The European Insurance and Occupational Pensions Authority (EIOPA) today announced the results of the European Union stress test for Occupational Pensions. The objectives of the stress test were to produce a comprehensive picture of the heterogeneous European occupational pensions’ landscape; to test resilience of defined benefits (DB) and hybrid pension schemes against adverse market scenarios and increased life expectancy; to identify potential vulnerabilities of defined contribution (DC) schemes; and to reveal areas that require further supervisory focus.
Seventeen European Economic Area countries with a material occupational pensions sector, which is over EUR 500 million in assets, participated in the exercise.
In order to compare diversified stress test results, EIOPA developed a Common Methodology using market-consistent valuation for assets and liabilities. Simultaneously, EIOPA conducted an assessment based on the National Balance Sheets (NBS).
DB and hybrid schemes demonstrated relative resilience to a permanent decrease of 20% in mortality rates. At the same time they appeared to be more sensitive to an abrupt drop in interest rates and an increase in inflation rates (under the Common Methodology) and to a severe drop in assets prices (under NBS).
The satellite module for DC schemes showed that the impact on the pensions' level strongly depends on the time which plan members have before retirement. Eldest plan members have the highest pension wealth and the least time to recover from price falls of assets. Youngest plan members are most heavily impacted by long-term low return on assets.
Gabriel Bernardino, Chairman of EIOPA, said: "The occupational pensions' stress test was the first exercise of this kind conducted at the European Union level. It has deepened the supervisors' understanding of the impact that different future stress scenarios can have on the pension plans resilience.
While pension plan liabilities have a very long-term nature, it is important that supervisory regimes are prepared to deal with these stresses in a transparent way, be it through appropriate recovery periods, the role of pension protection schemes, increased sponsor's contributions and/or benefit adjustment mechanisms.
Further work needs to be done to analyse how prolonged adverse market conditions will affect the sponsors' behaviour and the possible consequences for financial stability and the real economy.
EIOPA is fully committed to further enhancing supervisory convergence also in the field of occupational pensions."
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The Report on the results of the first EU Stress Test for Occupational Pensions can be viewed here.