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Regulator: results of first EU occupational pension 'stress tests' due before end of year


The first 'stress tests' of EU occupational pension schemes will measure the anticipated resilience of both defined benefit (DB) and defined contribution (DC) schemes against financial market shocks, according to the regulator.

The European Insurance and Occupational Pensions Authority (EIOPA) will assess whether selected occupational schemes would survive two asset price shock scenarios, two low return scenarios and a 'longevity' scenario, based on a 20% fall in mortality rates. Affected schemes have until 10 August to complete the exercise, and the regulator will publish a final report by the end of 2015, according to the announcement.

EIOPA will also undertake a 'quantitative assessment' of the potential uses of a holistic balance sheet approach to DB and hybrid scheme solvency over the same period, it said. This work will feed into advice that the regulator intends to submit to the European Commission on the potential for EU-wide pension solvency rules.

"Pension funds are already experiencing a challenging environment with low interest rates and rising life expectancy," said Gabriel Bernardino, chair of EIOPA.

"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 [institutions for occupational retirement provision], sponsoring undertakings and members and beneficiaries to such a scenario," he said.

However, pensions expert Robin Ellison of Pinsent Masons, the law firm behind Out-Law.com, said that the new stress tests would materially increase the administrative costs of running schemes while adding only marginal benefits for members.

"The next stress for schemes will come from unexpected quarters," he said. "For example, 25 years ago nobody expected negative interest rates on sovereign bonds, and so the then test would not have tested for the effects of them if the test had been required then."

"The new requirements seem particularly disproportionate given the work of the High Level Group on Administrative Burdens, another EU agency; whose Stoiber Report on cutting red tape in Europe produced in July last year called on agencies like EIOPA to reduce regulatory burdens on employers and others," he said.

The stress tests will cover 17 EU countries with "material" occupational pension scheme provision covering at least 50% of the national market. Participating DB and DC schemes will be selected by national regulators. DB schemes will be required to calculate the impact of the specified scenarios on a common, holistic balance sheet and their national balance sheet, while a dedicated satellite module for DC schemes will consider the effects of the shocks on the future income of three representative scheme members, due to receive benefits in five, 20 and 35 years respectively.

The quantitative assessment will be used to gather data from DB schemes on potential uses of the holistic balance sheet within an EU-wide supervisory framework, following last year's consultation paper on potential solvency standards. EIOPA's proposed holistic balance sheet approach to scheme solvency would require pension funds across Europe to meet similar solvency requirements regardless of the strength of the employer's covenant, or of whether national security mechanisms such as the UK's industry-funded Pension Production Fund (PPF) are in place.

EIOPA has been undertaking further work on scheme solvency on its own initiative after the Commission dropped plans to include more stringent solvency requirements in a revised IORP Directive. It intends to submit this work to the Commission in March 2016, although the Commission is under no obligation to implement its recommendations.

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