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Special Report

Impact investing


Sector underwhelmed by stress-test results

The first-ever sector-wide stress test of European occupational pension funds by the European Insurance and Occupational Pensions Authority (EIOPA) concludes that they are most unlikely to transmit financial shocks to other market participants, even though these would entail significant deficits.

EIOPA stress-tested 140 defined benefit (DB)/hybrid funds and 64 defined contribution (DC) funds in 17 markets across the European Economic Area. 

The tests predicted large deficits arising from a demand shock triggered by a drop in equity markets, or a broad decline in asset prices coinciding with a commodities supply shock and a drop in interest rates.

In the latter case, pension funds would face a €773bn deficit on the basis of the supervisory authority’s common methodology, which uses a risk-free discount rate. The impact is less severe using national balance sheet accounting. The stress tests found that funds would be better able to deal with a sudden 20% decrease in mortality. 


EIOPA says occupational pension funds’ ability to transmit financial shocks is limited due to various factors – direct links between the pension sector and other financial institutions, for example, are limited.

However, it says the extent to which the pension funds may act as market stabilisers depends on their investment behaviour, and that there can be secondary effects on the real economy from higher DB deficits – if sponsors are asked to increase contributions, for example. 

Commenting on the results, EIOPA chairman Gabriel Bernardino said it was too early for the authority to draw “absolute” conclusions about any systemic or financial stability impact and that more work needed to be done on this. 

He acknowledged that some aspects of the results “may seem obvious”, but he stressed the importance of having the data to back these up, as well as a common methodology to allow for cross-border comparison. 

Several pension fund associations and regulators welcome EIOPA’s conclusions. The UK Pensions Regulator (TPR) notes that high-quality risk management and strong employer covenants are among “flexibilities” that limit the link between pension schemes and financial stability.

The Dutch Pensions Federation says it is not surprised by the conclusions of the stress tests, “as they had been conducted while pension funds’ balance sheets were already stressed”.

The Dutch supervisor De Nederlandsche Bank concludes that, from a European perspective, Dutch schemes have a high-risk profile. It also notes that the stress tests make clear that the Dutch pensions sector poses no systemic risk.

But there are critical comments, too. PensionsEurope urges caution in interpreting the results because the exercise only includes a small number of IORPs, saying they “do not necessarily give the correct picture” of their ability to cope with stress scenarios.

Green Party MEP Sven Giegold, on the other hand, argues that the stress-tests paint “a gloomy picture” and that “it is unacceptable to pretend problems do not exist”. 

EIOPA’s common methodology and the risk-free discount rate at the heart of it also draws criticism, or scepticism at the least. Several market participants equate the common methodology used in the stress tests with the holistic balance sheet (HBS), which the industry associates with potential solvency requirements. 

Francois Barker, head of pensions at the UK law firm Eversheds, warns that the “threat” posed by the HBS remains, and that the results could revive the debate about its use. 

A more supportive stance on the common methodology comes from the Actuarial Association of Europe, although it does disagree with EIOPA’s use of a risk-free discount rate.

See our interview with EIOPA chairman Gabriel Bernardino on page 18

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