallel to minimise the burden on IORPs. Both exercises will run until 10 August 2015.
Gabriel Bernardino, EIOPA’s Chair: “Pension funds are already experiencing a challenging environment with low interest rates and rising life expectancy. A key vulnerability for the occupational pensions sector is a prolonged period of low interest rates combined with a fall in asset prices due to a re-appraisal of risk on financial markets. The stress test will retrieve valuable information on the sensitivity of IORPs, sponsoring undertakings and members and beneficiaries to such a scenario. ”
Click here to view the Occupational pensions stress test webpage
Click here to view the Quantitative assessment webpage