The European Insurance and Occupational Pensions Authority (EIOPA) has announced details of its first stress test for occupational pension funds, as well as a quantitative assessment of the solvency of the institutions.
The stress test is aimed at judging how resilient pension funds are to tough market scenarios, as well as a longevity scenario, the EU regulator said.
Gabriel Bernardino, chair at EIOPA, said: “Pension funds are already experiencing a challenging environment with low interest rates and rising life expectancy.”
He described the long period of low interest rates – combined with the fall in asset prices as risk-on financial markets had been reappraised – as a key vulnerability for the occupational pensions sector.
“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,” Bernardino said.
The regulator said it was running the stress test and the quantitative assessment alongside each other to minimise the burden on IORPs.
Both exercises will run until 10 August, the deadline for data to be submitted to the national supervisory authorities (NSAs).
On 19 May, there will be a workshop with participating IORPs, and a Q&A procedure for the institutes will go on between May and August.
From the end of August into September, EIOPA will then carry out what it described as a centralised quality assurance of all submissions, and finally, in December 2015, it will publish the results of the stress test analysis.
The stress test exercise will be conducted in seventeen European countries and cover both defined benefit (DB) and defined contribution (DC) pensions.
EIOPA said it would use the quantitative assessment to gather data from pension funds on the potential uses of its controversial holistic balance sheet (HBS) idea – which critics have said is too standardised – within an EU-wide supervisory framework.
The outcomes would, it said, help EIOPA in further developing its advice to the European Commission on EU solvency rules for IORPs.
At the same time, EIOPA has published responses to the consultation it launched last year addressing further work on the solvency of IORPs.
Among other things, the paper discussed possible uses of the HBS, such as an instrument to set funding requirements.
The responses reveal many negative reactions to this idea from the pensions industry.
The UK’s BT Pension Scheme questioned whether EIOPA’s proposed one-size-fits-all approach was the best way forward.
“Developing and complying with a mandatory and prescriptive regime predicated on the use of a holistic balance sheet will inevitably be time-consuming and costly for IORPs,” it said, adding that it did not see that this would lead to better outcomes for IORPs or their members than the processes already used locally.
On the sponsor side, umbrella employers’ association Gesamtmetall in Germany described applying more solvency requirements to pension funds via a “Solvency II-like” approach using the HBS methodology as “objectively unnecessary and counter-productive”.
Jerry Moriarty, chief executive of the Irish Association of Pension Funds, told IPE: “Like most people in the pensions industry, we struggle to see why EIOPA is proceeding with the stress tests, since the European Commission has taken the issue of solvency away from the IORP review that’s currently taking place.
“It seems to us this is going to cause quite a bit of work and cost to schemes but doesn’t add anything to the protection of schemes across Europe, as it’s largely an academic exercise.”